2017 (8) TMI 922 - AT - Income Tax

Reopening of assessment - reasons to believe - accommodation entry operations - non-independent application of mind by AO - Held that - Nothing was recovered in the search and seizure establishing the identity of the assessee or any link between the record showing the accommodation entry operations by Jain Brothers through their chain of companies and the investment in the assessee company. Paragraph 5 says that it is only as a result of post search investigation, it appeared to the investigation wing that the assessee had also obtained accommodation entries. A long distance has to be travelled by the Department to bridge the gap between the assessee obtaining the accommodation entries and appears to have obtaining the accommodation entries. Further it is clear from paragraph no. 7 that on obtaining such post search investigation material AO was advised that the amounts appeared to have been obtained by the assessee by way of accommodation entries to be brought to tax by initiating the action u/s 147/148 read with section 143(3) of the Act. Record does not reveal that after this advice, AO had done anything in verification of such information to form the basis for his satisfaction that the income of the assessee had escaped assessment. Assessing Officer has arrived at the satisfaction in a mechanical manner without due application of mind and since there is no rational connection between the formation of the belief and the seized material. Assessing Officer has not discharged his obligation after such allegations, and, therefore, reasons recorded by the Assessing Officer in the instance case, in our opinion, are vague and/or no reasons at all. We, therefore, quash the re-assessment proceedings initiated by the Assessing Officer as void. - Decided in favour of assessee.

Issues Involved:
1. Legality and validity of the reopening of assessment proceedings under Section 147/148 of the Income Tax Act.
2. Justification of additions made on account of share application money, share premium, and alleged payment of commission under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Reopening of Assessment Proceedings:

The assessee challenged the legality and validity of the reopening proceedings under Section 147/148 of the Income Tax Act. The assessment years involved were 2007-08 and 2008-09, where the returns were initially processed under Section 143(1). However, post a search and survey action conducted by the Investigation Wing on 14.09.2010 in the case of certain individuals, the assessments were reopened. The Assessing Officer (AO) added sums based on documentary evidence regarding share application money from certain companies.

The Tribunal noted that the AO relied entirely on the facts found in the case of the searched individuals without independent verification or confronting the assessee with the material used for reopening the assessment. The AO substituted the information received from the Investigation Wing for his satisfaction, which was deemed insufficient. The Tribunal emphasized that there must be a "rational connection" or "live link" between the material and the formation of belief for reopening the assessment, as established in various judicial precedents, including the Supreme Court's decision in ITO vs. Lakhmani Mewal Das (103 ITR 437).

The Tribunal highlighted that the AO acted on mere suspicion and advice from the Investigation Wing without independent application of mind or verification of the information. This was considered a violation of the principles laid down in judicial decisions like CIT vs. SFIL Stock Broking Ltd. (325 ITR 285) and Sarthak Securities Co. P. Ltd. vs. ITO (329 ITR 110), where it was held that the AO must independently arrive at a belief based on material before him.

The Tribunal concluded that the reopening of assessment was invalid as the AO did not fulfill the requirements of Section 147, which mandates a direct nexus between the material and the belief of income escapement. The Tribunal quashed the reassessment proceedings as void due to the lack of a rational connection and independent application of mind by the AO.

2. Justification of Additions Made on Account of Share Application Money, Share Premium, and Alleged Payment of Commission:

On the merits, the assessee argued that they had provided complete details of the share applicants, including their PAN details, share application forms, bank statements, and income tax returns. Despite establishing the identity, capacity, and genuineness of the transactions through banking channels, the AO made additions based on suspicion regarding the source of the funds.

The Tribunal reiterated that suspicion, however grave, cannot replace legal evidence or proof. The AO's additions were based on the suspicion of accommodation entries without concrete evidence or verification of the transactions. The Tribunal referenced the Supreme Court's decision in Lovely Exports (P) Ltd., which held that if the share application money is received from alleged bogus shareholders whose names are provided, the department should proceed against the individual shareholders rather than the assessee company.

The Tribunal found that the AO failed to establish a live link between the seized material and the assessee's transactions. The additions were made without proper inquiry or evidence, relying solely on suspicion and unverified information from the Investigation Wing. Consequently, the Tribunal quashed the additions made by the AO, emphasizing that legal evidence and proof are necessary to fasten financial liability on the assessee.

Conclusion:

The Tribunal allowed the appeals, quashing the reassessment proceedings and the additions made by the AO. The decision underscored the importance of independent application of mind by the AO and the necessity of a rational connection between the material and the belief of income escapement for valid reopening of assessments. The Tribunal emphasized that suspicion cannot replace legal evidence in justifying additions under Section 68 of the Income Tax Act.

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