2017 (9) TMI 966 - AT - Income Tax

Reopening of assessment - addition of on account of share application money and commission expenditure - information received from Director of Income Tax (Investigation), New Delhi - non independent application of mind by AO - Held that - Information shows that assessee has received the amount of credit through banking channels by mentioning names of the parties and cheque nos. with amount. This information by itself cannot be said to be tangible material. The A.O. has not gone through the details of these information and has not even applied his mind and merely concluded that he has reason to believe that income chargeable to tax has escaped assessment. The reason to believe are therefore, not in fact reasons but only conclusion of the A.O. The expression accommodation entry is used to describe the information set-out without explaining the basis for arriving at such conclusion. The A.O. being a quasi-judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. The A.O. however, merely repeated the report of Investigation Wing in the reasons and formed his belief that income chargeable to tax has escaped assessment without arriving at his satisfaction. The reason to believe contain no reason but the conclusion of A.O. without any basis. Thus, there is no independent application of mind by the A.O. to the report of Investigation Wing which form the basis for reasons to believe that income has escaped assessment. The conclusion of the A.O. in the reason are at best reproduction of conclusion of the Investigation report. It is borrowed satisfaction not permissible in law. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Reopening of the assessment under section 148 of the Income Tax Act, 1961.
2. Addition of ?27,54,000 on account of share application money and commission expenditure.

Issue-Wise Detailed Analysis:

1. Reopening of the Assessment under Section 148 of the Income Tax Act, 1961:

The assessee challenged the reopening of the assessment under section 148 of the I.T. Act, 1961. The A.O. issued a notice under section 148 on 26th March, 2010, based on information from the Investigation Wing that the assessee was a beneficiary of accommodation entries. The A.O. recorded reasons for the belief that income had escaped assessment, which were communicated to the assessee. The reasons included details of cheque amounts received, the payer, the payee, their respective banks, and cheque numbers. However, the A.O. did not provide any independent analysis or findings based on this information.

The Hon’ble Delhi High Court in the case of Pr. CIT vs. Meenakshi Overseas Pvt. Ltd., 395 ITR 677 (Del.), held that the reasons to believe must be based on tangible material and should demonstrate a link between the material and the formation of the belief that income has escaped assessment. The reasons recorded by the A.O. in this case were found to be mere conclusions without any independent application of mind, thus constituting "borrowed satisfaction" from the Investigation Wing's report. The court emphasized that the reopening of assessment under section 147 is a potent power and cannot be invoked casually or mechanically. The reasons must be self-evident and speak for themselves.

In the present case, the A.O. merely reproduced the information received from the Investigation Wing without any independent verification or analysis. This lack of independent application of mind and the absence of tangible material linking the information to the belief that income had escaped assessment led to the conclusion that the reopening of the assessment was not justified. The Hon’ble Delhi High Court's judgment in Meenakshi Overseas Pvt. Ltd. was applied to quash the reopening of the assessment.

2. Addition of ?27,54,000 on Account of Share Application Money and Commission Expenditure:

The A.O. added ?27 lakhs to the income of the assessee under section 68 of the I.T. Act, along with ?54,000 as commission paid for taking accommodation entries, totaling ?27,54,000. The assessee contended that it had no transactions with M/s. Kuldeep Textiles (P) Ltd., and provided details showing that the amounts were received as share capital from five different entities. The A.O. made the addition based on the information from the Investigation Wing without any independent verification.

The assessee relied on the judgment of the Hon’ble Delhi High Court in Meenakshi Overseas Pvt. Ltd., which held that the reasons to believe must be based on tangible material and should demonstrate a link between the material and the formation of the belief that income has escaped assessment. The court found that the A.O. had not provided any independent analysis or findings based on the information received, leading to the conclusion that the reasons recorded were mere conclusions without any independent application of mind.

Given that the reopening of the assessment was quashed, the addition of ?27,54,000 was also deleted. The court emphasized that the reasons to believe must be based on tangible material and should demonstrate a link between the material and the formation of the belief that income has escaped assessment. The reasons recorded by the A.O. in this case were found to be mere conclusions without any independent application of mind, thus constituting "borrowed satisfaction" from the Investigation Wing's report.

In conclusion, the reopening of the assessment under section 147/148 of the I.T. Act was quashed, and the entire addition of ?27,54,000 was deleted. The appeal of the assessee was allowed, and the order pronounced in the open court.