2018 (4) TMI 427 - AT - Income Tax

Initiation of proceedings u/s. 147 - deposition of cash in the saving bank account during the financial year 2006-07 based on AIR Information and not filing of return of income by the assessee - non application of independent mind by AO - Held that - Pursuant to receipt of AIR information from an external agency that cash has been found deposited in assessee s savings bank account, there has been no further examination by the AO as to whether the cash so found deposited in the assessee s bank account has been reflected or has any connection with the reported turnover in the return of income so filed by the assessee. The reason for the said action on part of the AO is not hard to found out as the AO has concluded that the assessee has not filed any return of income after looking at the Department s IT system and without verifying the physical records maintained by the department which shows that the assessee has filed the return of income. There is a clear contradiction on part of the AO to hold that assessee has not filed his return when the records so filed before us shows, and a fact which remain undisputed, that the return of income has been filed even though manually and which has been duly acknowledged. In the instant case, the AO has thus failed to examine the AIR information so received which would have provided the nexus or the vital link to form a prima facie opinion that income of the assessee had escaped assessment for the impunged assessment year. In absence of necessary nexus between the tangible material and formation of belief, the reassessment proceedings cannot be sustained in the instant case. - Decided in favour of assessee.

Issues Involved:
1. Initiation of proceedings under Section 147 of the Income Tax Act.
2. Validity of reassessment proceedings based on AIR information.
3. Requirement of independent opinion by the Assessing Officer (AO) for income escapement.
4. Mechanical sanction under Section 151.
5. Examination of the nexus between AIR information and the return of income.

Issue-wise Detailed Analysis:

1. Initiation of proceedings under Section 147 of the Income Tax Act:
The assessee challenged the initiation of proceedings under Section 147 for depositing ?10,57,000 in the savings bank account during the financial year 2006-07 based on AIR information. The assessee argued that the AO initiated reassessment proceedings solely on the basis of AIR information, presuming the non-filing of the return for AY 2007-08, which was incorrect as the return was filed manually on 21.05.2008. The AO ignored his own records, and the reasons to believe were vague and lacked a nexus with the alleged income escapement. The assessee contended that the cash deposit was from contractual receipts disclosed in the return filed under Section 44AD, making the reassessment proceedings bad in law and without proper application of mind.

2. Validity of reassessment proceedings based on AIR information:
The assessee argued that the AO borrowed satisfaction from AIR information without establishing whether there was an escaped income. The AO did not bring on record how the cash deposit represented income that escaped assessment, merely relying on AIR information and ignoring the already filed ITR. The AR cited multiple cases, including Harikishan Sunderlal Virmani v. Dy. CIT and Bir Bahadur Singh Sijwali v. ITO, to support the argument that reassessment cannot be based solely on information from another agency without independent verification.

3. Requirement of independent opinion by the Assessing Officer (AO) for income escapement:
The Tribunal noted that the AO issued the notice under Section 148 after four years from the end of the assessment year, and action under Section 147 could only be taken if the assessee failed to file the return or disclose necessary facts. The AO's contention was that the assessee did not file the return, which was incorrect as the return was filed manually. The AO's reassessment order acknowledged the return filed under Section 139, contradicting the initial reason for issuing the notice under Section 148. The Tribunal emphasized that the AO must form an independent opinion based on material on record, not solely rely on external information.

4. Mechanical sanction under Section 151:
The assessee argued that the sanction obtained under Section 151 was mechanical and without applying mind to the facts of the case. The Tribunal found that the AO's reasons for initiating proceedings were based on AIR information without verifying the return filed by the assessee. The Tribunal cited the Hon'ble Gujarat High Court's decision in Harikishan Sunderlal Virmani, emphasizing that reassessment proceedings cannot be initiated solely on information from another agency without forming an independent opinion.

5. Examination of the nexus between AIR information and the return of income:
The Tribunal noted that the AO failed to examine whether the cash deposit in the assessee's bank account was reflected in the return of income. The AO concluded that the assessee did not file the return based on the IT system without verifying physical records. The Tribunal highlighted the contradiction in the AO's reasoning, as the return was filed manually and acknowledged. The Tribunal referred to the Hon'ble Delhi High Court's decision in Indo Arab Air Services, emphasizing the need for a nexus between tangible material and the formation of belief for income escapement.

Conclusion:
The Tribunal concluded that the jurisdictional requirements under Section 147 were not fulfilled, and the reassessment proceedings were quashed. The Tribunal did not examine the grounds on merit, as the jurisdiction issue was decisive. The appeal of the assessee was allowed.

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