2018 (6) TMI 496 - AT - Income Tax

Reopening of assessment - assessee s objections to the reopening of assessment - Held that - Consideration of the assessee s objections to the reopening of assessment is not a mechanical ritual but it is a quasi judicial function. It has been mandated that the order disposing of the objections should deal with each objection giving proper reasons for the conclusion and no attempt should be made to improve or add to the reasons as recorded and disclosed. Though the reasons recorded by the AO for belief of escapement of income contain reference to material forming the basis thereof such material despite written request by the assessee to the AO in this regard was never supplied by the AO to the assessee. This is in direct contravention of the principle of natural justice as reiterated in Sabh Infrastructure Limited (2017 (9) TMI 1589 - DELHI HIGH COURT). In the present case the alleged material was only supplied to the assessee in the remand proceedings where too the objections of the assessee were not met. CIT(A) also did not deal with these objections of the AO. The reasons recorded by the AO are found to be not in accordance with law. Accordingly they are cancelled. Too in view of Sabh Infrastructure Limited (supra) none of the other decisions cited by the Department are of any aid to it. Consequently the reassessment proceedings culminating in the order under appeal are also not sustainable in the eye of law and they too are cancelled. Nothing further survives for adjudication. Appeal is allowed.

Issues Involved:
1. Validity of initiation of proceedings under Section 147 and consequent issuance of notice under Section 148 of the Income Tax Act.
2. Legality of the addition made under Section 68 of the Income Tax Act treating the receipt of share application money as unexplained cash investment.
3. Rejection of the appellant's submissions and documents proving the identity, creditworthiness, and genuineness of the share applicants.
4. Applicability of Section 68 in the first year of incorporation.

Detailed Analysis:

Issue 1: Validity of Initiation of Proceedings under Section 147 and Issuance of Notice under Section 148
The assessee challenged the initiation of proceedings under Section 147 and the issuance of notice under Section 148, arguing that it was based on borrowed satisfaction and lacked valid material. The Assessing Officer (AO) justified the reopening of the assessment by citing the assessee's investment of ?7,00,000, which was not reflected in the income tax return. The AO's belief was based on information received from the Joint Commissioner of Income Tax, indicating that the assessee had taken accommodation entries from the Surendra Kumar Jain Group.

The CIT(A) upheld the AO's action, stating that the AO had sufficient material from the Investigation Wing to form a reason to believe that income had escaped assessment. The CIT(A) emphasized that the AO is not required to independently verify the information received before issuing a notice under Section 148.

However, the Tribunal found that the AO did not independently apply his mind to the information received, which is a requirement as per the Delhi High Court's ruling in 'Meenakshi Overseas (P) Ltd. vs. ITO'. The Tribunal noted that the AO's reasons must be self-evident and demonstrate a link between the information and the belief of income escapement. Since this link was missing, the Tribunal held that the reasons recorded by the AO were not in accordance with the law.

Issue 2: Addition under Section 68 Treating Share Application Money as Unexplained Cash Investment
The AO added ?7,00,000 to the assessee's income under Section 68, treating the share application money as unexplained cash investment. The assessee argued that it had provided all necessary documents to prove the identity, creditworthiness, and genuineness of the share applicants.

The CIT(A) upheld the AO's addition, stating that the assessee failed to prove the genuineness of the transaction and the creditworthiness of the creditors. The CIT(A) relied on the Investigation Wing's report, which indicated that the share application money was an accommodation entry.

The Tribunal, however, found that the AO did not provide the assessee with the material forming the basis of the reasons recorded, which is a violation of the principles of natural justice. The Tribunal emphasized that the AO must provide the assessee with all relevant documents and material when communicating the reasons for reopening the assessment.

Issue 3: Rejection of Submissions and Documents Proving Identity, Creditworthiness, and Genuineness
The assessee submitted various documents to prove the identity, creditworthiness, and genuineness of the share applicants. The AO and CIT(A) rejected these submissions, stating that the assessee failed to prove the genuineness of the transactions.

The Tribunal found that the AO did not adequately consider the assessee's submissions and documents. The Tribunal noted that the AO's rejection of the assessee's objections was based on a mechanical application of the law without proper consideration of the facts and evidence presented by the assessee.

Issue 4: Applicability of Section 68 in the First Year of Incorporation
The assessee argued that since the year under consideration was the first year of incorporation, no addition could be made under Section 68 of the Income Tax Act. The CIT(A) rejected this argument, stating that the assessee failed to prove the genuineness of the transactions.

The Tribunal did not specifically address this issue, as it found that the entire reassessment proceedings were not sustainable in the eye of the law due to the AO's failure to provide the assessee with the material forming the basis of the reasons recorded.

Conclusion
The Tribunal allowed the assessee's appeal, holding that the reasons recorded by the AO for reopening the assessment were not in accordance with the law. The Tribunal emphasized the importance of providing the assessee with all relevant documents and material when communicating the reasons for reopening the assessment. Consequently, the reassessment proceedings and the additions made under Section 68 were cancelled.

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