2018 (6) TMI 1170 - AT - Income Tax

Reassessment proceedings - reasons to believe - reopening based on information of Investigation Wing - Held that - The reopening after four years from the end of the assessment year completed under section 143(3) is not permissible without satisfying the condition precedent as provided under the provisions of section 147 of the Act. The subsequent information received by the AO cannot remove or relax the said condition provided under the provisions of section 147 that the assessee failed to disclose fully and truly all the material necessary for assessment. When the AO has already conducted an enquiry on the issue and the assessee is not expected to furnish more than what was already furnished during the assessment proceedings then the reopening based on the information from the Investigation Wing on the same issue is nothing but change of opinion and to review the order passed by the AO under section 143(3) which is not permissible under law. Once the assessment was completed by rejecting the books of account and G.P. rate was estimated then trading accounts including the purchases stood merged in that estimation of the income and any further action U/s 148 of the Act for the reason that certain purchases were not verifiable shall amount to change in opinion which is not permitted by law. See ACIT Vs. ICICI Securities Primary Dealership 2012 (8) TMI 754 - SUPREME COURT - Decided in favour of assessee.

Issues Involved:
1. Validity of the reassessment based on information from a third party without corroborative evidence.
2. Legitimacy of holding diamond purchases as bogus and sustaining additions.
3. Appropriateness of applying profit rates without considering the nature and value of goods and relevant CBDT circulars.

Issue-wise Detailed Analysis:

1. Validity of the Reassessment:
The primary contention was whether the reassessment initiated under Section 148 of the Income Tax Act, 1961, was valid. The assessee argued that the reassessment was based on information from the Investigation Wing, Mumbai, without any independent application of mind by the Assessing Officer (AO). The AO relied on statements from a third party, Rajendra Kumar Jain, which were later retracted, and did not allow the assessee to cross-examine the witnesses or verify the accounting records of the supplier firms. The assessee cited several judgments, including those from the Gujarat High Court and the Supreme Court, emphasizing that reassessment must be based on material that leads to a bona fide belief of income escaping assessment, and not on mere suspicion or borrowed satisfaction. The Tribunal agreed with the assessee, noting that the AO failed to provide corroborative evidence and did not allow cross-examination, which violated principles of natural justice. The Tribunal quashed the reassessment, citing the lack of independent application of mind and the reliance on retracted statements.

2. Legitimacy of Holding Diamond Purchases as Bogus:
The assessee contested the addition made by the AO, which was based on the claim that diamond purchases were bogus. The AO had added 25% of the purchases as income, which was later reduced to 15% by the CIT(A). The Tribunal found that the AO's basis for the addition was the statement of Rajendra Kumar Jain, which lacked corroborative evidence. The Tribunal emphasized that once the books of account were rejected and a Gross Profit (GP) rate was applied, the purchases were implicitly accepted. The Tribunal reiterated that the reassessment was invalid as it was based on borrowed satisfaction and a change of opinion, rather than new material evidence.

3. Appropriateness of Applying Profit Rates:
The assessee argued that the CIT(A) erred in applying a profit rate without considering the nature and value of the goods and the relevant CBDT circulars applicable to the diamond trade. The Tribunal, having already quashed the reassessment, found this issue to be unacademic and did not adjudicate on it. However, the Tribunal's decision to quash the reassessment inherently addressed the inappropriate application of profit rates, as the basis for reassessment itself was found to be invalid.

Conclusion:
The Tribunal quashed the reassessment orders for both assessment years, holding that the reassessment was based on borrowed satisfaction without independent application of mind by the AO. The Tribunal emphasized the necessity of corroborative evidence and the opportunity for cross-examination, which were not provided in this case. Consequently, the additions made on the basis of alleged bogus purchases were also invalidated. The Tribunal's decision underscores the importance of adhering to principles of natural justice and the requirement for AOs to independently verify information before initiating reassessment.

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