2018 (10) TMI 1027 - AT - Income Tax

Reopening of assessment - regular scrutiny assessment u/s. 143(3) completed followed by reopening of assessment - reasons recorded by the AO before proposing to reopen the assessment - unexpalined exports - borrowed knowledge by AO - non independent application of mind - Held that - AO based on the information given by the DIT (Inv.) clearly reveals that assessee had exported 55.936 MT iron ore to its sister concern M/s. S. K. Resources Ltd., Hongkong for a total consideration of ₹ 13,90,97,755/-. This fact is not a new information since we note from the original assessment order dated 15.03.2013 passed u/s. 143(3) of the Act for the year under consideration wherein these facts are discernible from para 3.2 wherein the AO has noted in his words the facts of this case are that the assessee firm deals in export of iron ore and other minerals. It has made total sales of ₹ 13,90,97,755/-. This total sale is in respect of iron ore only and the whole of the sales have been made to the sister concern M/s. S. K. Resources Ltd., 2601, Metropoly Tower, Hongkong. Thereafter, the AO noted from the information given by the DIT(Inv) that the assessee had sold the iron ore through its associated enterprises to the end users at China for a higher price (prevailing price at China on the date of shipment) and thus, he concluded that there is profit shifting from India to China. This conclusion based on the aforesaid information is fundamentally flawed for the reason that DIT(Inv) has first of all given the FOB rate of iron ore prevailing in India which has been compared with the market rate prevailing at China. AO has simply gulped the information from DIT(Inv) to form a conclusion about escapement of income is itself flawed and cannot pass the test of reason to believe as laid by judicial precedents as discussed above. From the aforesaid reasons it is evident that other than the vague information given by DIT (inv) there is no other material the AO collected after preliminary enquiry which could have enabled him at the time of recording reasons to come to a conscious independent conclusion that income of the assessee has escaped assessment . The information given by DIT(Inv) can only be a basis to ignite/trigger reason to suspect for which reopening cannot be made for further examination to be carried out by him in order to strengthen the suspicion to an extent which can form the belief in his mind that income chargeable to tax has escaped assessment. No quantification of income escaping assessment has been spelt out by the AO in the reasons recorded for justifying reopening u/s. 147 of the Act. - decided in favour of assessee

Summary

Issues Involved:
1. Reopening of regular assessment under Section 143(3) of the Income-tax Act, 1961.
2. Compliance with Supreme Court's direction in GKN Driveshaft (India) Ltd. Vs. ITO & Ors.
3. Validity of the reasons recorded by the Assessing Officer (AO) for reopening the assessment.
4. Jurisdictional validity of the AO's actions based on information from the Directorate of Income Tax (DIT) Investigation.

Detailed Analysis:

1. Reopening of Regular Assessment under Section 143(3) of the Income-tax Act, 1961:
The main grievance of the assessee was against the action of the AO to reopen the regular assessment completed under Section 143(3) on 15.03.2013. The AO issued a notice under Section 148 on 08.09.2014 proposing to reopen the assessment. The assessee objected to this reopening, arguing that the AO did not apply his mind independently and merely acted on the information received from the DIT (Investigation), Kolkata.

2. Compliance with Supreme Court's Direction in GKN Driveshaft (India) Ltd. Vs. ITO & Ors.:
The assessee contended that the AO did not dispose of the objection to the reopening of the assessment as mandated by the Supreme Court in GKN Driveshaft (India) Ltd. Vs. ITO & Ors. This omission was argued to make the order fragile in the eyes of the law. The Tribunal noted that the AO's failure to address the objection was a significant procedural lapse.

3. Validity of the Reasons Recorded by the Assessing Officer (AO) for Reopening the Assessment:
The Tribunal scrutinized the reasons recorded by the AO for reopening the assessment. The AO's reasons were based on information from the DIT (Investigation) indicating that the assessee exported iron ore to its associated enterprise (AE) in Hong Kong at prices lower than the prevailing market prices in China, suggesting profit shifting from India to Hong Kong. The Tribunal found that the AO did not independently verify this information or conduct further inquiries to substantiate the claim of income escapement. The reasons recorded were deemed vague, lacking specific details, and based on borrowed satisfaction rather than independent application of mind.

4. Jurisdictional Validity of the AO's Actions Based on Information from the Directorate of Income Tax (DIT) Investigation:
The Tribunal emphasized that the AO must have a "reason to believe" that income has escaped assessment, which requires a foundation based on information and belief based on reasoning. The AO's reliance on the DIT (Investigation) report without independent verification was insufficient to establish a valid reason to believe. The Tribunal cited various judicial precedents, including decisions from the Delhi High Court and Bombay High Court, to support the view that the AO's reasons must demonstrate a tangible link between the information received and the belief that income has escaped assessment. The Tribunal concluded that the AO's actions were based on borrowed satisfaction and did not meet the legal requirements for reopening the assessment.

Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the reopening and the consequent reassessment order framed by the AO. The Tribunal held that the AO's assumption of jurisdiction to reopen the assessment was invalid due to the lack of independent application of mind and failure to comply with procedural requirements as mandated by the Supreme Court. The reasons recorded by the AO were found to be vague and insufficient to justify the reopening of the assessment.