2018 (12) TMI 571 - AT - Income Tax

Reopening of assessment - disallowing loss due to change of client code and disallowance on account of commission of 2% for the entry - reason to suspect or reason to believe - validity of reasons to believe - Held that - AO has been taken mechanically on the basis of alleged report of Investigation Wing. The mere recording/ formulation of reasons on the basis of reproduction of information from Investigation Wing and, issuing notice for initiation of re-assessment proceedings does not constitute application of mind much less independent application of mind. Hence, the proceedings are without jurisdiction. It is settled law that AO cannot act mechanically on the basis of report of Investigation Wing and to show that the AO has applied his mind, he must distinct all those materials and he must also show that what was material on record. Hence, initiation of proceedings is also based on non-application of mind much less independent application of mind. In this case the proceedings have been initiated on the basis of no material much less any tangible and, relevant material and as such reasons record do not constitute valid reason to believe for initiating proceedings u/s 147 of the Act. It is a case of reason to suspect and not reason to believe. After perusing the aforesaid extracts from the assessment order, it is evident that the assessee has raised objection to initiation of assessment proceedings u/s. 147 of the Act vide letter dated 24.11.2017 and the aforesaid objections were disposed of by the AO vide order dated 27.11.2017, which shows that the AO did not accept the objections so filed, he shall not proceed further in the matter with in a very short period of service of order disposing off objection, however, he has made the order of assessment u/s. 147/143(3) on 8.12.2017, which is not in accordance with law and not permissible. - Decided in favour of assessee.

Issues Involved:
1. Validity of the initiation of proceedings under section 147 of the Income Tax Act.
2. Legitimacy of the addition of ?6,05,037/- under section 68 of the Income Tax Act.
3. Justification for the addition of ?3,702/- on account of commission.
4. Evaluation of documentary evidence supporting the appellant's transactions.
5. Legality of the levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of the Initiation of Proceedings under Section 147:
The appellant contested the initiation of proceedings under section 147, arguing that it was done without jurisdiction and lacked specific, relevant, and tangible material to form a "reason to believe" that income had escaped assessment. The appellant further argued that the reasons were recorded mechanically without application of mind, and the approval granted was also mechanical. The Tribunal found that the proceedings under section 147 can only be initiated based on tangible material and not on assumptions and presumptions. The Tribunal noted that the AO's belief must be reasonable and based on relevant and material reasons, as held in CIT vs. Kelvinator of India Ltd. (320 ITR 561) and ACIT vs. Rajesh Jhaveri Stock Brokers (291 ITR 500). The Tribunal concluded that the initiation of proceedings was based on no material and constituted a "reason to suspect" rather than a "reason to believe."

2. Legitimacy of the Addition of ?6,05,037/- under Section 68:
The appellant argued that the addition of ?6,05,037/- representing unexplained credit entries was unsubstantiated and based on speculation, generalized statements, and theoretical assumptions. The Tribunal noted that the AO had relied on information from the Investigation Wing, Ahmedabad, regarding client code modifications used to shift profits and losses artificially. However, the Tribunal found that the AO's reasons were based on assumptions and lacked tangible and relevant material. The Tribunal emphasized that the AO must apply his mind independently and not act mechanically based on the Investigation Wing's report. Consequently, the Tribunal quashed the reassessment, rendering the addition under section 68 academic and not adjudicated.

3. Justification for the Addition of ?3,702/- on Account of Commission:
The appellant contested the addition of ?3,702/- on account of a 2% commission for the entry, arguing that the transactions were supported by documentary evidence. The Tribunal found that the AO's reasons for the addition were based on assumptions and lacked tangible material. Since the reassessment was quashed, the issue of the addition of ?3,702/- became academic and was not adjudicated.

4. Evaluation of Documentary Evidence Supporting the Appellant's Transactions:
The appellant argued that all transactions were supported by documentary evidence, including contract notes and account payee transactions. The Tribunal noted that the AO had not conducted any inquiry or verification of the appellant's records and had relied solely on the Investigation Wing's report. The Tribunal emphasized that the AO must independently verify the material facts and not act mechanically. As the reassessment was quashed, the Tribunal did not adjudicate this issue further.

5. Legality of the Levy of Interest under Section 234B:
The appellant contested the levy of interest under section 234B, arguing that it was not leviable based on the facts of the case. The Tribunal found that the reassessment proceedings were initiated without jurisdiction and quashed the reassessment. Consequently, the issue of the levy of interest under section 234B became academic and was not adjudicated.

Conclusion:
The Tribunal quashed the reassessment proceedings initiated under section 147, finding them to be without jurisdiction and based on assumptions rather than tangible and relevant material. Consequently, the additions under sections 68 and 234B, as well as the evaluation of documentary evidence, became academic and were not adjudicated. The appeal filed by the assessee was allowed.

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