2021 (7) TMI 728 - AT - Income Tax

Reopening of assessment u/s 147 - reason to believe - HELD THAT - AO should have reason to believe' that any income chargeable to tax has escaped assessment. The words reason to believe and escapement of income have been judicially interpreted by various courts to mean that the reason for the formation of belief must have a rational connection with the information received. Rational connection postulates that there must be some direct nexus or live link between the material coming to the notice of the income tax officer and the formation of the belief that there has been escapement of income of the assessee from assessment in the particular year. We agree with the contentions raised by the Ld. A.R. that the reason to believe that income chargeable to tax has escaped for the purposes of reopening assessment u/s 147 r/w 148 of the Act cannot be based on suspicion, surmises, conjectures but must be based on cogent and tangible material that establishes a causal nexus between the information available and inference drawn by the A.O. We are of the considered opinion that the A.O. had no specific information and/or material in his possession to even arrive at reason to believe that the share capital or share premium received by the assessees from any of the shareholders for the Assessment Years in question were not genuine and/or bogus and/or represented assessees own unaccounted funds. The A.O. s assumption of jurisdiction u/s 147/148 of the Act is therefore held to be illegal, erroneous and impermissible in law, rendering all subsequent proceedings to be non est . A.O.,by failing to confront the assessees with the evidence he had gathered u/s 142(2) Act, has, therefore, erroneously skipped the mandatory intermediary step prescribed u/s 142(3) of the Act. Thus, when the A.O. has directly gone on to pass the Assessment Orders u/s 147/143(3) of the Act to make the impugned additions u/s 68, the same is in direct violation of the procedure of enquiry prescribed in the Statute that inherently encompasses the Principle(s) of Natural Justice.There has been a violation of the Principle(s) of Natural Justice implied within Section142 (2) of the Act and such statutory non-compliance vitiates the entire assessment proceedings, therefore, rendering it to be null and void. Addition u/s 68 - HELD THAT - As already observed that the assessees have discharged the initial burden of proof, wherein the documents submitted by the assessees have remained un-refuted by the A.O. CIT - D.R. has submitted that the documents were a fa ade since the Inspector Reports draw a very different picture and cast a shadow on the genuineness of the investors. Our views on the veracity of these Reports and why the same could have not been utilized by the A.O. behind the back of the assessee have already been expressed. Thus, in light of the aforesaid findings, the grounds taken by the Department in the aforesaid Appeals are dismissed in favour of the assessee.

Summary

Issues Involved:
1. Validity of reopening assessments under Section 147/148 of the Income Tax Act.
2. Violation of Principles of Natural Justice.
3. Merits of additions made under Section 68 of the Income Tax Act for unexplained cash credits.

Detailed Analysis:

1. Validity of Reopening Assessments under Section 147/148:
The Assessing Officer (A.O.) issued notices under Section 148 to reopen assessments based on a survey conducted at the corporate office of the assessees, which was controlled by Bhushan Group. The A.O. cited the statement of an employee, Mr. B.S. Bisht, who claimed that several companies operating from the premises were paper companies. The A.O. concluded that the share capital and share premium received by the assessees were questionable. The assessees objected, arguing that there was no live link or causal nexus between the information and the belief that income had escaped assessment. The Tribunal held that the A.O. lacked specific information or material to establish a causal nexus between the information and the alleged escaped income. The reasons recorded were based on suspicion and conjecture, not on tangible material. Therefore, the assumption of jurisdiction under Section 147/148 was held to be illegal and erroneous, rendering all subsequent proceedings non-est.

2. Violation of Principles of Natural Justice:
The A.O. relied on Inspector Reports and field enquiries to make additions but did not confront the assessees with these findings. The Tribunal noted that Section 142(3) mandates that any information or evidence collected must be put to the assessee for rebuttal before being used for assessment. The A.O.'s failure to do so was a violation of the Principles of Natural Justice, rendering the assessment proceedings null and void. The Tribunal emphasized that the statutory procedure under Section 142 must be followed, and any deviation renders the assessment invalid.

3. Merits of Additions under Section 68:
On merits, the assessees had furnished documents such as confirmations, bank statements, and ITR acknowledgments to establish the identity, genuineness, and creditworthiness of the investors. The A.O. relied on Inspector Reports, which were not confronted to the assessees, to make additions under Section 68. The Tribunal noted inconsistencies in these reports and held that the assessees had discharged their initial burden of proof. The A.O. failed to refute the documentary evidence provided by the assessees. The Tribunal also noted that the requirement to prove the source of the source of the investors was not applicable for the assessment years in question. Therefore, the additions made under Section 68 were not sustainable.

Conclusion:
The Tribunal allowed the Cross Objections filed by the assessees, quashing the reopening of assessments under Section 147/148 and holding the assessment proceedings null and void due to the violation of Principles of Natural Justice. The Tribunal also dismissed the Department's appeals on merits, as the assessees had successfully discharged their burden of proof under Section 68.