2023 (7) TMI 865 - HC - Income Tax

Reopening of assessment u/s 147 - Reasons to believe - purported failure on the part of assessee to produce evidence/material concerning the remaining purchases to the records of JMD being seized by the DGCEI - HELD THAT - CIT(A) has merely observed that because some part of the record could be produced, the respondent/assessee should have been able to produce the entire record. There, perhaps, may have been some weight in this observation, if only a specific allegation had been made by the AO while triggering reassessment, that because the respondent/assessee failed to disclose, fully and truly, all material facts necessary for carrying out the assessment, income otherwise chargeable to tax had escaped assessment. Furthermore, in our opinion, the AO could have called the bluff of the respondent/assessee if it was construed to be one by addressing an appropriate communication to the DGCEI. Reasons recorded by the AO should not only have made such an assertion but should have also indicated the material found in the search operation carried out on the DSC Group of Companies, which gave reasons to believe that income chargeable to tax had escaped assessment. The arguments advanced on behalf of the appellant/revenue, that notwithstanding the absence of a specific allegation that the respondent/assessee had failed to disclose, fully and truly, all material facts, the reopening of the assessment was sustainable because it was a result of search action, is flawed. Thus, the argument that the search action spoke for itself fails to recognize that the AO had to apply his mind to the material available on record, which at the relevant point in time, would have impelled him to form a belief that because of the failure on the part of the respondent/assessee to disclose, fully and truly, all material facts necessary for assessment, income otherwise chargeable to tax had escaped assessment. No such exercise was carried out by the AO at the relevant point in time. It is only after reassessment had been triggered, that information was sought by the AO concerning the purchase made by the respondent/assessee from JMD. We, thus, tend to agree that the jurisdictional ingredients for reopening the assessment provided in the first proviso to Section 147 of the Act were absent - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the reopening of assessment under Section 147 of the Income Tax Act, 1961, was justified in the absence of an allegation that the assessee failed to disclose all material facts.
2. Validity of the additions made by the Assessing Officer (AO) to the taxable income of the assessee.

Summary of the Judgment:

Issue 1: Reopening of Assessment under Section 147
The primary issue was whether the assessment could be reopened under Section 147 of the Income Tax Act, 1961, without an allegation that the assessee failed to disclose all material facts necessary for the assessment. The Tribunal had reversed the CIT(A)'s decision, which upheld the AO's reopening of the assessment. The High Court noted that the trigger for reopening the assessment was a search operation against the DSC Group of Companies. However, the AO did not have any material evidence indicating that the assessee had failed to disclose all necessary material facts. The High Court highlighted that the jurisdictional ingredients for reopening the assessment, as provided in the first proviso to Section 147, were absent. The AO's reasons for reopening the assessment did not include a specific allegation of the assessee's failure to disclose material facts, which is a necessary condition for reopening beyond four years. Thus, the reopening of the assessment was deemed flawed and bad in law.

Issue 2: Validity of Additions Made by AO
The AO had made additions to the taxable income of the assessee, including Rs. 3,01,69,142/- for unverified purchases and Rs. 1,33,219/- for disallowed expenditure related to exempt dividend income. The Tribunal had reversed these additions, attributing the failure to produce evidence for the purchases to the seizure of records by the DGCEI. The High Court noted that the AO had accepted part of the purchases as genuine and found no merit in the argument that the assessee's employees being partners in JMD should affect the genuineness of the purchases. The High Court agreed with the Tribunal's finding that the AO's reasons for reopening the assessment were insufficient and that the additions made were not justified.

Conclusion:
The High Court upheld the Tribunal's decision, concluding that the reopening of the assessment under Section 147 was not justified due to the absence of an allegation that the assessee failed to disclose all material facts. Consequently, the additions made by the AO were also deemed invalid.