2023 (11) TMI 1103 - AT - Income Tax

Validity of reopening of assessment - reason to believe v/s 'reason to suspect' - allegation of issue of shares on premium to paper companies - HELD THAT - Adverse information may trigger reason to suspect , which is not sufficient to re-open an assessment because the requirement of law is reasons to believe escapement of income and not reason to suspect . This fine distinction should be borne in mind and when an AO receives an adverse information against an assessee, then he must make reasonable inquiry and collect material which would make him believe that there is in fact escapement of income. It is also settled position of law that when the validity of the reasons recorded is tested, then it should be examined on a standalone basis. Nothing can be added or subtracted. The AO should speak through the reasons recorded and the assessee should not be guessing as to what was the reasons for which the AO has reopened the assessment. Issue of shares at premium - allegation of accomodation transactions - From an analysis of the reasons recorded by AO, it is discerned that in the relevant year under consideration the assessee company had issued shares for a premium of Rs. 40 per share and in that process assessee has collected share- premium of Rs. 52 Lakhs which have escaped assessment. In this factual context it is noted that the settled position of law is that adverse information against an assessee would trigger only reason to suspect . Once the AO found that the assessee had issued 1,30,000 shares of face value of Rs. 10/- for share premium of Rs. 40 per share, then, he ought to have conducted a preliminary inquiry from which he should have found as a matter of fact who were the investors of these 1,30,000 shares; and whether those investors were paper companies providing only accommodation entry etc. And thereafter, he should have recorded the reasons as to whether the assessee had engaged in taking accommodation entry from the entry operators as reveled from search operation conducted at RK Kedia Group/Entry Operators as stated in para 2 3 of reason recorded. Since AO has not carried out even the preliminary enquiry after taking note of assessee collecting share capital with premium, the AO cannot be said to be possessing the requisite reason to believe, escapement of income . AO in the recorded reasons failed to provide the name of the investors which AO suspects to be entry operators which names of investors we find from the re-assessment order that there were four (4) companies . Thus, the AO failed to even mention the name of the investor/accommodation entry operators/paper companies, in his recorded reasons to believe escapement of income and bring out the nexus of these investors with the entry operators. AO had only information which can raise reasons to suspect and not reasons to believe which is not sufficient for usurping the reopening jurisdiction u/s 147 - Decided in favour of assessee.

Issues Involved:
1. Transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961.
2. Dropping of proceedings initiated under Section 153C and reopening of assessment.
3. Reopening of assessment under Section 147 by issuance of notice under Section 148 of the Act.

Summary:

Issue 1: Transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961
The Ld. AR of the assessee did not press ground no. 1 regarding the action of the transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961. Consequently, this ground stands dismissed.

Issue 2: Dropping of proceedings initiated under Section 153C and reopening of assessment
The Ld. AR also did not press ground no. 2 concerning the action of the AO dropping the proceedings initiated under Section 153C and instead resorting to the impugned reopening of assessment. Therefore, this ground also stands dismissed.

Issue 3: Reopening of assessment under Section 147 by issuance of notice under Section 148 of the Act
The primary issue dealt with is the action of the AO to reopen the assessment under Section 147 by issuing a notice under Section 148, which the assessee contended was bad in law. The Tribunal examined the reasons recorded by the AO for reopening the assessment. The legal principle established is that the AO must have "reason to believe" that income has escaped assessment, which requires a foundation based on information and belief based on reason.

The Tribunal noted that the AO's reasons for reopening were based on a search action on RK Kedia Group, which revealed that certain entities were controlled by entry operators providing accommodation entries. The AO observed that the assessee issued shares at a high premium, which seemed unjustified given the company's financials. However, the AO failed to conduct a preliminary inquiry to identify the investors and establish their connection to the entry operators. The Tribunal emphasized that adverse information might trigger "reason to suspect," but not "reason to believe," which is required for reopening an assessment.

Since the AO did not carry out the necessary preliminary inquiry and failed to mention the names of the investors or establish their nexus with the entry operators in the recorded reasons, the Tribunal concluded that the AO did not possess the requisite "reason to believe" that income had escaped assessment. Therefore, the action of the AO to initiate reopening of the assessment was found to be without jurisdiction and was quashed.

Conclusion:
The appeal of the assessee was allowed, and the order pronounced in the open court on 20/09/2023.

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