2024 (3) TMI 889 - HC - Income Tax

Validity of reopening of assessment - as alleged Petitioner has availed of hawala/accommodation entries from the Group provider of provides accommodation entries - AO states that just because payments were made through banking channel does not sanctify the transaction and submission of purchase and sales bills cannot legitimize the transactions, as the same evidence points to the issuing of accommodation bills as a part of this modus operandi - HELD THAT - The condition precedent of reason to believe that income chargeable to tax has escaped assessment on correct facts must be satisfied by the AO, who has to have jurisdiction to issue the reopening notice. Even when Assessee has pointed out that her relationship with Karnawat Impex P. Ltd. was only as the jeweller and a customer, payments have been made by cheque and the jewellery bought have been disclosed in the wealth tax returns filed, the AO instead of making a bald statement that payment through cheques does not sanctify, should have brought evidence or confronted Petitioner with evidence to the contrary. Therefore, it would be safe to conclude that the AO, not having done that, did not dispute the facts stated by Petitioner. Liquidated damages - Petitioner has in the computation of income, disclosed by way of a note that she has received a sum of Rs. 32.93 per share for 2,03,152 equity shares of Great Offshore Ltd. as liquidated damages, the amount has been reduced from the cost of the equity shares as per the provisions of Section 51 of the Act and the excess of liquidated damages received over the cost of the equity shares has been treated as capital receipt and not offered to tax. Even during the assessment proceedings, as could be evidenced by a letter dated 30th November 2011, query was raised regarding these liquidated damages and Petitioner has given detailed response. Subsequently, an assessment order dated 14th December 2011 has been passed u/s 143(3) of the Act accepting the returned income. Therefore, on the facts as found, there could be no reason for AO to believe that income chargeable to tax has escaped assessment. Assessee appeal allowed.

Summary

Issues Involved:
The issues involved in the judgment are the reopening of assessment under Section 147 of the Income Tax Act, 1961 for Assessment Year 2009-2010 based on alleged benami transactions and Hawala activities, treatment of liquidated damages received as 'capital receipt not chargeable to tax,' and the purchase of diamond jewellery disclosed in wealth tax returns.

Reopening of Assessment:
The Petitioner's assessment for AY 2009-2010 was sought to be reopened by the Revenue based on alleged benami transactions and Hawala activities. The Court noted that the law permits reopening of assessment if transactions are carefully examined and scrutinized. However, the Court found that the names of parties were ascertainable from the documents and bank statements provided during assessment, indicating that the law did not permit reopening on the grounds stated. The Court held that the AO must establish a reason to believe that income chargeable to tax has escaped assessment, and failure to dispute the facts stated by the Petitioner could lead to an adverse inference against the Revenue.

Treatment of Liquidated Damages:
The Petitioner received liquidated damages for the failure of a buyer to purchase shares, treating it as a 'capital receipt not chargeable to tax.' The Petitioner disclosed this amount in the Return of Income and reduced it from the cost of the shares as per Section 51 of the Act. The AO had raised queries during assessment proceedings regarding these damages, and the Petitioner provided a detailed response. An assessment order was passed accepting the returned income, indicating that there was no reason for the AO to believe that income chargeable to tax had escaped assessment.

Purchase of Diamond Jewellery:
During the same AY, the Petitioner purchased diamond jewellery from a company and disclosed the payment in wealth tax returns. The AO sought to reassess the Petitioner based on alleged Hawala activities and benami transactions. The Petitioner's objections were rejected without addressing the factual assertions made. The Court emphasized that the AO must establish a valid reason to believe that income has escaped assessment and confront the Assessee with evidence if disputing the facts presented. In this case, the AO failed to do so, leading to the Court quashing the notice seeking to reopen the assessment.

This judgment highlights the importance of the AO having a valid reason to believe that income has escaped assessment before issuing a reopening notice. The Court emphasized the need for the AO to address the Assessee's explanations and confront them with evidence if disputing the facts presented. In this case, the Court found that the AO did not meet the condition precedent for reopening the assessment, leading to the notice being quashed.