2025 (4) TMI 781 - AT - Income Tax

Reopening of assessment - reason to believe or suspect - borrowed satisfaction - addition made by the AO u/s. 68 treating the sale of shares by the assessee as bogus - HELD THAT - A perusal of the reasons recorded for reopening of the assessment would reveal that in this case the only information received by the AO was that the assessee company was beneficiary of accommodation entry through layering of bank transactions in the Financial Year 2010-11. This information is a vague information. The AO did not co-relate and verify this information from the accounts of the assessee. There is no mention in the said reasons recorded as to from whom assessee had received the aforesaid amount of Rs. 50, 00, 000/-. What was the nature of the transaction and as to whether the assessee had received the aforesaid sum of Rs. 50, 00, 000/- as share application money or as loan or on account of sale of penny stocks. There is no name mentioned of the parties who allegedly passed on the amount in question to the assessee. The aforesaid information therefore was not sufficient to form the belief that the income of the assessee has escaped assessment without co-relating the same with the accounts of the assessee or without verifying the correctness of the said information from any other sources. The reasons to believe of the AO in this case were based on borrowed satisfaction of the Investigation Wing without application of mind. The powers of Assessing Officer to reopen an assessment though wide are not plenary. The words of the statute are reason to believe and not reason to suspect . The entire law as to what would constitute reason to believe has been summed up by the hon ble Supreme Court in the case of Income Tax Officer v Lakhmani Mewaldas 1976 (3) TMI 1 - SUPREME COURT . The reasons pointed out by the AO cannot be said to be the reasons to form the belief that income of the assessee had escaped assessment. Therefore the reopening of assessment was bad in law and consequential assessment order is not sustainable and the same is accordingly quashed. Decided in favour of assessee.

ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

Whether the reopening of the assessment under Sections 147/148 of the Income-tax Act, 1961, was valid.
Whether the addition of Rs. 50 lakh under Section 68 of the Act, treating the sale of shares as bogus, was justified.

ISSUE-WISE DETAILED ANALYSIS

Validity of Reopening of Assessment under Sections 147/148 of the Act

Relevant Legal Framework and Precedents: The reopening of an assessment under Section 147 requires the Assessing Officer (AO) to have "reason to believe" that income has escaped assessment. This belief must be based on tangible material and not merely on suspicion. The Supreme Court's decision in "Income Tax Officer v Lakhmani Mewaldas" and other high court rulings, such as "CIT vs Paramjit Kaur" and "PCIT Vs. Meenakshi Overseas Ltd.", emphasize the need for a rational connection between the information received and the belief of income escapement.
Court's Interpretation and Reasoning: The Tribunal found that the reasons recorded by the AO for reopening were vague and lacked specificity. The information received from the Investigation Wing merely indicated that the assessee was a beneficiary of Rs. 50 lakh through accommodation entries, without detailing the nature of the transaction or identifying the parties involved.
Key Evidence and Findings: The AO's reasons for reopening were based on borrowed satisfaction from the Investigation Wing, without independent verification or correlation with the assessee's accounts. The Tribunal noted the absence of any direct nexus or live link between the information and the belief of income escapement.
Application of Law to Facts: The Tribunal applied the legal standards for "reason to believe" and found that the AO's reasons were insufficient to justify reopening. The lack of tangible material or independent verification rendered the reopening invalid.
Treatment of Competing Arguments: The assessee argued that the reasons for reopening were vague and constituted borrowed satisfaction. The Department relied on the lower authorities' orders. The Tribunal sided with the assessee, emphasizing the need for a direct nexus between information and belief.
Conclusions: The Tribunal concluded that the reopening of the assessment was bad in law due to the lack of sufficient material to form a belief of income escapement. Consequently, the assessment order was quashed.

Addition of Rs. 50 Lakh under Section 68 of the Act

Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, where the onus is on the assessee to explain the nature and source of any sum credited in the books. If the explanation is unsatisfactory, the sum may be treated as income.
Court's Interpretation and Reasoning: The Tribunal did not need to delve deeply into this issue, as the quashing of the reopening rendered the consequential assessment order unsustainable.
Key Evidence and Findings: The Tribunal noted that the AO's basis for the addition was the same vague information used for reopening, which lacked specificity and independent verification.
Application of Law to Facts: Given the invalidity of the reopening, the Tribunal did not further analyze the merits of the addition under Section 68.
Treatment of Competing Arguments: The Tribunal focused on the legal ground of reopening and did not address the merits of the addition in detail due to the quashing of the assessment order.
Conclusions: The addition of Rs. 50 lakh was deleted as a consequence of the quashing of the assessment order.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Reopening of the assessment is not permitted for making fishing and roving enquiries. The Assessing Officer, after receipt of alleged information from the Investigation Wing, was supposed to correlate the same with the records and other facts of the case and thereafter should have satisfied himself of escapement of income."
Core Principles Established: The Tribunal reaffirmed the principle that "reason to believe" must be based on tangible material and not borrowed satisfaction. The AO must independently verify information before forming a belief of income escapement.
Final Determinations on Each Issue: The Tribunal determined that the reopening of the assessment was invalid, leading to the quashing of the assessment order and the deletion of the Rs. 50 lakh addition.