Reassessment without application of mind and examining the facts is invalid and liable to quash

Brief of the case:

Hon’ble ITAT decided in this matter that reopening without application of mind is liable to quash and also elaborate that examination of facts and information received is necessary before reopening. In addition to this legal ground ITAT also heard the appeal on merits and decided various issues after considering the facts of the case.

Facts of the case:

• Original assessment of the assessee was accepted u/s 143 (1).
• Later on, on the basis of certain information received the case was reopened and notice was served accordingly.
• Assessment was completed u/s 147 which was challenged in appeal before CIT (A) who upheld the reopening.
• Besides the above AO also made addition of 20% of total amount after rejecting books of account. CIT (A) approved this action of AO by holding that since the sales have been accepted as genuine, for determining the net profit it will not be appropriate to tax the entire sales as income.

Contention of the revenue:

• In the information received it is clearly mentioned that these person received accommodation entries and name of the assessee appears in the list. Hence, AO was well in power to reopen the case of the assessee.
• At the time of reopening only prima facie material has to be looked into and there is no need of conclusive evidences.
• CIT (A) has confirmed the action of the AO while passing order.
• The CIT (A) has been most fare in restricting the addition to 20% despite holding that the purchases are bogus.
• In the statement all three persons accepted that they provide accommodation bills.
• The persons did not appear in response to the summons hence cross examination could not be provided.
  

Contention of the assessee:

• In the reason recorded assessee simply narrated the letter received from CIT whereby there is an allegation that certain persons provide accomodatiion entries.
• AO was having balance sheet and P&L a/c of the assessee filed with ROI.
• He has to firstly consider the facts of the case with that of information received and only after then he can form a belief to reopen the case.
• It is a case of non-application of mind and the case was reopened on the basis of information received from the higher authorities.
• Even JCIT has not applied mind in forming believe that assessee has escaped assessment.
• AO as well as CIT (A) have relied upon the statements of three person without verifying the facts and without providing an opportunity of being heard to the assessee.
• It is not disputed that the parties are not in trade and purchases were made on payment by account payee cheques so there was no reason for the AO to draw any adverse inference against the assessee.
• No further material was brought by the AO to show that purchases are bogus.
• 4% VAT is applicable on scrap which was paid by assessee as evident from the sale and purchase invoices and Ld. CIT (A) has indulged into surmises by making an observation that assessee would have something on VAT.
• No adverse finding was given by AO regarding understatement of sales and overstatement of purchases consideration and in absence of any adverse finding CIT (A) aas not right in enhancing profit by 20%.
• Invoking provision of section 40A(3) was not correct as the payments were made by account payee cheques. Also no purchases were made out of books of account.
  

Held by the ITAT:

• It is evident that the case was reopened on the basis of information received from the superior authorities with the direction to take necessary action.
• List of the person who obtained accommodation entries was provided to the AO in CD and the parties accepted that accommodation entries were provided to the persons mentioned in list. This is the main basis of AO in forming belief of reopening.
• It is clear that at the time of forming belief AO did not have information and he only have letter received from the CIT.
• The must be some nexus between reason to believe and material available.
• The reason to believe has to be that of AO but there have to be an application of mind.
• In the reason recorded AO only mentioned the name of the party and amount but did not mention nature of the party.
• AO made no effort to look into the return of the AO which was available with him. AO failed to look into the record available with him and in a mechanical way reopen the assessment only after the receipt of information.
• Reopening was without application of mind and examining the facts and liable to be quashed.
• Statements were provided to the assessee but no opportunity for cross examination was provided to the assessee.
• It was no doubted that assessee and parties are in same business.
• Doubts cannot be a basis of sustaining allegation.
• Sufficient evidences were produced by assessee which the AO has not been able to rebut.
• Purchases made by assessee cannot be held as bogus and hence additions made on this account cannot be sustained.
• Provisions of section 40A (3) cannot be invoked in this case as purchases are not made in cash.

NF