Addition of income not connected with recorded reasons for reassessment proceedings is erred in law

Abdul Rashid Sofi C/o Peer & Co. Vs ITO (ITAT Amritsar)

ITAT Amritsar held that reassessment proceedings initiated on recorded reasons on belief that the specific income has escaped assessment, however, addition on some other income not having any connection with the recorded reason is erred in law.

Facts-

The assessee’ s case is reopened u/s 148 of the Act on the ground that the assessee is one of the settlers of M/s Mars Educational Trust, (M.E.T.) situated at village Sangam Tehsil Bijbehara Distt. The assessee is jointly and separately owner of land and building with the trust and assessee took loan from bank after mortgaging the their land and building. The total value of the assets was Rs.9,46,05,848/- and also a capital fund Rs. 1,33,75,750/- was as source of the investment.

During assessment proceeding the ld. AO did not illuminate any point related to recorded reason which was formed on the basis of reasons to believe. But the entire addition was made on basis of income from petrol pump amount of Rs.6 lac and agricultural income Rs.1,75 ,000/-. The assessee filed a return related said assessment year U/s 139 bearing acknowledgement No.546 on dated 27.03.2009. The notice u/s 148 was issued and assessee made the reply of the said notice, but entire addition was made without considering a single point of the recorded reason. The assessee filed appeal before the ld. CIT(A) & relief was granted in appeal amount to Rs. 1,75,000/-. But other point related to addition Rs.6 lac was upheld. Also, the legal point was not adjudicated by the ld. CIT(A) in the impugned appeal order.

Being aggrieved, assessee filed an appeal before us.

Conclusion-

In the assessment proceeding there is no connection in between recorded reason and addition of the income. The entire reasons to believe are itself erroneous and not established on the true fact.

The fact which was ascertained / verified by the AO is itself erroneous. However, if after issuing a notice under section 148, he accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income.

If the ld. AO intends to do so, a fresh notice under section 148 would be necessary, legality of which would be tested in event of a challenge by assessee. The entire recorded reason is erroneous. The ld AO acted beyond jurisdiction.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

The instant appealsof the assessee are directed against the order of the ld. Commissioner of Income Tax (Appeals)-2, Amritsar, (Camp at Jammu)[in brevity the ld. CIT(A)] bearing appeal 157/2015-16 and 158/15-16, date of order 09.03.2018, the order passed u/s 250 (6) of the Income Tax Act 1961, [in brevity the Act] for A.Ys. 2008-09 and 2009-10.The impugned orders were originated from the order of the Income Tax Officer, Anantnag, (in brevity the AO) order passed u/s 144/147 for A.Y. 2008-09 and u/s 143(3)/147 for A.Y. 2009-10.

2. The assessee filed the appeals with delay of 1014 days. The assessee had despatched the appeal to ITAT for filing on 17/05/2018 bearing Indian Speed Post Acknowledge no-ED773722105IN. But for technical glitches the appeals were A condensation application was filed by the assessee in view of the short payment of appeals fees which has already been rectified and balance fees has been paid.Reason of delay is well explained by the assessee. With the consent of ld. Sr. Dr, the delay of 1014 days is condoned.

3. The assessee filed prayer in form of ground before the bench which is reproduced as below:

“a. That the initiation of concealment proceedings are without any credible conclusive evidence which have been proved frivolous, wrong and erroneous itself in the order passed and therefore, all the proceedings initiated on such frivolous evidence are nullity abilities and does not stand test of law.

b. That the averments submitted by the appellant of no investment of any kind being made in the trust – M/s Mars Educational Trust during the impugned financial year under appeal have not been proved wrong by any corollary evidence, if any available with the Ld. A. O. and consequent finalization of assessment proceedings on other superfluous matters not covered by the reasons recorded to circumvent the deficiency in reasons is devoid of any credibility in the eyes of law.

c. That the final assessment arrived at by the Ld. A. O. does not prove directly or indirectly in any manner whatsoever any nexus with the reasons communicated at the outset which have been the basis of initiation of proceedings under the Act conclusively prove that the reassessment proceedings initiated are sham, baseless and ab-initio invalid.

d. That the Ld. A. O. has exceeded his jurisdiction in arbitrary enhancement of income in respect of business of the appellant without conclusively & credibly establishing that the reasons recorded for initiation of proceedings U/s 147/148 of the Act are correct and complete. In absence of such onus not discharged first he had no authority to make arbitrary reassessment of income and proceed to levy tax on any assumed income not covered under reasons recorded.

e. That the Ld. CIT(A) has erred in upholding the addition to the income of the appellant on presumptions & assumptions without discussing as to whether the Ld. A. O. was justified in apparently dismissing right/claim of the appellant that no books of accounts and records were needed to be produced before justifying the correctness of initiation of reassessment proceedings without deciding the case on merits of appeal filed.”

4. The assessee filed both the appeals on same issue and both reopened u/s 148 of the Act. For the sake of brevity the appeal in ITA no. 02/ASR/2021 is taken as lead case.

5. The brief fact of the case is that the assessee’ s case is reopened u/s 148 of the Act on the ground that the assessee is one of the settlers of M/s Mars Educational Trust, (M.E.T.) situated at village Sangam Tehsil Bijbehara Distt. The assessee is jointly and separately owner of land and building with the trust and assessee took loan from bank after mortgaging the their land and building. The total value of the assets was Rs.9,46,05,848/- and also a capital fund Rs. 1,33,75,750/- was as source of the investment. During assessment proceeding the ld. AO did not illuminate any point related to recorded reason which was formed on the basis of reasons to believe. But the entire addition was made on basis of income from petrol pump amount of Rs.6 lac and agricultural income Rs.1,75 ,000/-. The assessee filed a return related said assessment year U/s 139 bearing acknowledgement No.546 on dated 27.03.2009. The notice u/s 148 was issued and assessee made the reply of the said notice, but entire addition was made without considering a single point of the recorded reason. The assessee filed appeal before the ld. CIT(A) &relief was granted in appeal amount to Rs. 1,75,000/-. But other point related to addition Rs.6 lac was upheld. Also, the legal point was not adjudicated by the ld. CIT(A) in the impugned appeal order.

6. Being aggrieved, assessee filed an appeal before us.

7. During the hearing before the ITAT, none was present on behalf of the The matter was taken with a consent of the ld. Sr. DR. The counsel of the assessee filed Paper Book bearing page nos. 1 to 33 which is kept in the record. The assessee is a businessman operating petrol filing station at Anantnag, Kashmir as capacity of proprietor in number of years. Apart from the said business, the assessee is also a trustee in M/s Mars Educational Trust, Bijbehara, Kashmir which is a charitable trust engaged in imparting education to children. The appellant was served a notice u/s 148 with regard to special information received by the ld. AO regarding investment of appellant as founder in M/s Mars Educational Trust, for F.Y. 2007-08 relevant to A.Y. 2008-09. The reasons for the issuance of notice by communicating to the assessee vide letter dated 03.11.2014. The copy of the recorded reason is extracted as below:

“The assessee is one of the settlers of Mars Educational Trust (MET) situated at Village Sangam Tehsil B jibe ha ra Distt. Anantnag which is unregistered. The assessee is jointly and severally owner of land and buildings situated at Village Sangam Tehsil Bijbehara. The assessee has mortgaged the said land and buildings to J&K Bank B/U General Bus Adda Anantnag against raising of loan. The bank sanctioned loan in the name of M/s Delhi Public School Sangam, Anantnag (Managed by  Mars Educational Trust) and as a surety/pledge/hypothecation the value of following properties/assets and monies has been disclosed by the assessee be fore the said Bank for raising loan:-

In the cash flow statement submitted to the bank by the assessee, the assessee has shown increase in capital fund account at Rs. 1,33,75,750/= during the year under consideration without giving details of source of investment. Perusal of the records available in this office reveal that assessee has failed to file the return of income for the assessment year 2008-09 and for immediately preceding assessment years, failed to disclose 1the above assets and monies disclosed by him before the J&K Bank Limited Bus Add Anantnag for raising loan. The above value of land and buildings and monies including addition to the capital fund are, therefore, income of the assessee from un-disclosed sources.

Accordingly I have reason to believe that income of Rs.10, 79,81,598/= as discussed above has escaped assessment in this case. In order to tax the income escaped assessment as mentioned above and any other income which will come to the notice of the undersigned subsequently in the course of assessment proceedings, notice under section 148 of the I. T. Act, 1961 is required to be issued in this case for the assessment year 2008-09.”

7.1 The assessment was completed, and no addition was made on basis of the recorded reason. Only the addition was sustained after the order of the ld. CIT(A) that the income from business amount of Rs. 6 lac related to non-production of books of account for business of petrol pump. In the written submission the ld. Counsel elaborately discussed the error in assessment order of the ld. AO related to non-considering the reasons recorded during addition in total income. The extract from written submission of the assessee is reproduced as below:

“13. That the appellant places his reliance on the following decided case laws of Hon ’ble Supreme Court who have laid down that there must exist reasons for holding a belief of escapement of income, the question whether reasons were adequate or sufficient is not for the courts to decide. It is open to the assessee to establish that there in fact existed no belief or that the belief was not a bona fide one or was based on vague, irrelevant and non specific information.

A. That as stated under provisions of Income Tax Act, 1961, the Ld. A. O. must have definite “reasons to believe” that income, chargeable to tax has escaped assessment. The important words U/s 147 are ‘has reason to believe’ and these words are stronger than the words ‘is satisfied’. Ganga Saran & Sons Pvt. Ltd V. ITO (1981) 130 ITR 1(SC).

B. That before initiation of the proceedings U/s 147/148 the Ld. A. O. has miserably failed to determine and prove that commencement of reassessment proceedings was valid it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case. No such prima facie material justifying the initiation of proceedings was available with the Ld. A. O. on the basis of which the case could have been reopened. Raymond Wollen Mills Ltd V ITO (1999) 236 ITR 34 (SC).

C. That the invalidity and irrelevance of the information relied upon by the Ld. A. O. for initiation of the proceedings stands wildlife by the order passed by the Ld. A. O. wherein the submissions of the appellant that no such investment has been made by him in the trust have been accepted by the Ld. A. O. itself in the order passed. Therefore, proceedings initiated on such vague reasons /information does not stand test of law and thus the proceedings are ab initio invalid and bad in law.

a. Phool Chand Baj rang Lai v ITO (1993) 203 ITR 456 (SC)

b. Gujarat Narmada Valley Fertilizers Co. Ltd. . v. Dy. CIT (2014) 369 ITR 763 / 223 Taxman 109 (Guj.)(HC).

D. That it has been held in following cases that if no addition is made on the issue forming part of the Reasons to believe or the grounds on which re-assessment notices was issued U/s 148 of the Act was dropped, A.O. could not assess or reassess any other income or any addition can be made on subsequently identified issue under any pretext.

a. Ranbaxy Laboratories Ltd. Vs. CIT [2011] 336 ITR 136 (Del.),

b. CIT Vs. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom.),

c. Adhunik NiryatIspat Ltd. [2011] 63 DTR 212 (Del.)

d. CIT vs. Double Dot Finance Ltd., [2013] 31 com 352 (Bom.)

e. CIT vs Mohmed Juned Dadani [2013] 30 taxmann.coml (Guj.)

E. That the appellant forcefully submits that the return of income for the assessment year 2008-09 stands already filed on 27/03/2009 as stated hereinabove and the case has been assessed U/s 143(1)(a). Therefore, under provisions of Income Tax Act, 1961 finality of an intimation U/s 143(1) can be disturbed only by dispensing with the requirement of “reason to believe”. It was observed that no assessment order is passed when the return is merely processed U/s 143(1 )(a) & an intimation to that effect is sent to the assessee. However, where proceedings U/s 147 are sought to be taken with reference to an intimation framed earlier U/s 143(1), the ingredients of Sec. 147 have to be fulfilled; the ingredient is that there should exist “reason to believe” that income chargeable to tax has escaped assessment.

The honble Supreme Court in the case of Asstt. CIT v. RajdshJhaveri Stock Brokers (P). Ltd. [2007] 291 ITR 500, has held that provisions of section 147 does not give a carte blanche to Ld. A. O. to disturb the finality of the intimation U/s 143(1) at his whims and caprice; he must have reason to believe within the meaning of the Section. CIT Vs. Orient Craft Ltd. [2013] 29 taxmann.com 392 (Delhi).

F. That the appellant submits that the reasons for reopening assessment, were agitated & objected by the appellant on the grounds that in view of NIL- investment by the appellant in the impugned – Mars Educational Trust the reassessment proceedings are violate of principle of law and therefore it was mandatory for the Ld. A. O. to dispose off the preliminary objections raised by the appellant against the reasons recorded for reopening assessment by passing speaking order before proceedings with assessment. The Ld. A. O. without considering assessee ’s objection proceeded to pass orders for reassessment which is devoid of any legal standing and is fit to be quashed on the lines as laid down in the following decided case laws:

a. CIT Vs. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom.),

b. S. Suresh v. Dy. CIT [2005] 279 ITR 61 (Mad.).

c. Sri A.S. Chinnaswamy Raju Vs. ACIT, ITA 1559/BANG./2010, ITAT-Banglore

d. Banaskantha District Oilseeds Growers Co-op. Union Ltd. V. CIT [2015] 59 taxmann.com 328 (Gujarat).”

8. The ld. Sr. DR vehemently argued and only relied on the order of the ld. CIT(A). No other contrary facts were established during the hearing.

9. We heard the rival submissions and relied on the documents available in the record and respectfully observed the decision of the Hon’ble Courts. In the assessment proceeding there is no connection in between recorded reason and addition of the income. The entire reasons to believe are itself erroneous and not established on the true fact. Respectfully considered the order of Jet Airways (I) Ltd, supra the basis of issuance of notice U/s 148 is non discloser of primary facts by the assessee. The fact which was ascertained / verified by the AO is itself However, if after issuing a notice under section 148, he accepts contention of assessee and holds that income, for which he had initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income. If the ld. AO intends to do so, a fresh notice under section 148 would be necessary, legality of which would be tested in event of a challenge by assessee. The entire recorded reason is erroneous. The ld AO acted beyond jurisdiction. Accordingly, the order passed u/s 147/143(3) of the Act is non est. The ld. Counsel had relied on the judgments of the Hon’ble Apex Court. Considering the ratio decided of the judgments, we are in opinion that the assessment order passed by the ld. AO is erroneous and bad in law. The ld. CIT(A) had not considered the legal point in his order. The ld. Sr. DR was unable to bring any contrary fact or any judgment against the assessee’ s submission. Accordingly, the addition made by the ld. AO is quashed.

10. In the result, ITA Nos. 02/Asr/2021 & 03/Asr/2021 are allowed.

Order pronounced in the open court on 20.09.2022