Delhi High Court held In the case of Principal CIT vs. G & G Pharma India Ltd. that this is basic requirement of law u/s 147 that before reopening of assessment, AO must have apply his mind to the available materials and have reasons to believe that income of the assessee has escaped assessment. After reopening of assessment, analysis of material will be only a post mortem exercise which will not make any basis for validity of reopening of assessment.
Facts of the Case
The Assessee filed its return on 14th November 2004 at Rs.1,190/- which was processed under Section 143(3) of the Act on 1st March 2004. Thereafter, on the basis of information received from the Directorate of Investigation, the AO issued notice under Section 148 of the Act to the Assessee on 19th March 2010 i.e., more than six years after the assessment. The AO made various additions and completed the assessment at Rs.55,50,1801. The Appeal of the Assessee was dismissed by the CIT (A).The Assessee’s further appeal was allowed by the ITAT on the ground that AO has no reason to believe that the income has escaped assessment.
Contention of the Assessee
The ld counsel of the assessee placed reliance on other decisions of this Court including CIT v. Pradeep Kumar Gupta (2008) 303 ITR 95; the decision dated 27th March 2015 in W.P.(C) No. 5330 of 2014 (Krown Agro Foods Pvt. Ltd. v. ACIT); the decision dated 4th August 2015 in ITA No. 486 of 2015 (CIT v. Shri Govind Kripa Builders P.Ltd.) and the decision dated 24th August 2015 in ITA No. 226 of 2015 (CIT v. Ashian Needles Pvt. Ltd.).
Contention of the Revenue
The ld counsel of the revenue relied on the decision dated 21st March 2012 passed by this Court in ITA No. 643 of 2011 (CIT v. India Terminal Connector System Ltd.) where, according to him, in similar circumstances, the appeal of the Revenue was allowed and the matter was remanded to the ITAT for examination of the case on merits. He also relied upon the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-tax Officer (1993) 203 ITR 456 SC.
Further submitted that like in the case of India Terminal Connector System, in the present case as well, there was specific information regarding the name of the entry provider, the date on which the entry was taken, the cheque details as well as the amount credited to the account of the Assessee. He accordingly submitted that this by itself constituted sufficient material for the AO to form an opinion that the assessee company has introduced his own unaccounted money in its bank account by way of accommodation entries.
Held by CIT (A)
The CIT (A) after referring the documents submitted by the revenue held that the reopening of assessment is valid.
Held by ITAT
The Tribunal set aside the orders of reopening of assessment. It was held that apart from making a mere reference to information received from the investigation wing, the AO mechanically issued notice under Section 148 of the Act, without coming to an independent conclusion that he has reason to believe that the income has escaped assessment.
Held by High Court
In the case of Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, in which the Supreme Court was dealing with a case where the AO had received certain communications from the CIT showing that the alleged creditors of the Assessee were “name-lenders and the transactions are bogus.” The AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment. The Supreme Court disagreed and observed that the AO “had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be ‘“bogus transactions’. The Supreme Court concluded that it was not satisfied that the ITO had any material before him which could satisfy the requirements under Section 147 and therefore could not have issued notice under Section 148. Also In ACIT vs. Dhariya Construction Co.(2010)328 ITR 515 the Supreme Court held that opinion of the DVO per se is not an information for the purposes of reopening assessment under section147. The AO has to apply his mind to the information, if any, collected and must form a belief thereon.
Also recently, this Court rendered a decision dated 22nd September 2015 in ITA No. 356 of 2013 (Commissioner of Income Tax II v. Multiplex Trading and Industrial Co. Ltd.) where the assessment was sought to be reopened beyond the period of four years. This Court considered the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-tax Officer (1993) 203 ITR 456 SC as well as the decision of this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. v. CIT 308 ITR 38 (Del). The Court noted that a material change had been brought about to Section 147 of the Act with effect from 1st April 1989. Finally it was held that in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty.
In the current case, without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: “it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries”. So, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case.
CIT (A) may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the Assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied, a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity.
Accordingly, appeal of the revenue dismissed.