Reasons to reopen assessment must be tangible & should not merely be based on Investigation wing’s report

Brief about the case

The assessee is a private Ltd. Company and it filed its return of income on 23.8.2004 declaring income of Rs. 11,000/-. The return of Income was processed u/s 143(1). Later notice u/s 148 of the Act dated 31.3.2011 was issued to the assessee. The assessee filed a reply dated 11.4.2001, wherein it has stated that, the return of income filed u/s 139 of the Act on 23.8.2004, be treated as a return filed in response to notice u/s 148 of the Act. The assessment was completed on 15.12.2011 u/s 147 r.w.section 143(3) determining total income of Rs.2,14,38,400/-. Aggrieved the assessee carried the matter in appeal, challenging both the reopening of assessment as well as the merits of the addition. The first appellate authority dismissed the appeal of the assessee. Aggrieved, the assessee knocked the door of Delhi ITAT.

The revenue averred that The assessee has received unexplained sums from the entry operators and the plough it back in its books of account in various forms including the form of bogus share capital/capital gains etc after routing the same through the bank account (s) of the entry operators.

As the assessee has produced evidences in support of this claim and as the AO has not conducted any investigation nor collected any evidence to controvert the claim of the assessee, the ITAT Delhi held the additions as bad in law and allowed the appeal of the assessee.

Facts of the case:

• The assessee is a private Ltd. Company declaring income of Rs. 11,000/-.After processing of the return, notice u/s 148 of the Act dated 31.3.2011 was issued to the assessee.
• The assessment was completed on 15.12.2011 u/s 147 r.w.section 143(3) determining total income of Rs. 2,14,38,400/-. Aggrieved the assessee carried the matter in appeal, challenging both the reopening of assessment as well as the merits of the addition. The first appellate authority dismissed the appeal of the assessee.
• Aggrieved the assessee filed this appeal alleging unjustified reassessment,absence of tangible material in context of provisions of section 148.
• The assessee averred that In the reasons recorded, it is alleged that the assessee has received entries amounting to Rs. 20 lacs from Mrs. Anjali Gupta, Shri C. Goel and M/s. Mitsu Securities Management Ltd. but, however, these entries are not corroborated from the assessment order passed. This proves that the information received by the AO from the investigation wing was vague and incorrect.
• On the same reasons, reassessment proceedings were initiated against the assessee for assessment year 2005-06 and after verification and recording the statement of Shri S.K. Gupta, the assessment order was passed for the assessment year 2005-06 and no addition was made by the AO on account of alleged accommodation entries.
• The appellant argued that initiation of reassessment proceedings was in respect of an amount of Rs. 20 lacs but the AO considered, other additions in an arbitrary manner and without recording proper reasons, had issued a notice u/s 148 illegally.
• The Ld. DR Shri Vikram Sahay on the other hand supported the order of the first appellate authority and submitted that Shri S.K. Gupta was admittedly an entry provider and that Smt. Anjali Gupta is the wife of Shri S.K. Gupta. He pointed out that, the income of Shri R.C. Goel is by way of salary of Rs. 72,000/- whereas the cumulative transaction in the bank was Rs. 3.41 crores which is abnormal. He submitted that in the case of Smt. Neelam Goel the rent receipt was Rs. 2,72,400/- and the taxable income was Rs. 165050/- and whereas the cumulative transactions in the bank account were Rs.50,73,000/-. This shows that the transactions of the assessee are not genuine.
• After careful analysis of all submissions the Delhi ITAT held the following:  The AO has not referred to any tangible material, which has given into this position, based on which, he has come to the conclusion that income has escaped assessment. The  report of the investigation wing, has been accepted by the AO, without independent application of mind. No reference has been made to any material gathered by the investigation wing, either by way of statements or by way of bank statement evidences etc. There is no prima facie material, to take a prima facie view that the assesee’s own money has been introduced by way of accommodation entries.
• On the issue as to whether the AO was right in travelling beyond the reasons recorded for reopening the assessment which was only in respect of amount of Rs.20 lacs alleged to be accommodation entry of share capital and making additions of amounts unconnected with the reasons and without any other tangible material, we uphold the contentions of the assessee that the AO cannot consider additions other than those material in the reasons for reopening in the absence of fresh tangible material.
• As the assessee had produced evidences in support of this claim and as the AO has not conducted any investigation nor collected any evidence to controvert the claim of the assessee in our view the additions are bad in law. Thus we allow the appeal of the assessee.
  

Contention of the Revenue

The Ld. DR alleged that the following reasons were evident for income escaping assessment:

• Unaccounted money of the beneficiaries are ploughed back in its books of account in various forms including the form of bogus share capital/capital gains etc after routing the same through the bank account (s) of the entry operators.
• Shri S.K. Gupta was admittedly an entry provider and that Smt. Anjali Gupta is the wife of Shri S.K. Gupta.
• the income of Shri R.C. Goel by way of salary is Rs. 72,000/- whereas the cumulative transaction in the bank was Rs. 3.41 crores which is abnormal.
• the rent received by Smt. Neelam Goel was Rs. 2,72,400/- and the taxable income was Rs. 165050/- and whereas the cumulative transactions in the bank account were Rs.50,73,000/-. This shows that the transactions of the assessee are not genuine.

Contention of the Assessee

The assessee asserted:

• that CIT(A) was not justified in confirming reassessment under section 148 without appreciating facts of the case, provisions of law and submission of the appellant.
• that there was no factual or legal basis in assuming jurisdiction u/s 148 as there was no case of any income escaping assessment or any tangible material and recording of satisfaction in the context of provisions of section 148.
• no opportunity for clarification and cross examination was allowed and as such, the said statement is not admissible or having any evidentiary value.
• that based on the very same material, reasons were recorded and reassessment proceedings were initiated for the assessment year 2005-06 and the Assessing Officer had dropped the proceedings.
  

Held by ITAT (Delhi)

• The ITAT considered a handful of decided cases in order to study the principles and propositions based on which the validity of reopening has to be tested. To list a few – Signature Hotels Pvt. Ltd. vs. ITO (2011) 338 ITR 51 (Del); CIT vs. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC); Madhukar Khosla vs. ACIT (2014) 367 ITR 165 (Del); CIT vs. Insecticides (India) Ltd. (2013) 357 ITR 330 (DEL).
• All the above cases emphasized existence of “tangible material” to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief.

• Applying the proposition laid down in these case laws to the facts of this case, we uphold the contentions of the Ld. Counsel for the assessee that the reopening is bad in law for the reason that ,

a) There is no tangible material, which come to the possession of the AO to lead to the conclusion that there was an escapement of income from assessment. There is no reference to any statement or bank account or any other material other than a main report of the investigation wing.

b) The reasons recorded are not after independent verification and application of mind by the AO and it is merely based on a report of the investigation wing. This is clear from the conclusions in the assessment order that the figure of Rs. 20 lakhs is not correct.

c) The reasons are vague and unsubstantiated and are not corroborated at the time of assessment or by any other evidence, such as statement, bank account copy etc.

d) When share capital is contributed by the directors, to believe that the money in question belonged to the assessee company and that this money was routed through the director of the assessee company, based on the report of the investigation wing is unsubstantiated and not corroborated by any material.

• With regard to reopening of assessment, we uphold the contentions of the assessee that the AO cannot consider additions other than those material in the reasons for reopening in the absence of fresh tangible material. In case fresh tangible material comes to the possession of the AO on any other issue, then the proper course of action would be, to record fresh reasons and issue a fresh notice u/s 148. Thus the additions made by travelling beyond the reason for re-opening, without tangible material , is bad in law.
• The other arguments of the Ld. Counsel for the assesee is that, on the very same reasons, based on the very same material, reasons were recorded and reassessment proceedings were initiated for the assessment year 2005-06 and the Assessing Officer had dropped the proceedings, our view is that the order of the AO for the assessment year 2005-06, cannot in any way influence the proceedings for this assessment year.Each assessment year is an independent proceedings and the additions during the impugned assessment year has to be decided based on the merits and evidence of the current assessment year. Thus this contention of the assessee is rejected.
• As the assessee had produced evidences in support of this claim and as the AO has not conducted any investigation nor collected any evidence to controvert the claim of the assessee in our view the additions are bad in law. Thus we allow the appeal of the assessee.