Reopening of assessment not allowed for mere verification of claim

Inderjeet Kohli Vs DCIT (ITAT Delhi)

As far as the second allegation, namely the verification of source of commodity transactions and its income is concerned, I find that as per the reasons recorded, the AO wants to verify it. In view of the settled position of law that for a mere verification of the claim, the power of reopening of assessment cannot be exercised. Hon’ble Gujarat High Court in the case of Inductotherm (India) P. Ltd. Vs. M. Gopalan, reported in 2013 356 ITR 481 has held that for a mere verification of the claim, the power of re-opening of the assessment could not be exercised and it further held that AO under the guise of power to re-open the assessment cannot seek to undertake an undertaking a fishing or roving inquiry or seek to verify the claim as if he is the scrutiny officer.

Further, the reading of the reasons for re-opening of the assessment, it is seen that the notice has been issued and reassessment has been sought for verification of the cash and cheque transactions in the bank account of the assessee. I find that the Hon’ble Gujarat High Court in the case of Inductotherm (India) P. Ltd. Vs. M. Gopalan, reported in 2013 356 ITR 481 has observed that for a mere verification of the claim, the power of re­opening of the assessment could not be exercised and it further observed that AO under the guise of power to re-open the assessment cannot seek to undertake an undertaking a fishing or roving inquiry or seek to verify the claim as if he is the scrutiny officer.

Considering the totality of the aforesaid facts and in view of the decision cited herein above, I am of the view that in the present case, notice for re-opening of the assessment u/s 147 of the Act is not as per the mandate of Sec.147 of the Act and therefore the re-opening is not permissible. I am therefore of the view that the notice issued for reopening has to be set aside and the same deserves to be quashed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is directed against the order dated 28.06.2019 of the Commissioner of Income Tax – Delhi – 13, New Delhi relating to Assessment Year 2011-12.

2. The relevant facts as culled from the material on records are as under :

3. Assessee is an individual who is stated to be having income from business, house property, capital gains and other sources. Assessee had filed his original return of income for A.Y. 2011-12 on 27.08.2011 declaring loss of Rs. 8,27,977/-. Subsequently, the AO has noted in the assessment order that information was received from the office of ADIT (Inv.), New Delhi about assessee having rental income from various properties and the income from such properties was not disclosed by the Assessee. Accordingly, notice u/s 148 of the Act was issued to the Assessee on 29.03.2018 wherein the assessee was inter alia asked to file the return of income. In response to the aforesaid notice, assessee filed the return of income on 22.10.2018 declaring Nil taxable income. Thereafter, the case of the assessee was taken up for scrutiny and consequently, the assessment was framed u/s 147 r.w.s 143(3) of the Act vide order dated 27.12.2018 and the total income was determined at Rs.20,77,592/- on account of deemed rental income and after adjusting the loss of Rs.8,27,977/- , the total taxable income was determined at Rs.12,49,610/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 28.06.2019 in Appeal No.230/18-19 granted partial relief to the assessee. Aggrieved by the order of CIT(A), assessee is now in appeal and has raised the following grounds:

1) The order passed by AO and confirmed by CIT[A] are bad in law and against the facts of the case.

2) The reopening by AO and further assessment was not in line with apex court , therefore, assessment be annulled.

3) The addition by AO and confirmation by CIT[A] are incorrect and against the provision of section 22/23(1)(a) which is without any basis or cogent evidence, therefore addition of Rs.400000/- and Rs.1440000/- sustained ,deserves to be deleted.

4) The averments made in order by AO and sustained by CIT[A] are against the principles of natural justice ,against the law of evidence completely arbitrary based on whims and fancies, without following the due procedure of law and without proper notice.”

4. At the outset, Ld AR submitted that vide Ground No.1 & 2, Assessee is challenging the assumption of jurisdiction u/s 148 of the Act and vide Ground No. 3, assessee is challenging the addition on merits.

5. With respect to challenging the assumption of jurisdiction, Ld. AR at the outset, submitted that the reopening by the AO u/s 148 of the Act is bad in law and without jurisdiction and therefore, needs to be quashed and set aside. He pointed to the copy of reasons that were recorded for reopening which is placed at Page 1 & 2 of the paper book. Pointing to the recorded reasons, he submitted that the AO had initiated the reopening proceedings on the basis of the information received from ADIT (Inv.), New Delhi about the alleged escapement of rental income from the properties. Referring to the reasons recorded, he submitted that the AO had failed to record the independent findings as to how the income has escaped assessment on a proper application of mind and that the AO recorded his satisfaction only on the basis of the information received from the Investigating wing without any enquiries and hence, he assumed jurisdiction only on the borrowed satisfaction, which is impermissible in law. He submitted that it is a settled law that reopening cannot be initiated on the basis of borrowed satisfaction and for the aforesaid proposition he relied on the following decisions:

(i) PCIT vs. Dharamvir Singh Rao (2017) TIOL 2447 HC Del

(ii) PCIT vs. RMG Polyvinyl (I.) Ltd. (2017) 83 com 348

(iii) PCIT vs. Shodiman Investments (2018) 93 com 153 (Bom) and other decisions.

6. He thereafter with respect to the alleged allegation that the assessee had not disclosed the rental income, submitted that no independent enquiry was made by the AO to verify as to whether the alleged properties was in fact owned by the assessee or not and whether those properties were self occupied or let out. He submitted that the AO merely proceeded on the basis of the report of ADIT (Inv) without making any independent inquiry. He submitted that the AO was not having any tangible material on the basis of which he could have concluded that at the relevant point of time, the properties were owned by the assessee or by some other person. He thereafter submitted that there is no live link that the two properties for which deemed rental income is considered as escaped income was in fact actually owned by the assessee or not. He submitted that nothing has been brought on record by the AO to demonstrate that the properties at Ludhiana Mall and house at Rohini, Delhi were owned by the assessee or not. He further submitted that even during the assessment proceedings, the AO could not bring any evidence to demonstrate that the aforesaid properties were owned by the Assessee.

7. He thereafter submitted that the reasons recorded by the AO for reopening the assessments cannot be said to be valid reasons as they were no wrong facts as the addition with respect to the deemed rental income made for two shops in the Mall at Ludhiana was not owned by the Assessee but was owned by the firm, S. K. Interiors, in which the assessee was one of the partner. With respect to the addition in respect of the property at Rohini, Delhi, he submitted that the aforesaid property was not owned by the assessee but was owned by his wife, Mrs. Vinod Kohli and further, the said property was sold by her on 31^st March 2008, i.e. prior to the relevant assessment year. He therefore submitted that the AO did not have the jurisdiction under Section 147/148 to reopen the proceedings based on incorrect facts.

8. The Ld. AR thereafter pointed to the second page of the reasons and pointed to the reasons recorded about the alleged commodity transactions amounting to Rs 125.91 lacs. He pointed to the reason wherein the AO has noted that the AO wanted to verify the source of the commodity transactions and the income from the same. Ld AR pointing to the aforesaid reasons submitted that the AO had not spelt out valid reasons and he had not formed any belief of any escapement of income but it was a case of fishing/roving inquiry. He submitted that the AO must have some tangible material at his command to form a belief that income chargeable to tax has escaped assessment which requirement in the present case was not satisfied. He further submitted that for a fishing inquiry or for mere verification of the claims made, reopening cannot be permitted even in the assessment which was accepted under section 143(1) of the Act. In support of his aforesaid contentions, he placed reliance on various decisions cited in the synopsis that was filed.

9. Ld. AR thereafter submitted that AO had made addition of Rs.14,40,000 on account of deemed rental income with respect to the two shops in Mall in Ludhiana. He submitted that the aforesaid two shops are not owned by the assessee but are owned by S. K. Interiors, a partnership firm, in which assessee is one of the partner. He therefore submitted that even on merits no addition could have been made in the hands of the assessee with respect to the rental income from the aforesaid two shops. He submitted that in support of his contention of the shops being owned by the firm and not the assessee, the assessee during the course of assessment and appellate proceedings had submitted the letter from the builder, copy of the bank statement of the firm but the same were ignored by the concerned authorities.

10. With respect to the property at A2/29, Rohini, New Delhi, and in respect of which the addition of Rs. 4 lac has been made u/s 23(1)(a) of the Act, he submitted that the aforesaid property did not belong to the assessee but belonged to his wife, Mrs. Vinod Kohli and the said property was sold by her on 31st March 2008 i.e. prior to the relevant assessment year. He further submitted that during the course of assessment and appellate proceedings, assessee had brought the aforesaid facts before the authorities but the same was ignored by the concerned authorities.

11. With respect to the property at Rajpur Residency, Dehradun, in respect of which the addition of Rs.40,000/- on account of rental income was made, he submitted that the aforesaid property was jointly owned by the assessee with his wife, Vinod Kohli and during the relevant assessment year, it could not be let out and had remained vacant. He submitted that it could be let out for Rs.21,000/- in F.Y. 2013-14. He submitted that the aforesaid submissions were made before the AO and CIT(A), but the same were ignored by them and addition was made. In support of his aforesaid contentions, he pointed to the relevant papers placed in the paper book.

12. Ld. AR therefore submitted that the reassessment being without jurisdiction, the same be set aside.

13. Ld. DR on the other hand supported the order of lower authorities and submitted that the AO had not challenged the validity of reopening before the lower authorities.

14. I have heard the rival submissions and perused the material on record. The assessee is challenging the assumption of jurisdiction for reopening the assessment u/s 147/148 of Act and also challenging on merits the addition made. The law on re­opening of an assessment under the Act, is fairly settled. The Assessing Officer (AO) can re-open an assessment only in accordance with the express provisions provided in Section 147/148 of the Act. It is only on the AO strictly satisfying the provisions of Section 147 of the Act that he acquires jurisdiction to re-open an assessment. Section 147 of the Act, clothes the AO with jurisdiction to reopen an assessment on satisfaction of the following: (a) The AO must have reason to believe that (b) Income chargeable to tax has escaped the assessment and (c) In cases where the assessment sought to be reopened is beyond the period of four years from the end of the relevant assessment year, then an additional condition is to be satisfied viz: there must be failure on the part of the Assessee to fully and truly disclose all material facts necessary for assessment.

15. In the present case, notice u/s 148 of the Act has been issued on 29.03.2018 in relation to A.Y. 2011-12. Hence, the re­opening of assessment is beyond the period of four years from the end of relevant assessment year. In such a scenario, as per the 1st proviso to Sec.147 of the Act, no action for initiation of re­assessment proceedings for A.Y. 2011-12 could have been taken unless the AO had reason to believe that income chargeable to tax had escaped the assessment for a reason of failure on the part of assessee to disclose fully and truly all material facts necessary for assessment.

16. It is a settled law that the reasons which are recorded by the Assessing officer for reopening an assessment are the only reasons which can be considered when the formation of the belief is impugned and that the reasons which are recorded by the A.O. for reopening the assessment are the only reasons which can be considered and no substitution or deletion is permissible. The reading of the reasons placed by the assessee in the Paper Book shows that there is not even an allegation that there was any failure on the part of the assessee to disclose any material facts which lead to any income chargeable to tax had escaped the assessment. Further, even on the reading of the reasons recorded, it cannot be said that it suggests about any failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment.

17. The reading of the reasons placed by the assessee in the paper book reveals that the reopening has been initiated for 2 reasons. The first allegation of the AO is that he had received information from ADIT (Inv.) that the assessee owns 8 properties listed in the reasons recorded out of which from the 4 properties (namely, property at Rajapur Residency, Dehradun, 2 properties at Rohini Delhi and two shops in Mall in Ludhiana) no deemed rental income has been declared by the assessee. The second allegation is that the assessee had entered into commodity transactions aggregating to Rs 125.91 lacs and its source and income was required to be checked.

18. As far as the first allegation, namely not disclosing the deemed rental income from the 4 properties is concerned, I find that before me, Ld. AR has pointed out that the properties from which the AO wants to tax the deemed rental income does not belong to the assessee.

19. It is a settled position that even where an assessment has been only processed under Section 143(1) of the Act, the reopening notice must satisfy the test of having reason to believe that the income chargeable to tax has escaped assessment. The reason to believe has to be arrived at after applying one’s mind to the material available and to reach a prima facie view that income chargeable to tax has escaped assessment. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessment. Before me, Ld. AR has submitted that the property from which the deemed rental income the Revenue proposes to add does not belong to the assessee. When the property does not belong to the assessee, the question of taxing the deemed rental income does not arise. Revenue has not placed any material on record to demonstrate that the submission of the assessee of it not being the owner of the aforesaid properties is false/ incorrect. In the present case the AO prima facie has not done the bare necessary enquiry into the material received before he concluded that income chargeable to tax has escaped assessment.

20. I further find that the Hon’ble Bombay High Court in the case of Ankita A. Choksey vs. ITO [2019] 411 ITR 207 (Bom) has held that the reasons to believe that income chargeable to tax has escaped Assessment must be on correct facts. If the facts, as recorded in the reasons are not correct and the assessee points out the same in its objections, then the order on objection must deal with it and prima facie, establish that the facts stated by it in its reasons as recorded are correct. In the absence of the order of objections dealing with the assertion of the assessee that the correct facts are not as recorded in the reason, it would be safe to draw an adverse inference against the Revenue.

21. As far as the second allegation, namely the verification of source of commodity transactions and its income is concerned, I find that as per the reasons recorded, the AO wants to verify it. In view of the settled position of law that for a mere verification of the claim, the power of reopening of assessment cannot be exercised. Hon’ble Gujarat High Court in the case of Inductotherm (India) P. Ltd. Vs. M. Gopalan, reported in 2013 356 ITR 481 has held that for a mere verification of the claim, the power of re-opening of the assessment could not be exercised and it further held that AO under the guise of power to re-open the assessment cannot seek to undertake an undertaking a fishing or roving inquiry or seek to verify the claim as if he is the scrutiny officer.

22. Further, the reading of the reasons for re-opening of the assessment, it is seen that the notice has been issued and reassessment has been sought for verification of the cash and cheque transactions in the bank account of the assessee. I find that the Hon’ble Gujarat High Court in the case of Inductotherm (India) P. Ltd. Vs. M. Gopalan, reported in 2013 356 ITR 481 has observed that for a mere verification of the claim, the power of re­opening of the assessment could not be exercised and it further observed that AO under the guise of power to re-open the assessment cannot seek to undertake an undertaking a fishing or roving inquiry or seek to verify the claim as if he is the scrutiny officer.

23. Considering the totality of the aforesaid facts and in view of the decision cited herein above, I am of the view that in the present case, notice for re-opening of the assessment u/s 147 of the Act is not as per the mandate of Sec.147 of the Act and therefore the re-opening is not permissible. I am therefore of the view that the notice issued for reopening has to be set aside and the same deserves to be quashed.

24. I therefore quash the impugned re-assessment proceedings for A.Y. 2011-12 and thus, set aside the same. Since I have hereinabove set aside the assessment framed u/s 143(3) r.w.s 147 of the Act and held it to be void and therefore, the issue on merits have been rendered academic and requires no adjudication. Thus, the ground No.1 of the assessee is allowed.

25. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 10.01.2022