Reopening invalid if AO records satisfaction in mechanical manner & without application of mind

Brief of the case:

While the CIT 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.

Fact of the case:

The brief facts of the case are that the proceedings u/s. 147/148 were initiated in this case after recording the reasons on the basis of the information received from Director of Income Tax (Investigation), New Delhi, that certain persons including the assessee company were beneficiaries of taking accommodation entries received from the private limited companies floated by Sh. Tarun Goyal during the period relevant to AY 2006-07. The findings of the “Investigation Wing” of the Department, were brought to the knowledge of all the Assessing Officers alongwith the data collected in the course of investigation. The modus operandi adopted by such beneficiaries of the services of accommodation entry providers was detected and the assessee was found to be the accommodation entry from such entry operator controlled by Sh. Tarun Goyal during the FY 2005-06 relevant to AY 2006-07 as per the following specific details of transaction:-

Accordingly, notice u/s. 148 of the I.T. Act, 1961 was issued and the assessee was supposed to file the return of AccorAccordingly, notice u/s. 148 of the I.T. Act, 1961 was issued and the assessee was supposed to file the return of income within 30 days in compliance to notice u/s. 148. In compliance to notice u/s. 148, the AR of the assessee has filed a letter dated 22.5.2013 alongwith a photocopy of e-filed return without any stamp/ receipt of the relevant Ward/Circle. The declared income / loss was shown at Rs. 11,172/-. The assessee also requested a copy of reasons vide the above letter. The reasons were provided to the assessee vide letter dated 16.7.2013. Thereafter, the AR of the assessee filed objections on the reasons recorded on 11.9.2013. The objections were disposed off vide order dated 4.10.2013 and the case was fixed accordingly. Thereafter, the AO has observed that in the absence of any supporting documents to substantiate the identity, genuineness and creditworthiness of loan giver, the information received from the DIT(Inv.), regarding accommodation entries of Rs. 3,50,00,000/- is corroborated with the bogus transactions through banking channel. Accordingly, the AO added Rs. 3,50,00,000/- being received from entry operator and treated the same as undisclosed income of the assessee and completed the assessment at Rs. 3,49,88,828/- u/s. 147/143(3) of the Act vide order dated 28.2.2014.

Contention of Assessee:

On the contrary, Ld. DR relied upon the order passed by the authorities below and draw our attention towards the page no. 17-21 of the Paper Book wherein the reasons recorded and approval thereof was mentioned. He stated that the AO has properly recorded the reasons for reopening and in turn Ld. Addl. CIT has granted the approval for the same, by due application of mind. He further stated that approval granted by the Addl. CIT is not mechanical on the contrary the Addl. CIT has fully considered the facts of the case and after due consideration of the facts has given a direction for reopening of the case by writing the word “approved”. Therefore, he stated that, it cannot be said that the sanction was granted mechanically or without application of mind.

Judgement of ITAT Delhi

(E). Hon’ble High Court of Madhya Pradesh in the case of CIT vs. S. Goyanka Lime & Chemicals Ltd. reported in (2015) 56 taxmann.com 390 (MP) has held as under:-

We have considered the rival contentions and we find that while according sanction, the Joint Commissioner, Income Tax has only recorded so “Yes, I am Satisfied”. In the case of ARjun Singh vs. Asstt. DIT (2000) 246 ITR 363 (MP), the same question has been considered by a Coordinate Bench of this Court and the following principles are laid down:- “The Commissioner acted, of course, mechanically in order to discharge his statutory obligation properly in the matter of recording sanction as he merely wrote on the format “Yes, I am satisfied” which indicates as if he was to sign only on the dotted line. Even otherwise also, the exercise is shown to have been performed in less than 24 hours of time which also goes to indicate that the Commisisoner did not apply his mind at all while granting sanction. The satisfaction has to be with objectivity on objective material Hon’ble Supreme Court of India in the case of CIT vs. S. Goyanka Lime & Chemical Ltd. reported in (2015) 64 taxmann.com 313 (SC) in the Head Notes has held that “Section 151, read with section 148 of Income Tax Act, 1961 – Income escaping assessment – Sanction for issue of notice (Recording of satisfaction) – High Court by impugned order held that where Joint Commissioner recorded satisfaction in mechanical manner and without application of mind to accord sanction for issuing notice under section 148, reopening of assessment was invalid – Whether Special Leave Petition filed against impugned order was to be dismissed – Held, Yes (in favour of the Assessee).”

In view of above, we are of the considered view that the above issue is exactly the similar and identical to the issue involved in the present appeal and is squarely covered by the aforesaid decisions of the Hon’ble Supreme Court of India, Hon’ble High Courts of Delhi & Madhya Pradesh & ITAT, Delhi & Mumbai. Hence, respectfully following the above precedents, we decide the legal issue in dispute in favor of the Assessee and against the Revenue and quash the reassessment proceedings being bad in law.