2004 (7) TMI 20 - HC - Income Tax

Court emphasizes corroborative evidence in reassessment proceedings, directs detailed inquiry for fresh examination.

Raunaq Finance Ltd. Versus Joint Commissioner of Income-tax.

The court held that reassessment proceedings cannot solely rely on the testimony of a hostile witness, requiring corroborative evidence. It criticized the ... Whether the existence of 'reason to believe' which is sine qua non for validity of initiating reassessment proceedings u/s 147/148, can be solely established by the testimony of a hostile witness examined at the back of the assessee which is contrary to the evidence on record - Whether the finding that the appellant had no materials to lease is so contradictory to the accepted position that the appellant was actually assessed on rental income for five years derived from the leasing of the very material, that it stands vitiated by itself? - In such cases, the AO should depute his inspector and make a detailed enquiry by visiting the places and contact the concerned persons and then submit a report regarding genuineness of the transaction. If the assessee so desires, he can cross-examine the inspector and thereafter a fresh view should be taken regarding genuineness of the transaction. Issues Involved:1. Validity of initiating reassessment proceedings under section 147/148 based on the testimony of a hostile witness.2. Contradiction regarding the appellant's materials for lease.3. Reliability of uncorroborated testimony.4. Admissibility of the statement of Shri Manish Mehrotra.5. Legality of the Income-tax Appellate Tribunal's decision to confirm the reassessment withdrawing the depreciation allowance.Detailed Analysis:1. Validity of Initiating Reassessment Proceedings:The court examined whether reassessment proceedings under section 147/148 can be initiated solely based on the testimony of a hostile witness, Shri Manish Mehrotra. The court held that mere statements of Shri Manish Mehrotra cannot be the sole basis for disbelieving the transaction. However, if corroborated with other materials, these statements can be considered. The court emphasized that at the notice stage, a prima facie view on income escapement is sufficient for reopening the assessment. The court cited precedents from the Delhi High Court and the Supreme Court, affirming that subsequent reliable information can justify reassessment.2. Contradiction Regarding the Appellant's Materials for Lease:The court addressed the contradiction between the appellant being assessed on rental income from leasing materials and the finding that the appellant had no materials to lease. The court noted that the appellant claimed depreciation on shuttering material purchased from M/s. Longman Industrial Traders, which was allowed in the original assessment. However, subsequent statements by Shri Manish Mehrotra indicated the transaction was bogus. The court found that the Assessing Officer did not adequately investigate the genuineness of the transaction, relying heavily on Mehrotra's statements without corroborative evidence.3. Reliability of Uncorroborated Testimony:The court scrutinized the reliability of Shri Manish Mehrotra's uncorroborated testimony. The court acknowledged that while Mehrotra's statements indicated a hawala transaction, this alone was insufficient to disallow the depreciation claimed by the appellant. The court criticized the Assessing Officer for not conducting a thorough investigation, such as verifying the existence of Mehrotra's factory. The court directed a detailed inquiry to establish the genuineness of the transaction, including deputing an inspector to verify facts on the ground.4. Admissibility of the Statement of Shri Manish Mehrotra:The court considered whether Shri Manish Mehrotra's statements were admissible as evidence. The court held that while Mehrotra's statements could not be completely disregarded, they needed corroboration. The court emphasized that the Assessing Officer should have given the appellant an opportunity to cross-examine Mehrotra. The court directed a fresh inquiry, allowing the appellant to cross-examine the inspector's findings.5. Legality of the Income-tax Appellate Tribunal's Decision:The court examined the Tribunal's decision to confirm the reassessment and withdrawal of the depreciation allowance. The court found that the Tribunal and the Commissioner of Income-tax (Appeals) had not adequately considered the appellant's evidence supporting the genuineness of the transaction. The court set aside the Tribunal's order, directing the Assessing Officer to conduct a detailed inquiry and issue a fresh finding based on comprehensive evidence.Conclusion:The court remitted the matter back to the Assessing Officer for a detailed inquiry into the genuineness of the transaction between M/s. Longman Industrial Traders and the appellant. The court directed the Assessing Officer to gather additional evidence, including an inspector's report, and allow the appellant to cross-examine the findings. The court also provided the appellant an opportunity to contest any lease money assessed in relation to the disputed shuttering material if found bogus. The appeal was disposed of with these directions.