2015 (11) TMI 1525 - AT - Income Tax

Invalid Reassessment Notice under Income Tax Act; Tribunal rules in favor of assessee

ITO Ward 15 (2) Versus Rajat Export import P. Ltd.

The Tribunal held that the reassessment proceedings initiated by the Department under Sections 147/148 of the Income Tax Act were invalid as the Assessing ... Reopening of assessment - Held that:- AO has merely relied on the report of the investigation wing but it is apparent that he has not applied his mind to the materials which were before him. In our view, without forming a prima facie opinion on the basis of only the report of the Investigation Wing of the Income Tax Department, it was not legal for the AO to have simply concluded that he has reason to believe that income chargeable to tax has escaped assessment. Unless the 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. In the circumstances and respectfully following the judgment of the Hon’ble High Court of Delhi in the case of Pr. Commissioner of Income Tax-4 vs. G&G Pharma India Ltd. (2015 (2) TMI 104 - ITAT DELHI) we hold that the reopening of the case of the assessee for the assessment year is bad in law. In the circumstances, no interference is called with the order of the Ld. CIT (A). - Decided against revenue. Issues Involved:1. Validity of reassessment proceedings initiated under Section 147/148 of the Income Tax Act.2. Adequacy of the Assessing Officer's (AO) application of mind in forming the 'reason to believe' for income escaping assessment.3. Legitimacy of the addition of Rs. 16,00,000 to the assessee's income based on alleged bogus entries.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings:The Department initiated reassessment proceedings based on a report from the Directorate of Income Tax (Investigation). The AO issued a notice under Section 148 of the Income Tax Act, 1961, citing that the assessee had not disclosed fully and truly all material facts necessary for the assessment year 2003-04. The AO believed that Rs. 8,00,000 chargeable to tax had escaped assessment. The assessee challenged the jurisdiction of the AO under Section 147 on two grounds: (a) lack of proper sanction for the issuance of notice under Section 148, and (b) the AO's failure to independently apply his mind to the information received from the investigation wing.2. Adequacy of AO's Application of Mind:The assessee argued that the AO mechanically proceeded based on the investigation wing's information without independently analyzing the nature of the transactions. The AO's reasons for reopening were vague and not based on tangible material. The Tribunal noted that the AO had not applied his mind independently to form a belief that income had escaped assessment. The Tribunal cited several judgments, including the Hon'ble Delhi High Court's decision in Pr. Commissioner of Income Tax-4 vs. G&G Pharma India Ltd., which emphasized that the AO must apply his mind to the materials before forming a belief that income has escaped assessment.3. Legitimacy of the Addition of Rs. 16,00,000:The AO observed that the assessee had received share application money from parties whose bank statements showed entries cleared after depositing equivalent amounts in cash. The AO concluded that these entries were bogus and added Rs. 16,00,000 to the assessee's income. However, the CIT (A) ruled in favor of the assessee, stating that the assessee had provided proof of identity and creditworthiness of the parties, making the additions legally unsustainable.Conclusion:The Tribunal held that the AO had not applied his mind independently and had mechanically issued the notice under Section 148 based on the investigation wing's report. The Tribunal found the reopening of the assessment to be bad in law and dismissed the Department's appeal. The Tribunal upheld the CIT (A)'s decision, which favored the assessee, stating that the reassessment proceedings were invalid due to the AO's failure to fulfill the jurisdictional requirements under Sections 147/148 of the Income Tax Act.Order:The appeal filed by the Department was dismissed, and the order was pronounced in the open court on 27th November 2015.