2010 (12) TMI 1256 - AT - Income Tax

Challenged reassessment validity for late addition of loan amount; Tribunal directs AO to verify source.

Cosmos Fibre Glass Limited Versus Dy. Commissioner of Income Tax, Circle-3 (1), New Delhi

The appeal challenged the validity of reassessment proceedings initiated under section 147 after four years from the relevant assessment year, regarding ... - ISSUES PRESENTED AND CONSIDERED 1. Whether initiation of reassessment proceedings under section 147/148 after the expiry of four years from the end of the relevant assessment year is valid when the reasons record an alleged failure by the assessee to disclose fully and truly all material facts necessary for assessment. 2. Whether the assessee's prior production of confirmations, bank statements and acknowledgements during original assessment proceedings amounts to 'full and true disclosure' for the purpose of ousting reassessment beyond four years. 3. Whether the Assessing Officer must disclose the source and material basis of information received from the Investigation Wing (or provide evidence in possession of the department) and afford the assessee an opportunity to test/cross-examine that material before making an addition under section 68 for an alleged accommodation entry. ISSUE-WISE DETAILED ANALYSIS - Validity of reopening after four years (Issue 1) Legal framework: Reopening of assessment under section 147/148 is permitted where the AO has reasons to believe that income has escaped assessment; the proviso to section 147 bars reassessment after four years from the end of the relevant assessment year unless there was failure by the assessee to disclose fully and truly all material facts necessary for assessment. Precedent treatment: The Tribunal distinguishes prior decisions where reasons did not record failure to disclose; those authorities quashed reassessments where the reasons merely alleged escaped income without stating failure of disclosure. Interpretation and reasoning: The Tribunal examined the reasons recorded and found an explicit statement by the AO that there was failure by the assessee to disclose fully and truly all material facts (quoted in para 4.2 of AO's order). Because the reasons specifically invoked failure of disclosure, the factual distinction from cases cited by the assessee (where such a finding was absent) is dispositive. Ratio vs. Obiter: Ratio - where the reasons for reopening expressly record failure to make full and true disclosure, the proviso to section 147 (limitation beyond four years) is not attracted and reassessment initiation is valid; distinction from cases lacking such a finding is integral to the holding. Conclusion: The Tribunal upheld the validity of initiation of reassessment proceedings beyond four years because the reasons recorded explicitly alleged failure by the assessee to disclose fully and truly all material facts necessary for assessment. ISSUE-WISE DETAILED ANALYSIS - Effect of prior production of documents during original assessment (Issue 2) Legal framework: The proviso to section 147 turns on whether there was failure to disclose fully and truly all material facts; the evidentiary question is whether documents produced in original assessment constituted complete disclosure such that reassessment is barred. Precedent treatment: The assessee relied on authorities holding reassessment impermissible when no failure to disclose was alleged and when material was already placed on record; the Tribunal distinguished those authorities on their facts. Interpretation and reasoning: The Tribunal held that mere filing of some evidence (confirmation, bank statement) during original assessment does not automatically equate to 'full and true' disclosure if the entry is alleged to be an accommodation entry and the departmental intelligence suggests otherwise. The Tribunal noted absence of a recordable copy of the confirmation before the appellate authority and absence of fresh corroborative material from the assessee in these proceedings. Where the genuineness of the entry itself is in dispute, mere prior filing does not negate the AO's reason to believe that income escaped assessment by reason of nondisclosure. Ratio vs. Obiter: Ratio - prior production of evidence does not conclusively preclude reopening if the AO forms a reason to believe, based on material (e.g., investigation report), that the disclosure was not full and true; the factual sufficiency of disclosure is a question for the AO to consider and for adjudication on merits. Conclusion: The Tribunal found that the assessee had not shown that prior disclosures were full and true so as to bar reassessment; therefore reopening was rightly sustained on the recorded reasons. ISSUE-WISE DETAILED ANALYSIS - Duty to disclose departmental material and right to confrontation (Issue 3) Legal framework: Principles of natural justice and statutory fair procedure require that an assessee be given adequate opportunity of hearing; forensic reliance on third-party information normally requires the AO to disclose the basis/source of the information so the assessee may meet it. Additions under section 68 for unexplained cash credits require the AO to satisfy himself as to genuineness and afford the assessee opportunity to substantiate the entry. Precedent treatment: The Tribunal accepted generally recognised principles that information received from Investigation Wing cannot be the sole basis for addition without disclosing its source/material to the assessee and affording an opportunity to test it. Interpretation and reasoning: While upholding validity of reopening, the Tribunal held that a mere information/intelligence report is not sufficient to sustain an addition; the assessee must be confronted with the departmental material and permitted to rebut it, including cross-examination where appropriate. Accordingly, the Tribunal directed restoration to the AO for readjudication limited to examination of the genuineness of the cash credit, after providing reasons/source of the information to the assessee, reasonable opportunity of hearing, and opportunity to cross-examine evidence in the department's possession. Ratio vs. Obiter: Ratio - departmental information must be disclosed to the assessee and opportunity to test/cross-examine such material must be given before confirming additions; procedural fairness is an essential precondition to sustaining additions based on third-party intelligence. Conclusion: The Tribunal ruled that, although reassessment initiation was valid, the merits could not be decided solely on departmental information; the matter was remitted to the AO for de novo consideration of genuineness of the cash credit after disclosing the source and providing opportunity to the assessee to rebut and cross-examine the departmental material. INTER-RELATIONSHIP OF ISSUES 1. The Tribunal treated validity of reopening (Issue 1) and the merits (Issue 3) as distinct: recorded failure to disclose justified reopening beyond four years, but substantiation and procedural fairness govern the merits of additions. 2. The Tribunal distinguished cases cited by the assessee on the narrow factual ground that in those cases the reasons did not allege failure of disclosure; that factual distinction supports both the jurisdictional conclusion and the remand for fair adjudication on evidence.