2011 (2) TMI 1522 - AT - Income Tax

Re-assessment proceedings deemed invalid due to lack of evidence, assessments set aside as illegal.

The Tribunal allowed the assessee's appeals, holding that the re-assessment proceedings initiated under section 147 were invalid as they were based on ... Validity of Re-Assessment Proceedings u/s 147 - Reason to Believe - non independent application of mind by AO - Borrowed satisfaction - AO initiated proceedings on the basis of information received by investigation wing that the assessee has purchased a plot of land and he could not give any specific clarification during the course of inquiry regarding such investment - As per CIT(A), there was reason to believe for initiating such proceedings HELD THAT:- In the present case, it is crystal clear AO acted upon the information received from the Investigation Wing, where it was not stated that the investment in purchase of land was out of undisclosed income of the assessee or out of income which escaped assessment. As per Sec. 147, AO must have reason to believe that any income chargeable to tax has escaped assessment. However, it cannot be said that if there is any investment it is sufficient to believe that the income to that extent escaped assessment because there may be so many sources for making investment and it is not necessary that only on the basis of investment it can be presumed that the income to that extent escaped assessment. There should be a concrete finding before coming to the conclusion that any income has escaped assessment and merely on the basis of the information provided by any another Wing of the Income-tax Department, the AO cannot believe that there was income which has escaped assessment. In present case, AO simply acted upon the information of ADIT (Investigation) and did not apply his own mind to the information to arrive at a belief independently that on the basis of material which he had before him the income had escaped assessment. We are, therefore, of the view that the ld. CIT(A) was not justified in confirming the action of the Assessing Officer. Therefore, initiation of proceedings u/s. 147 cannot said to be a valid proceeding. We are fortified by the decision of ITO, WARD 6 (2) , KANPUR VERSUS RICH CAPITAL & FINANCIAL SERVICES LTD. [2010 (9) TMI 1214 - ITAT LUCKNOW], where it was held that proceedings u/s 147 cannot be initiated either on the basis of mere suspicion or for making fishing or roving enquiries the initiation of the proceedings u/s 147 of the Act on this ground was also illegal and bad in law. AO without referring to any material which could justify his conclusion that the income of the assessee escaped assessment, instantiated the proceedings u/s. 147, the said action was not justified because the said action appears to be on suspicion and for making roving enquiries. In that view of the matter, assessments framed on the basis of notices issued u/s. 148 are set aside considering the same as illegal and bad in law, hence vitiated - Decision in favour of Assessee Issues Involved:1. Validity of re-assessment proceedings under section 147 of the Income-tax Act, 1961.2. Justification of additions made by the Assessing Officer (A.O.) on account of unexplained investments and other expenses.Detailed Analysis:1. Validity of Re-assessment Proceedings under Section 147 of the Income-tax Act, 1961:The primary issue in these appeals is the validity of the re-assessment proceedings initiated under section 147 of the Income-tax Act, 1961. The assessee challenged the initiation of these proceedings, arguing that the notice under section 148 was issued based on mere suspicion without any concrete evidence. The assessee cited the Supreme Court's decision in Sheo Nath Singh v. Appellate Assistant Commissioner of Income-tax, which held that the A.O. must act on direct or circumstantial evidence and not on mere suspicion.The CIT(A) dismissed the assessee's challenge, stating that the A.O. had relevant material and information to form a 'reason to believe' that income had escaped assessment. The CIT(A) referenced the Supreme Court's decision in ACIT v. Rajesh Jhaveri Stock Broker (P) Ltd., which clarified that at the initiation stage, the A.O. only needs to have a cause or justification to believe that income has escaped assessment, not conclusively prove it.However, the Tribunal found that the A.O. had not independently applied his mind to the information received from the Investigation Wing. The reasons recorded by the A.O. merely reiterated the information provided by the ADIT (Investigation) without any independent verification or analysis. The Tribunal emphasized that the A.O. must have a concrete basis for believing that income has escaped assessment, and mere receipt of information from another department is insufficient.The Tribunal referenced the Delhi High Court's decision in CIT v. SFIL Stock Broking Ltd., which held that the A.O. must independently arrive at a belief that income has escaped assessment based on the material before him. The Tribunal concluded that the A.O.'s action was based on suspicion and for making roving enquiries, which is not permissible under the law. Therefore, the initiation of proceedings under section 147 was deemed invalid.2. Justification of Additions Made by the Assessing Officer:The A.O. made several additions to the assessee's income on account of unexplained investments in a plot and construction, household expenses, and unexplained cash. The main contention was regarding the investment of Rs. 5,38,860 in the purchase of a plot from Eldeco Housing and Industries Ltd. The assessee argued that the investments were made over several years from his own sources, and provided detailed evidence of payments made from 1993 to 1998.The CIT(A) upheld the A.O.'s additions, stating that the notice under section 148 was validly issued and the A.O. had followed due process. However, the Tribunal found that the A.O. had not provided any material evidence to justify the conclusion that the assessee's income had escaped assessment. The Tribunal emphasized that the A.O. must have concrete evidence to support the belief that income has escaped assessment, and mere information about investments is insufficient.The Tribunal also referenced its own decision in the case of ITO, Ward 6(2), Kanpur v. M/s Rich Capital & Financial Services Ltd., where it held that the A.O. must have specific material evidence to justify the initiation of re-assessment proceedings. The Tribunal concluded that the A.O.'s action was based on suspicion and not on concrete evidence, and therefore, the additions made were not justified.Conclusion:The Tribunal allowed the assessee's appeals, holding that the re-assessment proceedings initiated under section 147 were invalid as they were based on mere suspicion without any concrete evidence. Consequently, the assessments framed on the basis of the notices issued under section 148 were set aside as illegal and bad in law. The Tribunal did not provide a finding on the merits of the other grounds contested by the assessee, as the primary issue of the validity of the re-assessment proceedings was decided in favor of the assessee.