Alleged brokerage income addition based solely on abated settlement disclosure struck down; reassessment reopening u/s147 upheld, s.35D disallowance deleted

Reopening under s.147 was upheld because the AO had tangible information to form a reason to believe, the assessee's writ challenge had failed before the HC, and the Department was free to initiate reassessment; the challenge to reopening was rejected. On addition of alleged brokerage income and consequential disallowance u/s 35D, the Tribunal held that a disclosure made in a settlement application (later abated) cannot, by itself, justify an addition absent incriminating material establishing actual undisclosed income; applying the principle in Maruti Fabrics to s.245HA abatement, the brokerage addition and related disallowance were deleted.

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Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Addition of income based on the disclosure made before the Settlement Commission.

Detailed Analysis:

Issue 1: Reopening of Assessment under Section 147
The assessee filed the return of income for A.Y. 2008-09 declaring a loss. A notice under Section 148 was issued to the assessee based on the additional income disclosed before the Settlement Commission, which was not included in the original return. The Settlement Commission did not allow the application to proceed, leading the Assessing Officer (AO) to believe that income had escaped assessment. The assessee’s writ petition against this was dismissed by the High Court, and the proceedings under Section 147 were reinitiated. The CIT(A) upheld the reopening of the assessment. The Tribunal found that the AO had precise and definite information regarding the escapement of income, justifying the reopening of the assessment. Thus, the Tribunal dismissed the assessee's objection regarding the reopening of the assessment.

Issue 2: Addition of Income Based on Disclosure Before Settlement Commission
The AO made an addition of Rs. 5,01,049 based on the disclosure made by the assessee before the Settlement Commission, which included brokerage income and disallowance under Section 35D. The assessee contended that this income was offered only to meet the threshold limit for maintainability of the petition before the Settlement Commission and that no actual income was earned. The CIT(A) upheld the AO’s decision. The Tribunal, however, found that the AO did not bring any new material or conduct any inquiry to substantiate the addition apart from relying on the disclosure made before the Settlement Commission.

The Tribunal referred to the Gujarat High Court's decision in Maruti Fabrics, which held that admissions made before the Settlement Commission are not binding if the application is rejected, and such disclosures cannot be used as evidence against the assessee. The Tribunal also cited the ITAT Mumbai decision in Dolat Investment, which stated that confidential information disclosed in the settlement application cannot be used by the AO to make additions if the application is not admitted for settlement.

The Tribunal concluded that the AO could not make any addition based solely on the disclosure made before the Settlement Commission without any corroborative evidence. Since no incriminating material was found during the search to substantiate the undisclosed income, the addition made by the AO and upheld by the CIT(A) was deleted.

Conclusion:
The Tribunal allowed the appeals of the assessee, ruling that the reopening of the assessment was justified, but the addition of income based on the disclosure before the Settlement Commission was not valid without corroborative evidence.

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