2016 (9) TMI 254 - HC - Income Tax

High Court favors assessee in ITAT order appeal on reassessment & income addition under Sections 147(1) & 68.

Constellation Capital Ltd. Versus Income Tax Officer, Ward-10 (4) & Another

The High Court ruled in favor of the assessee in a case involving the correctness of the ITAT order rejecting the cross-objection, the validity of ... Reopening of assessment - Held that:- In the present case, the opinion of the AO which is placed on the record discloses that his part of the order is entirely concerned with the transactions to which M/s. H.B. Relan and Company was exclusively a party to. Thereafter, in para 5, the opinion discusses the two transactions whereby the shares of M/s/ Constellation Capital (P) Ltd., were sold by the assessee. The mere circumstance that in respect of this company, M/s. H.B. Relan and Company too had transacted earlier or that it had maintained a bank account does not ipso facto lead to an inference that the assessee’s undisclosed income had escaped assessment due to failure on its part to provide particulars. If such wide margins were to be provided to the AOs, possibly, thousands of entries would lead to reopening of assessment of careless assessees. The link between the assessee’s returns and the amounts said to have escaped assessment had to be necessarily shown. Now, the opinion which led to the reopening of assessment nowhere shows that the assessee had in fact failed to report the transaction itself. In completely omitting to see this aspect, we are of the opinion that the ITAT fell into fundamental error of law. The question of law is accordingly answered in favour of the assessee and against the revenue. Issues:1. Correctness of the order of the Income Tax Appellate Tribunal (ITAT) rejecting the assessee’s cross-objection.2. Reopening of assessment under Section 147(1) of the Income Tax Act, 1961.3. Addition of a sum under Section 68 and taxability of the same.Issue 1: Correctness of ITAT Order on Cross-objection:The appeal questioned the correctness of the ITAT order rejecting the assessee's cross-objection. The ITAT remitted the matter concerning the deletion of amounts taxed under Section 68 but dismissed the assessee's cross-objection without detailed discussion. The High Court found this dismissal erroneous as it failed to establish a link between the assessee's returns and the alleged undisclosed income. The Court held that the ITAT erred in law, ruling in favor of the assessee and against the revenue.Issue 2: Reopening of Assessment under Section 147(1):The reassessment was sought under Section 147(1) based on information regarding transactions with M/s. H.B. Relan and Company. The AO believed that the credits in the assessee's bank account from the said company represented income chargeable to tax under Section 68. The CIT(A) allowed the appeal on merits but upheld the reassessment notice's validity. The High Court analyzed the requirement of tangible material for reassessment as per the Kelvinator India Ltd. case, emphasizing the necessity of clear satisfaction by the AO. The Court found the AO's opinion lacking in establishing non-disclosure by the assessee, thereby ruling in favor of the assessee on this issue.Issue 3: Addition under Section 68 and Taxability:The AO added a sum under Section 68 and brought it to tax, leading to an appeal by the assessee. The CIT(A) overturned the addition on merits but upheld the reassessment's legality. The High Court found the addition unwarranted and the reassessment notice not in accordance with law. The Court emphasized the need for a clear link between the alleged undisclosed income and the assessee's reporting, ruling in favor of the assessee and allowing the appeal against the revenue.In conclusion, the High Court's judgment addressed the correctness of the ITAT order, the validity of the reassessment under Section 147(1), and the addition under Section 68. The Court ruled in favor of the assessee, emphasizing the importance of tangible material for reassessment and the necessity of establishing a direct link between the undisclosed income and the assessee's reporting to warrant taxability.