2019 (9) TMI 371 - AT - Income Tax

Tribunal Invalidates Re-opening, Emphasizes Need for Concrete Belief in Income Escaping Assessment

M/s. Rozelle Sales And Services Pvt. Ltd. Versus ACIT, Central Circle-1 (1), Kolkata

The tribunal quashed the re-opening/re-assessment as non-est, rendering the PCIT's revision under section 263 invalid. The tribunal emphasized that the ... Revision u/s 263 after reopening of assessment u/s 147 - Assessee filed its return in response to section 148 notice - unexplained cash credit u/s. 68 - whether the assessee could challenge validity of re-assessment itself in validity section 263 revision proceedings? - HELD THAT:- As relying on M/S. CLASSIC FLOUR & FOOD PROCESSING PVT. LTD. VERSUS C.I.T., KOL-IV, KOLKATA [2017 (5) TMI 631 - ITAT KOLKATA] the assessee is very much entitled to challenge validity of the above said re-assessment in collateral proceedings. Facts of re-opening reasons that the AO has nowhere formed his belief of assessee’s taxable income having escaped assessment of ploughing back of the undisclosed income. We wish to reempahsise on the above extracted reasons of re-opening are merely an “inference “ than a belief to this effect. AO had alleged that three of the entity operator’s entities had made investments in assessee’s stake. The same goes adjudicator facts on record since this taxpayer had received share application/share premium from one of the said entity M/s. Urch Traders P.Ltd only to the tune of ₹ 55 lakhs, which stood added as unexplained cash credit u/s. 68. Assessing Officer’s re-opening reasons have to be read on standalone basis and no substitution or deletion is permissible. Hon’ble jurisdictional high court’s decision in Equitable Investment [1988 (2) TMI 25 - CALCUTTA HIGH COURT] also holds that when section 148 notice is issued after the CIT’s approval is challenged only the reasons recorded for obtaining such an approval. It transpires during the course of hearing that Shri Pransukha was neither promoter nor director of the said entity. We also find that Assessing Officer’s reopening reasons formed do not satisfy the settled law as per hon’ble Delhi high court’s decision on the very issue in PCIT V/s. RMG Polyvinyl (I) Ltd. [2017 (7) TMI 371 - DELHI HIGH COURT] upholding the tribunal ‘s order quashing similar re-opeing based on investments, wherein the Assessing Officer had nowhere undertaken any independent enquiry. Thus lordships hold that mere such an information could not be treated as tangible material for the purpose of initiation of 148/147 proceedings. Assessing Officer has erred in initiating the impugned re-opening, which is aggrieved the assessee. We therefore quash the same as non est. That being the case the PCIT’s assumption of revision jurisdiction u/s. 263 of the Act must also follow the suit since it has no legs to stand. The assessee succeeds on the foregoing legal issue. All of its arguments on merits that PCIT has wrongly exercised sec 263 revision jurisdiction on various facts in the instant appeal are rendered infructuous. We make it clear that we have quashed the above stated re-opening/re-assessment to the extent of validity of PCIT revision jurisdiction exercise in the instant case only. Necessary consequences in pursuance to Assessing Officer’s re-assessment dated 30-11-2017 shall continue to follow. Issues Involved:1. Validity of the re-opening/re-assessment under section 148/147 of the Income-tax Act, 1961.2. Exercise of revision jurisdiction under section 263 by the Principal Commissioner of Income Tax (PCIT).3. Genuineness of the share capital received by the assessee.4. Adequacy of the Assessing Officer's (AO) enquiries during the re-assessment.Detailed Analysis:1. Validity of the Re-opening/Re-assessment under Section 148/147:The re-opening of the assessment was based on information from a search operation in the 'Ghanshyam Sarada' group of cases, revealing that the assessee received share capital and premium from shell companies controlled by an entry operator. The AO initiated the re-opening on the grounds that the assessee's fundamentals did not justify the high premium received and inferred that unaccounted income was ploughed back as share capital.The tribunal found that the AO's reasons for re-opening were merely an 'inference' rather than a belief of taxable income having escaped assessment. The AO failed to form a concrete belief and did not undertake any independent enquiry. The tribunal referenced several judicial precedents, including the Delhi High Court's decision in 'PCIT v/s. RMG Polyvinyl (I) Ltd.' and 'M/s. Sabh Infrastructure v/s. ACIT,' which held that mere information without independent enquiry does not constitute tangible material for re-opening. Consequently, the re-opening was quashed as non-est.2. Exercise of Revision Jurisdiction under Section 263 by the PCIT:The PCIT sought to revise the re-assessment on the grounds that it was erroneous and prejudicial to the interests of the Revenue. The PCIT observed that the AO did not conduct sufficient enquiries to verify the genuineness of the share capital, especially given the high premium and the nominal income of the investor companies. The PCIT cited the ITAT's decision in 'Subhlakshmi Vanijya Pvt. Ltd. vs. Commissioner of Income Tax-1, Kolkata,' where inadequate enquiry by the AO was deemed as 'no enquiry,' making the order erroneous and prejudicial to the Revenue.The tribunal upheld the assessee's argument that if the re-assessment itself is invalid, the revision proceedings under section 263 cannot stand. The tribunal referenced the ITAT's decision in 'Classic Flour & Food Processing P.Ltd,' which held that the validity of the re-assessment can be challenged in collateral proceedings. Since the re-opening was quashed, the PCIT's revision under section 263 was also rendered invalid.3. Genuineness of the Share Capital Received by the Assessee:The AO had added Rs. 55 lakhs received from M/s. Urch Traders P.Ltd as unexplained cash credit under section 68, citing the inability of the assessee to produce the investor party. The PCIT further questioned the genuineness of the remaining share capital received from sixteen other companies, noting that these companies had either no income or very nominal income and did not exist at their registered addresses.The tribunal noted that the AO's acceptance of the share capital from these companies without thorough enquiry was a significant oversight. The PCIT's direction for a fresh assessment included comprehensive field enquiries to verify the physical existence, business activities, and creditworthiness of the shareholder companies.4. Adequacy of the AO's Enquiries During the Re-assessment:The PCIT criticized the AO for relying solely on replies to notices under section 133(6) without conducting field enquiries to verify the genuineness of the shareholder companies. The PCIT emphasized that the AO's enquiries were inadequate, and such nominal enquiry is tantamount to 'no enquiry.'The tribunal agreed with the PCIT's observation that the AO's enquiries were insufficient. However, since the re-opening itself was quashed, the tribunal did not delve further into the adequacy of the AO's enquiries.Conclusion:The tribunal quashed the re-opening/re-assessment as non-est, rendering the PCIT's revision under section 263 invalid. The tribunal emphasized that the AO's reasons for re-opening must be based on a concrete belief of income escaping assessment, supported by independent enquiry. The tribunal's decision underscores the importance of thorough and adequate enquiries by the AO in verifying the genuineness of share capital, especially when high premiums and shell companies are involved.