2022 (11) TMI 668 - AT - Income Tax

Tribunal rulings on assessment reopening, unexplained cash credit, notice issuance, and fair cross-examination

The Tribunal upheld the reopening of assessment, citing procedural regularities and lack of proof of creditor identity and transaction genuineness, ... Reopening of assessment u/s 147 - accommodation entries in the nature of sales/unsecured loans and share application money - HELD THAT:- Additional ground can be seen that from the perusal of assessment records that approval was sought prior to recording reasons, therefore, the additional ground taken by the assessee does not sustain hence dismissed. As regards, Ground No. 1 related to notice from the records presented by the Ld. D.R. before was it can be seen that the reasons were properly recorded and the notice was issued to the assessee. In respect to the contention of the assessee that no cross-examination was done related to statement of Shri Praveen Jain it appears to be genuine as the Assessing Officer has not given any opportunity for the assessee to counter the statement made by Shri Praveen Jain. As regards, the merit of the case is concerned the assessee has provided all the details related to creditworthiness, identity and genuineness of the transaction thereby provided share application form, copy of Gold Resolution of the Company to invest in shares of assessee company of those two companies. The assessee before the AO presented the bank statement of said company i.e. Yash V. Jewels Ltd. & Ostwal Trading India Pvt. Ltd. reflecting these transactions of investment in assessee’s company as well as the financial capacity of the said companies. In fact, no statement of the Directors of Creditors Company were recorded by the authorities and Praveen Jain was not the Director of the Creditor company. Nearly reliance on the statement of third party cannot be the sole criteria for making addition under Section 68 - Appeal of the assessee is partly allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under Section 148 is invalid because the Assessing Officer recorded reasons after obtaining approval of the higher authority under Section 151 (approval sequence and timing)? 2. Whether notice under Section 143(2)/143(3) r.w.s. 147 was validly issued in the proceedings leading to reassessment? 3. Whether addition under Section 68 (unexplained cash credit/share application money) was justified where the assessee produced documents claiming identity, genuineness and creditworthiness of the contributors and relied upon documentary proof rather than cross-examination of a third-party declarant? 4. Whether denial of opportunity to cross-examine the declarant whose statement was relied upon by the Department (a third party from search/investigation) renders the reassessment and resulting addition invalid? 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening where reasons were recorded after obtaining approval Legal framework: Reopening under Section 148 requires recording of reasons for belief and requisite approval by the competent authority before issuance of notice; procedural sequence and genuineness of reasons are relevant to validity. Precedent Treatment: The Tribunal examined the sequence reflected in the record and parties' submissions; no specific authority was invoked to distinguish or overrule precedent in the judgment. Interpretation and reasoning: The Tribunal examined the assessment record and observed the approval 'was sought prior to recording reasons' on the presented papers. On that basis, the Tribunal held the additional ground claiming invalidity of reopening due to improper sequencing did not stand because the record showed reasons were properly recorded and approval was obtained as required. Ratio vs. Obiter: Ratio - a challenge to reopening based on asserted improper sequence failed where the assessment record demonstrated proper recording of reasons and issuance of notice; the finding is directed to the facts and documentary record in the case. Conclusion: Ground alleging reopening was bad because reasons were recorded after approval was dismissed for want of merit based on the assessment record. Issue 2 - Validity of notice under Section 143(2)/143(3) r.w.s. 147 Legal framework: Reassessment proceedings under Section 147 require issuance of notice (as applicable under Sections 143(2) or 143(3) read with Section 147) in accordance with statutory requirements; validity of notice is a jurisdictional question. Precedent Treatment: The Tribunal accepted the Revenue's production of record to demonstrate issuance of notice; no precedent was distinguished or overruled. Interpretation and reasoning: On perusal of record presented by the Revenue, the Tribunal found that reasons were recorded and notice was issued. The Assessing Officer's file supported the procedural compliance, and therefore the ground challenging notice issuance was not sustained. Ratio vs. Obiter: Ratio - procedural challenge to the notice was rejected where documentary record supported proper issuance. Conclusion: The notice under the relevant provisions was held to have been validly issued; Ground No.1 on notice was dismissed. Issue 3 - Justification for addition under Section 68 where assessee produced documents proving identity, genuineness and creditworthiness Legal framework: For additions under Section 68, the Assessing Officer must examine and be satisfied about identity of the creditor, genuineness of the transaction and creditworthiness; when the assessee furnishes evidence (bank statements, confirmations, share application forms, corporate resolutions, audited accounts), such material is relevant to discharge onus. Precedent Treatment: The Tribunal noted that reliance solely on statements of third parties from search/investigation is not sufficient to make an addition under Section 68 when the assessee places documentary evidence proving the transactions and financial capacity; the decision cited by the assessee was held applicable (treated as followed in the present reasoning). Interpretation and reasoning: The Tribunal observed that the assessee produced: confirmations of account, share application forms, board resolution authorizing investment, bank statements of the creditor companies reflecting relevant transactions, and audited financial statements. The Department had not recorded statements of directors of the creditor companies and the declarant relied upon in investigation was not a director of those creditor companies. Given these facts, the Tribunal held that near-total reliance on a third-party statement from search proceedings could not, by itself, justify treating the documented share application money as unexplained cash credits. The Assessing Officer had noted the documents but concluded identity/genuineness not established; the Tribunal disagreed with that conclusion on the facts, finding the evidence established identity, genuineness and creditworthiness to the extent that the addition under Section 68 could not be sustained fully. Ratio vs. Obiter: Ratio - where an assessee furnishes contemporaneous documentary evidence proving identity, genuineness and financial capacity of creditors, and where the Department has not recorded statements of the actual creditor-directors, an addition under Section 68 cannot be founded solely on statements of unrelated third parties from search proceedings. Conclusion: The Tribunal partially allowed the appeal on merit, displacing the Section 68 addition insofar as it was based predominantly on a third-party statement despite the assessee's documentary proof; the appeal was partly allowed. Issue 4 - Effect of absence of opportunity to cross-examine the departmental declarant relied upon Legal framework: Principles of natural justice and fair procedure require that where adverse reliance is placed on statements or material that could affect the assessee's rights, opportunity to rebut or cross-examine may be relevant; however, statutory reassessment process and reliance on recorded evidence have been treated differently depending on circumstances. Precedent Treatment: The Tribunal accepted the assessee's contention that no cross-examination of the declarant (third party from search) was afforded and treated that as a factor in assessing the weight of the departmental evidence; no authority was expressly overruled. Interpretation and reasoning: The Tribunal found it 'genuine' that no opportunity was afforded to cross-examine the declarant whose statement was used by the Department. Coupled with the absence of direct statements from the creditors and the presence of documentary evidence from the assessee, the Tribunal considered denial of cross-examination as weakening the Department's reliance on that third-party statement. The Tribunal held that reliance on such a statement, without offering the assessee an opportunity to rebut or to cross-examine, cannot be the sole criterion for sustaining additions under Section 68. Ratio vs. Obiter: Ratio - denial of opportunity to confront or cross-examine a departmental declarant relied upon to establish accommodation entries undermines the sufficiency of that evidence, particularly where the assessee has produced documentary proof of the transactions. Conclusion: The absence of cross-examination weighed in favour of the assessee; the Tribunal found the Assessing Officer's reliance on the declarant's statement insufficient to uphold the Section 68 addition in the face of documentary evidence, contributing to partial allowance of the appeal.