AO failed to establish "reason to believe" for reopening assessment despite share premium allegations

The ITAT Mumbai held that reopening of assessment was invalid as the AO failed to establish "reason to believe" income had escaped assessment. The case involved allegations that the assessee issued shares at premium to paper companies. The tribunal distinguished between "reason to suspect" and "reason to believe," noting that adverse information alone only triggers suspicion, which is insufficient for reopening. The AO must conduct preliminary inquiry and collect material evidence to form a belief about income escapement. Here, despite the assessee collecting Rs. 52 lakhs share premium, the AO failed to identify investors, establish their connection to entry operators, or conduct adequate preliminary inquiry. The recorded reasons lacked specific details about suspected accommodation transactions, rendering the reopening invalid.

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Issues Involved:
1. Transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961.
2. Dropping of proceedings initiated under Section 153C and reopening of assessment.
3. Reopening of assessment under Section 147 by issuance of notice under Section 148 of the Act.

Summary:

Issue 1: Transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961
The Ld. AR of the assessee did not press ground no. 1 regarding the action of the transfer of the case from Kolkata to Mumbai under Section 127 of the Income Tax Act, 1961. Consequently, this ground stands dismissed.

Issue 2: Dropping of proceedings initiated under Section 153C and reopening of assessment
The Ld. AR also did not press ground no. 2 concerning the action of the AO dropping the proceedings initiated under Section 153C and instead resorting to the impugned reopening of assessment. Therefore, this ground also stands dismissed.

Issue 3: Reopening of assessment under Section 147 by issuance of notice under Section 148 of the Act
The primary issue dealt with is the action of the AO to reopen the assessment under Section 147 by issuing a notice under Section 148, which the assessee contended was bad in law. The Tribunal examined the reasons recorded by the AO for reopening the assessment. The legal principle established is that the AO must have "reason to believe" that income has escaped assessment, which requires a foundation based on information and belief based on reason.

The Tribunal noted that the AO's reasons for reopening were based on a search action on RK Kedia Group, which revealed that certain entities were controlled by entry operators providing accommodation entries. The AO observed that the assessee issued shares at a high premium, which seemed unjustified given the company's financials. However, the AO failed to conduct a preliminary inquiry to identify the investors and establish their connection to the entry operators. The Tribunal emphasized that adverse information might trigger "reason to suspect," but not "reason to believe," which is required for reopening an assessment.

Since the AO did not carry out the necessary preliminary inquiry and failed to mention the names of the investors or establish their nexus with the entry operators in the recorded reasons, the Tribunal concluded that the AO did not possess the requisite "reason to believe" that income had escaped assessment. Therefore, the action of the AO to initiate reopening of the assessment was found to be without jurisdiction and was quashed.

Conclusion:
The appeal of the assessee was allowed, and the order pronounced in the open court on 20/09/2023.

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