Assessment reopening under section 147 quashed for lack of nexus between material and belief formation

The Jharkhand HC quashed the reopening of assessment under section 147 for alleged accommodation entries and bogus financial transactions. The court found no nexus between available material and the assessing officer's belief formation. The statement of an alleged accommodation entry provider under section 133A lacked evidentiary value, contained no direct reference to the petitioner, and had no specified date linking it to the relevant assessment year. The court held that proceedings initiated for verification and roving enquiry are impermissible under sections 147/148. The assessment was based on conjecture without tangible material, violating best judgment assessment principles. The belief formation was found to be vague, far-fetched, and lacking bona fides. The petition was decided in favor of the assessee.

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Issues Involved:
1. Quashing the Assessment Order dated 31.03.2022.
2. Quashing the Notice of Demand under Section 156.
3. Quashing the Notice for Penalty under Section 274 read with Section 271(1)(c).
4. Direction to produce records pertaining to reassessment.
5. Declaration of reassessment proceedings as violative of the Principles of Natural Justice and the Income-Tax Act, 1961.

Summary:

1. Quashing the Assessment Order dated 31.03.2022:
The petitioner challenged the assessment order dated 31.03.2022, which added Rs. 15,54,42,417/- to the petitioner's income for the Assessment Year 2015-2016 under Section 147 read with Sections 144 and 144B of the Income-Tax Act, 1961. The petitioner argued that the reassessment was initiated without material and reasons to form a reasonable belief that income had escaped assessment. The court found that there was no nexus between the material before the assessing authority and the formation of belief, and no tangible or cogent material on record leading to such belief. The reliance on the statement of Ajay Kumar Sharma, without evidence of the petitioner's involvement, was deemed insufficient.

2. Quashing the Notice of Demand under Section 156:
The petitioner sought to quash the Notice of Demand dated 31.03.2022. The court observed that the reassessment proceedings were initiated on vague and far-fetched grounds, lacking a direct nexus or live link between the material on record and the formation of belief. The court held that the reassessment proceedings were initiated for verification and roving enquiry, which is impermissible under Section 147/148.

3. Quashing the Notice for Penalty under Section 274 read with Section 271(1)(c):
The petitioner also sought to quash the Notice for Penalty dated 31.03.2022. The court found that the entire proceeding was carried out in gross violation of the principles of natural justice, as the petitioner was given only 24 hours to file an objection/reply to the Show Cause Notice. The court held that the recorded reasons and the impugned assessment order were silent about the provisions under which the additions were sought to be made, rendering the proceedings arbitrary and irrational.

4. Direction to produce records pertaining to reassessment:
The petitioner requested a direction for the respondents to produce the entire records pertaining to the reassessment proceedings. The court noted that the petitioner was denied access to the relied-upon documents, which violated the principles of natural justice. The court emphasized that the petitioner is entitled to a copy of the investigation report and other relevant documents.

5. Declaration of reassessment proceedings as violative of the Principles of Natural Justice and the Income-Tax Act, 1961:
The petitioner argued that the reassessment proceedings were conducted in gross violation of the Principles of Natural Justice and the Income-Tax Act, 1961. The court agreed, stating that the reasons for reopening the assessment were vague and lacked a rational connection with the formation of belief. The court held that the reassessment proceedings were initiated on borrowed satisfaction without independent application of mind.

Conclusion:
The court quashed the impugned notice issued under Section 147 dated 31.03.2021, the impugned assessment order dated 31.03.2022, the notice of demand dated 31.03.2022, and the notice for penalty under Section 274 read with Section 271(1)(c) dated 31.03.2022. The penalty order and demand notice dated 28.09.2022, and the order disposing of objections dated 16.03.2022, were also quashed. The writ application was allowed, and any pending interlocutory applications were closed.

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