2024 (2) TMI 280 - HC - Income Tax

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 ... Reason to believe - re-opening of assessment under Section 147/148 - nexus / live link between material and formation of belief - borrowed satisfaction - recorded reasons cannot be supplemented by assessment order or affidavit - principles of natural justice - right to relevant material and adequate opportunity - statements recorded under Section 133A have no evidentiary value - best judgment assessment under Section 144 requires relevant material and is not to be based on guessworkReason to believe - nexus / live link between material and formation of belief - re-opening of assessment under Section 147/148 - Validity of the recorded reasons for re-opening assessment under Section 147/148 - HELD THAT: - The Court found that the recorded reasons lack a direct nexus or live link with the formation of belief that the assessee's income had escaped assessment. The re-opening rested solely on a generalized statement attributed to a third party (Sri Ajay Kumar Sharma) without specifying that he named the petitioner, without the date of the statement, and without showing that the statement related to the relevant year. The entries in the reasons were treated as conclusions (e.g. 'accommodation entry', 'bogus financial transactions') rather than material facts underpinning a reasoned belief. Relying on the settled principle that the belief must be based on relevant material and not on remote, vague or far-fetched information, the Court held that there was no bona fide reason to form the belief required for jurisdiction under Section 147/148 and that the re-opening was therefore without authority of law. [Paras 10, 14, 16, 19, 20]Recorded reasons for reopening were insufficient and the re-opening under Section 147/148 was invalid; impugned notices/orders quashed on this ground.Recorded reasons cannot be supplemented by assessment order or affidavit - Whether the Department may cure defective recorded reasons by later supplementation in the assessment order or by affidavit - HELD THAT: - The Court reaffirmed that recorded reasons for reopening cannot be supplemented subsequently by the assessment order or by affidavits. The assessment order in this case contained findings and language (e.g. reference to bill purchase, provider of accommodation entries) that were materially different from and contradictory to the recorded reasons, and thus could not be used to validate the initial reasons. Reliance was placed on settled precedents that supplementation is impermissible and that reasons must stand on the material set out at the time of reopening. [Paras 12, 13, 18]Supplementation of recorded reasons by the assessment order/affidavit is impermissible; such attempted supplementation did not cure the defective reasons.Principles of natural justice - right to relevant material and adequate opportunity - Compliance with principles of natural justice in reassessment proceedings - HELD THAT: - The Court found procedural unfairness: the petitioner was not supplied with the underlying documents forming the basis of the reasons to believe despite requests, and was afforded an effectively unreasonably short time (24 hours) to file objections to the draft assessment. The show-cause process did not inform the assessee of the specific provision under which additions were proposed, thereby denying the assessee a fair opportunity to contest the case. Citing authorities that require adequate notice of the charges and the legal basis relied upon, the Court held the procedure adopted violated natural justice. [Paras 4, 5, 18, 19]Reassessment proceedings were conducted in violation of principles of natural justice; consequential orders are unsustainable.Best judgment assessment under Section 144 requires relevant material and is not to be based on guesswork - statements recorded under Section 133A have no evidentiary value - Validity of additions and best judgment assessment under Section 144 in absence of relevant material - HELD THAT: - The impugned assessment under Section 144 amounted to conjecture and guesswork because there was no material showing cash flows, payment to or receipt from the alleged accommodation entry provider, or identification of the nature of the transactions (receipt, payment, loan, capital, etc.). The Court noted uncertainty whether the supporting statement was under Section 132(4) or Section 133A and reiterated that a statement under Section 133A carries no evidentiary weight. In absence of material specifying the legal basis (e.g., provisions like Section 68/69/69A/69B/69C), the best judgment additions were not sustainable. [Paras 10, 13, 16, 17, 18]Additions made by way of best judgment assessment under Section 144 are unsustainable for lack of relevant material and were set aside.Maintainability of writ despite alternative statutory remedy - Whether writ petition was maintainable despite availability of statutory appellate remedy - HELD THAT: - Although normally statutory remedies (appeal to Commissioner (Appeals)) are to be availed, the Court held that the initiation of proceedings in this case raised a jurisdictional defect going to the root of the matter (invalid re-opening for lack of reason to believe and breach of natural justice). Consequently, the writ was held maintainable because the jurisdictional vice could not be adequately remedied by the ordinary statutory appellate route. [Paras 6, 19, 20]Writ petition was maintainable and the challenged notices/orders were amenable to writ relief; reliance on alternative statutory remedies was rejected in the facts of this case.Final Conclusion: The writ petition was allowed: the notice under Section 147/148 dated 31.03.2021, the assessment order dated 31.03.2022, the demand and penalty notices of 31.03.2022 and 28.09.2022, and the order disposing objections dated 16.03.2022 were quashed for lack of valid reasons to reopen, impermissible supplementation of reasons, breach of natural justice and absence of material supporting the best judgment additions. 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.