2024 (9) TMI 1715 - AT - Income Tax

ITAT quashes section 147 reopening based on third-party search information, rules section 153C applies instead

The ITAT Pune held that the Assessing Officer erred in reopening assessment under section 147 based on information obtained during a search at third party ... Reopening of assessment u/s 147 v/s assessment u/s 153C - information obtained during a search on a third party - HELD THAT:- Since admittedly the Assessing Officer in the instant case has reopened the assessment on the basis of information that emerged at the time of search at the premises of M/s. Shri Renuka Mata Multistate Credit Society Ltd., therefore, the proper course of action by the Assessing Officer should have been under the provisions of section 153C and not under the provisions of section 147 of the Act. Therefore, we hold that the initiation of provisions of section 147 are not in accordance with law and liable to be quashed. Appeal filed by the assessee is allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, based on information obtained during a search on a third party, was valid.Whether the estimation of net profit at 8% on the turnover of Rs. 6,09,74,438/- was justified.Whether the additional legal ground regarding the jurisdiction of reopening under Section 148 was admissible.ISSUE-WISE DETAILED ANALYSIS1. Validity of Reopening under Section 147Relevant legal framework and precedents: The reopening of an assessment under Section 147 requires that the Assessing Officer has reason to believe that income has escaped assessment. Section 153C is applicable when information obtained during a search pertains to a person other than the one searched.Court's interpretation and reasoning: The Tribunal noted that the information leading to the reopening of the assessment was obtained during a search on M/s. Shri Renuka Mata Multistate Credit Society Ltd., a third party. The Tribunal referenced a similar case (ITO vs. Narendra Sampatlal Bafna) where it was held that Section 153C should be invoked in such situations, not Section 147.Key evidence and findings: The Tribunal found that the information regarding cash deposits emerged during a search on a third party, and hence, Section 153C was the appropriate provision.Application of law to facts: The Tribunal applied the provisions of Section 153C, determining that the reopening under Section 147 was not valid.Treatment of competing arguments: The Tribunal considered the Department's argument that the reopening was proper under Section 147 but found it unconvincing, given the legal framework of Section 153C.Conclusions: The Tribunal concluded that the reopening under Section 147 was invalid, and the proper course was under Section 153C.2. Estimation of Net Profit at 8%Relevant legal framework and precedents: The estimation of income is typically based on the nature of business and past records. The principle of res judicata does not apply in tax proceedings.Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer estimated the profit at 8% based on the nature of the business as money lending, where profits are typically higher.Key evidence and findings: The assessee argued for a 2% estimation, citing previous assessments, but failed to maintain proper books of accounts to substantiate the claim.Application of law to facts: The Tribunal did not adjudicate this issue since the legal ground regarding the validity of reopening was dispositive.Treatment of competing arguments: The Tribunal acknowledged the Department's position that each assessment year is independent and not bound by previous estimations.Conclusions: The Tribunal did not reach a conclusion on this issue due to the decision on the legal ground.3. Admissibility of Additional Legal GroundRelevant legal framework and precedents: The Tribunal referenced decisions from the Hon'ble Supreme Court allowing purely legal grounds to be admitted if no new facts are required.Court's interpretation and reasoning: The Tribunal admitted the additional legal ground, finding it purely legal and not requiring further fact-finding.Key evidence and findings: The Tribunal found that the facts necessary for the additional ground were already on record.Application of law to facts: The Tribunal applied the Supreme Court's guidance to admit the additional ground.Treatment of competing arguments: The Department opposed the admission, arguing procedural default, but the Tribunal found the legal nature of the ground justified its admission.Conclusions: The Tribunal admitted the additional legal ground.SIGNIFICANT HOLDINGSThe Tribunal held that the reopening of the assessment under Section 147 was invalid because the information was obtained during a search on a third party, making Section 153C the appropriate provision. The Tribunal stated: 'Since admittedly the Assessing Officer in the instant case has reopened the assessment on the basis of information that emerged at the time of search at the premises of M/s. Shri Renuka Mata Multistate Credit Society Ltd., therefore, the proper course of action by the Assessing Officer should have been under the provisions of section 153C and not under the provisions of section 147 of the Act.'The Tribunal allowed the additional ground challenging the validity of the reassessment proceedings and quashed the assessment made under Section 147. Consequently, the Tribunal did not adjudicate the merits of the estimation of net profit, rendering those issues academic.The appeal filed by the assessee was allowed, emphasizing the necessity of following the correct legal procedures for reopening assessments based on third-party search information.