ITAT deletes Rs.2.94 crore addition finding reopening assessment bad in law lacking proper application of mind

The ITAT Kolkata allowed the assessee's appeal, deleting additions of Rs.2,94,13,031/- made by the AO. The tribunal held that reopening of assessment was bad in law as the AO failed to apply mind to facts and circumstances. Regarding alleged bogus property sale, the assessee had entered into a Joint Development Agreement with 41 persons, with ongoing litigation in Civil and HC. The source of payments was satisfactorily explained and Benami proceedings were dropped. For accommodation entries from M/s Raghuvir Sales Pvt. Ltd., the AO failed to establish how the receipt constituted escaped income, lacking details of alleged bogus share transactions. The assessee explained the amount as repaid unsecured loans with interest and TDS deducted.

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The core legal questions considered by the Tribunal in this appeal pertain to the validity of the reopening of the assessment under section 147 of the Income Tax Act, 1961, the legality and correctness of additions made to the assessee's income on account of alleged bogus property sale transactions and unexplained loan credits, and the correctness of the order passed by the National Faceless Appeal Centre (CIT(A)) dismissing the appeal without adjudicating on merits.

Issue 1: Whether the reopening of the assessment under section 147 read with section 144 of the Income Tax Act, 1961, was valid and justified in the facts and circumstances of the case.

Issue 2: Whether the addition of Rs.2,94,13,031/- as unaccounted income on account of alleged bogus sale of property is sustainable in law and on facts.

Issue 3: Whether the addition of Rs.26,00,000/- on account of alleged unexplained loan credits is justified under section 68 of the Income Tax Act, 1961.

Issue 4: Whether the order passed by the National Faceless Appeal Centre dismissing the appeal ex-parte without dealing with the merits was legally sustainable.

Issue 1: Validity of Reopening under Section 147

The reopening was predicated on information received from the Investigation Wing alleging that the assessee had engaged in sham transactions involving sale of property to 41 persons who were nominees, with the sale consideration routed back to the assessee, thus constituting unaccounted income. Additionally, an amount of Rs.28,00,000/- was alleged to have been received from a third party through banking channels. The Assessing Officer recorded reasons to believe that income had escaped assessment and accordingly reopened the assessment for the relevant assessment year.

The Tribunal examined the reasons recorded and found that the Assessing Officer's foundational premise-that the assessee had sold the property by way of sham transactions-was factually incorrect. The property was sold by third-party vendors to the 41 persons, and the assessee was only a confirming party to the Joint Development Agreement (JDA) with those persons. The Tribunal relied on an order passed under section 24(4)(a)(ii) of the Prohibition of Benami Property Transactions Act, 1988, wherein the competent authority had thoroughly examined the same transactions and concluded that the assessee had satisfactorily explained the source of payments and was not guilty of benami transactions. The proceedings under the Benami Act were dropped against the assessee.

The Tribunal held that the Assessing Officer's reasons for reopening were based on incorrect factual assumptions and a failure to apply mind to the material facts. Mere suspicion or surmises without proper application of mind and factual basis do not justify reopening under section 147. The reopening was therefore held to be invalid and bad in law.

Issue 2: Addition of Rs.2,94,13,031/- on Account of Bogus Sale of Property

The addition was made on the premise that the assessee had introduced unaccounted money by way of bogus sale of property to the 41 persons, who were nominees, and that the sale consideration was routed back to the assessee. However, the Tribunal noted that the competent authority under the Benami Act had found the assessee's explanation satisfactory and had dropped proceedings. The Tribunal emphasized that the Assessing Officer and the CIT(A) failed to appreciate the factual matrix and the findings of the competent authority.

The Tribunal observed that the addition was based on mere suspicion and surmises without any cogent evidence to establish that the transactions were sham or that the amounts received were unaccounted income. It was also noted that the assessee had entered into a valid JDA with the 41 persons and that litigation was pending in civil and high courts regarding the same.

Accordingly, the addition of Rs.2,94,13,031/- was held to be untenable, illegal, and liable to be deleted.

Issue 3: Addition of Rs.26,00,000/- on Account of Loan Credits

The Assessing Officer added Rs.26,00,000/- alleging accommodation entries through bogus share transactions. The reopening reasons mentioned receipt of Rs.28,00,000/- from M/s Raghuvir Sales Pvt. Ltd. through banking channels but did not specify any details or evidence to substantiate that the amount was unexplained or unaccounted income.

The assessee submitted that the amount represented genuine unsecured loans which were taken and repaid within the same financial year along with interest, with TDS deducted. Bank statements were furnished to substantiate the genuineness of the transactions.

The Tribunal found that mere receipt of an amount without any material or evidence to form a reason to believe that income had escaped assessment does not justify reopening under section 147. The Assessing Officer failed to demonstrate how the loan credits were unexplained cash credits under section 68. The addition was therefore held to be unjustified and liable to be deleted.

Issue 4: Dismissal of Appeal by National Faceless Appeal Centre Without Adjudication on Merits

The assessee challenged the ex-parte dismissal of the appeal by the National Faceless Appeal Centre without dealing with the grounds of appeal or the merits of the case. The Tribunal observed that both the Assessing Officer and the CIT(A) had confirmed additions without properly appreciating the facts or evidence on record.

The Tribunal implicitly held that dismissal of appeal without adjudication on merits, especially when the reopening itself was invalid and additions were not sustainable, was erroneous. The appeal was allowed accordingly.

Significant Holdings:

"The Assessing Officer's reasons for reopening were based on incorrect factual assumptions and a failure to apply mind to the material facts. Mere suspicion or surmises without proper application of mind and factual basis do not justify reopening under section 147."

"The addition of Rs.2,94,13,031/- was based on mere suspicion and surmises without any cogent evidence to establish that the transactions were sham or that the amounts received were unaccounted income."

"Mere receipt of an amount, without any information or evidence to form the belief that the said amount is unaccounted/escaped income of the assessee, would not constitute reasons to believe of escapement of income for the purpose of reopening of the assessment under section 147."

"The impugned additions were totally untenable, illegal, invalid and liable to be deleted."

The Tribunal concluded that the reopening of assessment was invalid, the additions were unsustainable both legally and factually, and the ex-parte dismissal of the appeal by the CIT(A) was erroneous. Consequently, the appeal was allowed and the additions were deleted. The decision underscores the principle that reopening of assessment requires a valid reason to believe supported by material facts, and additions must be based on cogent evidence rather than suspicion or surmises.

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