2018 (11) TMI 1979 - AT - Income Tax

AO's additions based on conjecture dismissed; fresh inquiry into FIR required before further action under relevant tax rules

The ITAT Lucknow held that the AO erred in making additions based on mere conjecture without considering the FIR lodged by the assessee against a third ... Unexplained credits in bank account - as submitted this account was operated by one Shri Om Jaiswal, owner of M/s Clasic Flour Mill, Unnao, in the name of the assessee, by utilizing thirty signed blank cheques obtained by him from the assessee HELD THAT:- Neither of the authorities below has taken into account the undisputed position that an FIR had been lodged by the assessee against Shri Om Jaiswal, on 17.12.2010, regarding the fraud alleged to have been committed on the assessee by Shri Jaiswal. AO did not deem it appropriate to enquire into the fate of this FIR and went on to make the addition on the mere surmise and conjecture that ‘it appears’ that the assessee had lodged the FIR against Om Jaiswal merely because he was a history-sheeter in the police records as a defaulter of the Bank and enquiries were already pending against him, whereas the bank account in which the deposits in question had been found, had been operated by the assessee himself only. Documentary evidence filed by the assessee, in the shape of the FIR lodged by him on 17.12.2010 against Om Jaiswal and papers related to the police enquiry against Om Jaiswal, was wrongly not considered by the AO, causing prejudice to the case of the assessee. The matter needs to be examined afresh ab initio by the AO, on enquiring about the fate of the FIR got lodged by the assessee against Om Jaiswal, way back on 17.12.2010. As such, the matter is remanded to the file of the AO. Assessee appeal allowed for statistical purposes. ISSUES: Whether the addition of unexplained bank account credits as undisclosed income under section 147 of the Income Tax Act, 1961 is justified when the assessee denies ownership and operation of the bank account involved in the transactions.Whether the assessing officer and appellate authority erred in disregarding the FIR lodged by the assessee alleging fraud by a third party who allegedly operated the bank account without the assessee's knowledge.Whether the initiation of reassessment proceedings under section 147 is valid in light of the assessee's explanation and documentary evidence regarding the disputed bank transactions.Whether the evidence and explanations provided by the assessee, including statements on oath and police reports, require a fresh inquiry before confirming additions as escaped income. RULINGS / HOLDINGS: The addition of Rs. 98,08,000/- credited to the disputed bank account as undisclosed income was not justified without proper inquiry into the FIR lodged by the assessee, as the AO and CIT(A) failed to consider this unrebutted documentary evidence.The authorities below erred in dismissing the assessee's explanation that the bank account was fraudulently operated by a third party using blank signed cheques, without investigating the fate of the FIR filed against the said third party.The initiation of proceedings under section 147 requires a formation of belief based on credible evidence, which was lacking here due to the failure to examine the police investigation and the assessee's sworn statement.The matter is remanded to the assessing officer for a fresh adjudication afresh in accordance with law, with due opportunity to the assessee to prove his case and for the AO to inquire into the FIR and related police enquiry. RATIONALE: The Court applied the provisions of section 147 of the Income Tax Act, 1961, which permits reopening of assessment only if income has escaped assessment and there is a valid formation of belief supported by material.The Court emphasized the need for proper inquiry into the documentary evidence (FIR and police enquiry) submitted by the assessee, which was disregarded by the lower authorities, resulting in a flawed conclusion based on surmise and conjecture.The decision reflects the principle that unexplained bank credits cannot be treated as undisclosed income without a thorough investigation, especially when the assessee denies involvement and provides credible evidence of fraud.The remand directs adherence to principles of natural justice by affording the assessee an opportunity to be heard and to substantiate his claims before confirming any addition.