2024 (8) TMI 1606 - AT - Income Tax

Reopening Assessments u/s 147 Quashed for Lack of Valid Reason and Borrowed Satisfaction

Purple Suppliers Pvt. Ltd. Versus Asstt. Commissioner of Income Tax, Circle-5 (1), Kolkata

The ITAT Kolkata held that the reopening of assessments u/s 147 for AYs 2011-12 to 2013-14 was invalid as the AO lacked a valid reason to believe ... Reopening of assessment u/s 147 - purchases made by the assessee from such bogus entity - Reason to believe or suspect - information received from Investigation Wing, Mumbai in the case of M/s. SDPL which is engaged in trading of diamond and gold jewellery HELD THAT:- We observe that only the purchase transactions have been doubted by the Ld. AO but the sale transaction with the company viz., M/s. SDPL has been accepted and the profit arising therefrom has been taxed. We also note that even though for AY 2011-12 the return was not selected for scrutiny but still the reopening proceedings which have been carried out after a span of almost five and half years, AO failed refer to any material evidence or any material facts which the assessee failed to disclose in its regular returns of income. For the purpose of carrying out the reassessment proceedings beyond four years or in cases where regular scrutiny proceedings have been carried out u/s. 143(3) of the Act one of the important aspects is that there has to be a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. In the present case, for all the three impugned years assessee has fully disclosed all material facts and the transactions of purchases and sales and they have also passed through the processing for AY 2011-12 and assessment proceedings u/s. 143(3) of the Act for AYs 2012-13 and 2013-14 and the transaction of purchases and sales have been accepted by the revenue authorities for these years. In the case of an assessee a consistent view has been taken by the revenue authorities accepting the business transaction of the assessee. Before carrying out of the reassessment proceedings Ld. AO failed to find that the assessee has not disclosed fully and truly all material facts. The reassessment proceedings have been carried on a very poor foundation i.e. borrowed satisfaction in the form of information from Investigation Wing that too in the given scenario where the statement recorded before the survey team by the key person of M/s. SDPL has been retracted. This brings us to a firm conclusion that Ld. AO has carried out the reassessment proceedings merely based on borrowed satisfaction ‘reason to suspect’ and merely ‘change of opinion’ and, therefore, such reopening of the reassessment proceeding cannot be held to be valid in the eyes of law. Therefore, the impugned reassessment proceedings for AYs 2011-12 - 2013-14 are void, illegal and bad in law and, therefore, the assessment orders in question are hereby quashed on the very same ground that there was no proper reason to believe with the AO to reopen the cases of the assessee. Since we have quashed the reopening proceedings all additions stand deleted. Assessee appeal allowed. ISSUES: Validity of reopening assessment proceedings under sections 147 and 148 of the Income Tax Act, 1961.Whether the Assessing Officer (AO) had 'reason to believe' that income chargeable to tax had escaped assessment, justifying reopening beyond four years.Whether reopening was based on 'reason to suspect' or 'reason to believe' and distinction between the two.Whether reopening constituted mere change of opinion or was supported by relevant material and credible information.Whether purchases from a company alleged to be a bogus entity could be treated as unexplained expenditure under section 69C of the Act.Admissibility and weight of evidence such as statements recorded under duress and their retraction.Whether the AO erred in accepting sales transactions with the alleged bogus entity but rejecting corresponding purchases.Whether the reassessment orders were arbitrary, erroneous, and bad in law. RULINGS / HOLDINGS: The reopening of assessments for the impugned years was held to be invalid and illegal as the AO did not have 'reason to believe' but only a 'reason to suspect' escapement of income; reopening was based on 'borrowed satisfaction' and 'mere change of opinion.'The AO's reliance on statements recorded under duress, which were subsequently retracted, was insufficient to form a valid reason to believe for reopening.The AO failed to consider that sales transactions with the alleged bogus entity were accepted, while only purchases were disallowed, which lacked rational nexus and indicated arbitrary treatment.The reassessment proceedings were quashed on the ground that the AO did not properly apply mind or verify material facts before reopening, violating the statutory requirement of 'reason to believe.'All additions made under section 69C on account of alleged bogus purchases were deleted as the reassessment itself was invalid.The decision affirmed that reopening requires a 'rational and intelligible nexus' between reasons recorded and the belief of escapement of income, which was absent in this case. RATIONALE: The Court applied the statutory framework under sections 147 and 148 of the Income Tax Act, 1961, which mandate that reopening of assessment can only be done if the AO has 'reason to believe' that income chargeable to tax has escaped assessment.Distinction was emphasized between 'reason to suspect' and 'reason to believe,' with the latter requiring a foundation based on credible and relevant material, not mere suspicion or information from third parties.Precedents were followed and cited which hold that reasons recorded for reopening must be 'self-explanatory' and 'read as they were recorded,' without addition or deletion, and must establish a prima facie case of escapement of income.The Court relied on authoritative judgments including the Supreme Court's ruling in Ganga Saran & Sons P. Ltd. v. ITO, which requires that the AO's belief must be 'reasonable' and based on 'relevant and material' reasons.The Court noted that reopening after four years requires a failure on the part of the assessee to disclose fully and truly all material facts, which was not established here as the assessee had filed audited accounts, VAT returns, and had undergone scrutiny assessments.The Court also referred to decisions emphasizing that reopening on the basis of information from investigation wings or statements of third parties without independent verification amounts to 'borrowed satisfaction' and is impermissible.The Court highlighted that acceptance of sales transactions with the alleged bogus entity while rejecting purchases without cogent basis undermines the rationale for reopening and indicates arbitrariness.The Court underscored the quasi-judicial nature of the reopening process and the necessity for the AO to exercise jurisdiction with 'scrupulous care' and proper application of mind.Guidelines from the Delhi High Court were noted, requiring that reasons for reopening must be detailed, accompanied by relevant documents, and the AO must address objections of the assessee in a reasoned manner.