2024 (5) TMI 1607 - AT - Income Tax

Reassessment under section 147 quashed where AO lacked genuine belief and relied solely on suspicious-transaction report about supplier

Gillanders Arbuthnot And Co. Ltd Versus Deputy Commissioner of Income Tax, Circle-4 (1), Kolkata

Gillanders Arbuthnot And Co. Ltd Versus Deputy Commissioner of Income Tax, Circle-4 (1), Kolkata - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 147 (notice under section 148) is valid where the assessment was previously completed after scrutiny under section 143(3) and the reassessment is initiated merely on the basis of a Suspicious Transaction Report (STR) concerning a third party without any new information indicating failure to disclose material facts by the assessee. 2. Whether reassessment proceedings can be sustained where the Assessing Officer relied mechanically on third-party information (STR) without examining assessment records, and where procedural steps to verify the third-party information (e.g., service of section 133(6) notice) remained unavailing. 3. Whether ex-parte orders by the Commissioner of Income Tax (Appeals) during the COVID restriction period, without addressing filed replies and without dealing with merits, require restoration to the appellate authority for fresh adjudication and a speaking order after affording reasonable opportunity of hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of reopening under section 147/148 - legal framework Legal framework: Reopening after completion of assessment requires the Assessing Officer to have 'reason to believe' that income chargeable to tax has escaped assessment (section 147) and, for assessments beyond four years, there must be a recorded reason showing failure by the assessee to disclose fully and truly all material facts necessary for assessment. A mere change of opinion is not a permissible basis for reopening; the record must indicate some new information or omission which demonstrates nondisclosure or inaccuracy in the original return. Precedent Treatment: The Court/Tribunal applied settled principles governing reassessment - that reopening cannot be based solely on a change of opinion and must be supported by material showing failure to disclose material facts. (No contrary precedent was relied upon or overruled in the judgment.) Interpretation and reasoning: The assessment for the relevant year had been completed after scrutiny (section 143(3)). The reassessment notice was issued more than four years later based on information in an STR relating to a third party (the seller). The Assessing Officer did not identify any new defect in the assessee's own return or record showing nondisclosure; the transactions in question were recorded in the assessee's books, quantitative records existed, and the books were produced during the original scrutiny. The reasons recorded relied solely on the STR indicating cash withdrawals by the seller after receiving payments, without any material demonstrating that the assessee furnished inaccurate particulars or withheld material facts. Thus, the Assessing Officer's action constituted a change of opinion grounded on third-party STR information rather than a reasoned belief of nondisclosure by the assessee. Ratio vs. Obiter: Ratio - reopening was invalid because no proper reason to believe was recorded showing failure by the assessee to disclose material facts; reliance on third-party STR alone and absence of new information meant reassessment was a change of opinion. Obiter - observations on best practices for examining assessment records prior to recording reasons. Conclusions: Reopening under section 147/148 was quashed as bad in law, illegal and untenable for lack of reason to believe and for being based on change of opinion rather than any failure by the assessee to disclose material facts. The legal ground raised by the assessee was allowed and reassessment proceedings were set aside. Issue 2: Reliance on third-party STR and procedural verification (section 133(6) notice returned unserved) Legal framework: Reassessment must be founded on credible, verifiable material establishing that income has escaped assessment; reliance on information received from investigation branches requires the Assessing Officer to examine and verify such information against the assessee's records and, where necessary, to secure corroboration from the third party through authorized notices. Precedent Treatment: The Tribunal applied established standards requiring application of mind and verification of information before initiating reassessment. No express conflicting precedent was cited. Interpretation and reasoning: The Assessing Officer relied on an STR indicating that the seller received funds and made cash withdrawals. However, the Assessing Officer did not demonstrate that he examined the assessment records to detect defects or inaccuracies in the assessee's return. The section 133(6) notice issued to the third party returned unserved with postal remark 'left this place,' leaving no authentic verification from the third party. The approach was characterized as one-sided and mechanical: the AO initiated reassessment on the basis of the STR but failed to obtain corroborative information or to point to any omission by the assessee. Mere suspicion arising from cash withdrawals in the seller's bank account, without more, cannot convert a recorded, scrutinized transaction into a bogus transaction for purposes of reopening. Ratio vs. Obiter: Ratio - reliance on third-party STR without verifying the information and without demonstrating failure to disclose by the assessee is insufficient to sustain reassessment; such mechanical action evidences lack of application of mind. Obiter - procedural critique that the AO ought to examine assessment records before recording reasons and to pursue authentic verification of third-party information. Conclusions: The reassessment could not be sustained because the AO neither examined assessment records for defects nor secured reliable verification of the STR; the section 133(6) notice returning unserved amplified the lack of authentic information and undermined the basis for reopening. Issue 3: Restoration of appeals disposed ex-parte at appellate stage and requirement of speaking order and hearing Legal framework: An appellate authority must deal with merits and give reasons in a speaking order; where ex-parte orders are passed without considering responses filed by the appellant or without affording adequate opportunity to be heard (notably during COVID restrictions), principles of natural justice and requirement of adjudication on merits require restoration. Precedent Treatment: The Tribunal followed supervisory principles that appellate orders passed without considering filed replies or without adjudication on merits merit restoration to enable a proper hearing and issuance of a speaking order. (No contrary precedent applied.) Interpretation and reasoning: For two assessment years, the Commissioner of Income Tax (Appeals) issued ex-parte orders and did not consider the assessee's replies; some hearing dates fell during COVID restriction periods. The assessee contended that replies were filed and that the issues were covered by earlier Tribunal decisions in the assessee's own case. Given that the appellate orders did not address merits or consider material placed on record, the Tribunal restored the appeals to the file of the appellate authority for fresh adjudication, directing issuance of a speaking order after giving reasonable opportunity of hearing. The restoration was unopposed by Revenue and therefore granted for statistical purposes. Ratio vs. Obiter: Ratio - ex-parte appellate orders not dealing with merits or filed replies and passed during restrictive circumstances require restoration for fresh adjudication with opportunity to be heard; parties are entitled to a speaking order. Obiter - reference to earlier Tribunal orders in the assessee's own case as potentially covering issues but deferral to appellate authority for fresh consideration. Conclusions: Appeals that were decided ex-parte without consideration of filed replies and without dealing with merits were restored to the appellate authority for fresh adjudication and a speaking order after affording reasonable opportunity to the appellant; these appeals were treated as allowed for statistical purposes. Cross-references 1. Issues 1 and 2 are related and treated together to the extent that both address the sufficiency and quality of material necessary to form a reason to believe for reopening - the absence of new material specific to the assessee and the reliance on unverified third-party STR were jointly decisive in quashing reassessment. 2. Issue 3 is procedurally distinct but linked by the Tribunal's insistence on proper adjudication (speaking orders and hearing) and application of mind - the same standards of reasoned decision-making underpin the Tribunal's quashing of reopening (issues 1-2) and the restoration of ex-parte appellate orders (issue 3).