2025 (2) TMI 404 - AT - Income Tax

Assessment reopening under section 147 based solely on investigation report without independent application constitutes borrowed satisfaction and is illegal

Ajay Singh Versus ACIT Circle 28 (1), New Delhi

ITAT Delhi held that reopening assessment under section 147 based solely on ADIT (Inv.) report without independent application of mind constitutes ... Reopening of assessment u/s 147 - independent application of mind v/s borrowed satisfaction - Addition u/s 68 - AO merely reproduced the report of ADIT (Inv.) and came to the conclusion that income had escaped assessment - HELD THAT:- In the case of PCIT Vs. Meenakshi Overseas Pvt. Ltd.[2017 (5) TMI 1428 - DELHI HIGH COURT] held that mere reproduction of Investigation report in reasons recorded initiation of reassessment proceedings u/s 148 is illegal in the absence of link between tangible material and formation of belief that income has escaped assessment. The crucial link between information made available to the AO and the formation of belief was absent. The reasons to believe recorded were not reasons but only conclusions and a reproduction of the conclusion in the Investigation Report received from the ADIT (Inv.) and held it to be a borrowed satisfaction. In the case on hand also AO merely reproduced the report of ADIT (Inv.) and came to the conclusion that income had escaped assessment. To justify this action he also noted that in the return filed by the assessee for the AY 2012-13 the assessee has reported income from other sources only to the extent of Rs. 6,10,072/-. However, the return filed by the assessee clearly show that apart from income from other sources of Rs. 6,10,072/- the assessee had exempt income of Rs. 15,26,571/- which was completely ignored by the Assessing Officer. Reopening of assessment in this case merely based on report of the ADIT (Inv.) without making any independent enquiry by the AO is nothing but borrowed satisfaction. Even on merits also the creditor’s bank statements and the confirmation, PAN details, etc. show that all these transactions were made through banking channels and the assessee had repaid the credits through banking channels. Therefore, the credits in the bank cannot be assessed as unexplained credits. Appeal of the assessee is allowed. The appeal in this case was filed by the assessee against the order of the Ld. CIT(Appeals)-NFAC, Delhi, dated 02.05.2023, for the AY 2012-13, which upheld the addition made by the Assessing Officer under section 68 of the Income Tax Act. The key issues presented and considered in this case are as follows:1. Whether the assessment was validly reopened based on the report of the Investigation Wing without an independent enquiry by the Assessing Officer.2. Whether the addition made under section 68 of the Income Tax Act was justified given the evidence provided by the assessee regarding the source of credits in the bank account.The Court considered the arguments presented by both parties. The Ld. Counsel for the assessee contended that the assessment was reopened solely based on the report of the Investigation Wing without any independent enquiry by the Assessing Officer, which is impermissible. The Counsel also argued that the credits in the bank account were adequately explained with supporting evidence, such as bank statements and confirmations from creditors.The Court analyzed the legal framework and precedents related to the reopening of assessments based on third-party reports without independent verification. It referenced decisions of the Delhi High Court and emphasized the requirement for a valid link between tangible material and the formation of belief for income escapement.In its reasoning, the Court found that the Assessing Officer's reliance solely on the Investigation Wing's report without conducting independent enquiries was unjustified. The Court noted that the Assessing Officer failed to consider the exempt income declared by the assessee in the return, leading to an incorrect belief of income escapement.The Court cited the decision in PCIT Vs. Meenakshi Overseas Pvt. Ltd., highlighting the importance of a valid link between information and belief for reopening assessments. It concluded that the reassessment made by the Assessing Officer was based on borrowed satisfaction and therefore quashed the reassessment for the AY 2012-13.Regarding the merits of the addition under section 68, the Court found that the evidence provided by the assessee, including bank statements and confirmations, demonstrated that the transactions were conducted through banking channels. Therefore, the Court held that the credits in the bank account should not be treated as unexplained.In conclusion, the Court allowed the appeal of the assessee, ruling in favor of the assessee and quashing the reassessment for the AY 2012-13. The significant holdings include the invalidity of reopening assessments based solely on third-party reports without independent verification and the requirement for a valid link between information and belief for income escapement. The Court also emphasized the importance of considering all relevant evidence before making additions under the Income Tax Act.This judgment highlights the importance of due diligence and independent verification by Assessing Officers in reopening assessments and making additions under the Income Tax Act.