2025 (7) TMI 739 - AT - Income Tax

AO's borrowed satisfaction without independent inquiry leads to quashed reopening under section 147

Nova Formworks Private Limited, (Formerly Known as Wonder Moldplast Private Limited), Delhi Versus Income Tax Officer, Ward-27 (3), New Delhi

The ITAT Delhi quashed the reopening of assessment under section 147, finding that the AO relied on borrowed satisfaction without independent inquiry. The ... Reopening of assessment u/s 147 - Reasons to believe - borrowed satisfaction or independent application of mind - whether reopening initiated on borrowed satisfaction without making any enquiry whatsoever? - HELD THAT:- AO has simply reopened the case on borrowed satisfaction without making any enquiry whatsoever. He has merely relied upon the report of Investigation Wing as well as copies of hand written papers. However, those have never been disclosed in the course of assessment proceedings nor the same has been placed before us. Thus it is highly doubtful about the existence of these relied upon materials. There is the apparent anomaly and infirmity in the above form for seeking approval. In para no.8 it is stated that the assessment is made for first time, whereas, the assessment has already been completed u/s 143(3). Thus, it is seen that there is mechanical application of mind by the approving authority who has not ever cared to examine the records and such approval u/s 151 of the Act is liable to be quashed since the same is given based on erroneous facts. CIT-DR could hardly submit any reply to the above discrepancies and simply relied on the order of the CIT(A). Since, the ground of opening is fragile and further coupled with the mechanical approval, the entire assessment is quashed and the appellant succeeds in assailing ground no.1 to 3. See SABH INFRASTRUCTURE LTD. [2017 (9) TMI 1589 - DELHI HIGH COURT]. Assessee appeal allowed. The core legal questions considered in this appeal revolve around the validity and legality of the reopening of assessment proceedings under sections 147 and 148 of the Income Tax Act for the Assessment Year 2008-09. Specifically, the issues include whether the Assessing Officer (AO) had jurisdiction to reopen the assessment, whether the mandatory procedural requirements under sections 147 to 153 were complied with, the sufficiency and disclosure of the 'reasons to believe' for reopening, the issuance of valid notices under section 143(2), adherence to principles of natural justice, and the correctness of additions made to the share capital under section 68.1. Jurisdiction and Validity of Reopening under Sections 147/148:The appellant challenged the jurisdiction of the AO in issuing the notice under section 148, asserting that the reopening was without jurisdiction and bad in law and procedure. The legal framework mandates that reopening of assessment must be based on tangible 'reasons to believe' that income has escaped assessment, which must be self-explanatory and disclosed to the assessee. Precedents emphasize that mere suspicion or conjecture is insufficient and the primary facts must be shown to be false or undisclosed for reopening to be justified.The Court examined the reasons recorded by the AO, which relied solely on a report from the Investigation Wing and handwritten papers not disclosed to the assessee or placed on record. The approval for reopening under section 151 was found to be mechanically granted, as the form incorrectly stated that the assessment was being made for the first time despite prior completion under section 143(3). This indicated lack of proper application of mind by the approving authority, rendering the approval invalid.The Court relied heavily on the jurisdictional High Court's ruling in a similar matter, which held that reasons to believe must be self-contained and cannot be supplemented by extraneous material or post hoc explanations. The Court noted that the primary facts-existence of the five companies subscribing to share capital, receipt of money, and their tax assessments-were undisputed and fully disclosed during the original assessment. The reopening notice failed to specify any new facts or information withheld by the assessee, and the AO did not conduct any inquiry to verify the allegation that these companies were 'paper companies'.Consequently, the Court concluded that the assumption of jurisdiction under sections 147 and 148 was erroneous, and the reopening notice and subsequent reassessment order were quashed.2. Compliance with Mandatory Procedural Provisions under Sections 147 to 153:The appellant contended that the AO failed to comply with mandatory procedural requirements relating to reopening and reassessment. The Court found that since the reopening itself was invalid due to lack of jurisdiction and defective reasons to believe, the procedural compliance issue became moot. However, the Court underscored that procedural safeguards, including proper issuance of notices and adherence to natural justice, are critical to uphold the validity of reassessment proceedings.3. Sufficiency and Disclosure of 'Reasons to Believe':The appellant argued that the AO did not supply the complete 'reason to believe' to the assessee, violating procedural requirements. The Court emphasized that the reasons must be clear, complete, and disclosed in their entirety to the assessee, including any supporting documents or reports relied upon. In this case, the reasons were vague, incomplete, and based on undisclosed investigation reports, thereby failing the legal standard. The Court reiterated the principle that the reasons cannot be supplemented by the order disposing of objections or affidavits filed subsequently.4. Issuance of Valid Notice under Section 143(2):The appellant raised that no valid notice under section 143(2) was issued before making additions. The Court did not delve deeply into this issue, as the invalidity of reopening rendered subsequent procedural defects inconsequential. Nonetheless, it recognized that issuance of valid notices is a procedural prerequisite for reassessment and additions.5. Principles of Natural Justice and Equity:The appellant contended that the AO's order violated natural justice by not issuing show cause notices before making additions and by mechanical decision-making. The Court acknowledged the importance of natural justice in tax proceedings, requiring that the assessee be given a fair opportunity to respond to allegations. The absence of proper show cause notices and mechanical approvals indicated a breach of these principles, further undermining the reassessment's validity.6. Taxation of Share Capital under Section 68:The appellant challenged the additions made to the share capital on the ground that the AO erred in applying section 68 without proper mandate of law and procedure. Since the reopening was invalid, the Court did not examine the merits of this ground. However, it noted that additions under section 68 require strict adherence to procedural safeguards and evidentiary standards, including verification of the genuineness of share capital contributions.The Court's conclusions are encapsulated in the following verbatim excerpts from the High Court's precedent relied upon:'The reasons to believe have to be self explanatory. The reasons cannot be thereafter supported by any extraneous material. The order disposing of the objections cannot act as a substitute for the reasons to believe and neither can any counter affidavit filed before this court in writ proceedings.''An allegation that the companies are 'paper companies' without further facts is by itself insufficient to reopen assessments that stand closed after passing of orders under Section 143 (3) of the Act.''The assessment proceedings, especially those under Section 143 (3) of the Act, have to be accorded sanctity and any reopening of the same has to be on a strong and sound legal basis. It is well settled that a mere conjecture or surmise is not sufficient.''In the facts of this case, the primary facts have not been shown to be false. The five companies do exist. They did subscribe to the share capital of the Petitioner. They did pay the money to the Petitioner. All the five companies are assessed to tax. These are the primary facts.''The exercise of considering the Assessee's objections to the reopening of assessment is not a mechanical ritual. It is a quasi-judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion.'In light of these principles, the Court allowed the appeal, quashing the reopening notice and reassessment order. It further observed that many writ petitions challenging reopening are filed due to repeated errors by Revenue authorities and issued guidelines to ensure proper compliance in future cases, including:Providing the standard form used for approval of reopening to the assessee, including comments and endorsements by the superior officer.Reasons to believe must fully disclose all grounds and paraphrase any investigation reports relied upon, along with conclusions of any enquiries.Enclosing any documents or reports referenced in the reasons to believe.Treating the consideration of objections as a quasi-judicial function requiring reasoned orders without adding to the reasons for reopening.Given the successful challenge to the reopening itself, the Court found it unnecessary to adjudicate the remaining grounds of appeal.