2025 (7) TMI 747 - AT - Income Tax

Reassessment proceedings under Section 148 quashed for lack of material evidence and procedural non-compliance by authorities

Amandeep Singh Versus DCIT, Circle 10 (1), New Delhi.

The ITAT Delhi quashed reassessment proceedings initiated under section 148 against an individual proprietor. The AO reopened assessment based solely on ... Validity of reassessment proceedings - recording the proper reasons for reopening - roving enquiry - reliance on information received from DDIT (Inv.) - Chartered Accountant is involved in money laundering cases - HELD THAT:- As per the reasons recorded by the AO, it indicates that Tarun Goyal, a Chartered Accountant is involved in money laundering cases and it is fact on record that it is only a suspicion on the basis of which the proceedings were initiated in the case of Tarun Goyal and we observed that the Investigation Wing has investigated the issue and directed the Axis Bank and HDFC Bank to submit the transactions relating to Tarun Goyal. The AO has not brought on record any cogent material linking the assessee and Tarun Goyal while recording the reasons. He initiated the proceedings only on the basis of suspicion and no cogent material brought on record linking the assessee any way in these transactions. We observed that the assessee has already recorded various transactions in his books of account. Reasons recorded by the AO are on the basis of initiating proceedings in the case of the companies. However, the assessee is an individual having proprietorship concern. The allegation in the case of Tarun Goyal is involving accusation of existing companies and formation of new ones in order to indulge in money laundering whereas the assessee’s is a proprietorship concern. How the abovesaid transactions having impact on the proprietorship concern is not clearly brought on record by the AO while recording the reasons. After carefully going through the reasons recorded or initiating of proceedings u/s 148, we observed that the AO initiated the proceedings for roving enquiry without having any cogent material in his hands. Therefore, without recording the proper reasons for reopening the assessment backed by cogent material to support, the initiation of proceedings is bad in law and further we observed that AO has not disposed off the main objections separately before initiating the reassessment proceedings. Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in this appeal are:(a) Whether the Assessing Officer (AO) validly assumed jurisdiction under sections 147/148 of the Income-tax Act, 1961 ('the Act') for reopening the assessment for the Assessment Year 2010-11, given that the reopening was based primarily on suspicion without any tangible or cogent material indicating escapement of income.(b) Whether the notice issued under section 148 of the Act was validly issued within the statutory time limits prescribed under section 149, and whether the sanction under section 151 was granted after proper application of mind.(c) Whether the reasons recorded by the AO for reopening the assessment were legally sufficient, cogent, and supported by material facts linking the assessee to the alleged undisclosed income or suspicious transactions.(d) Whether the addition of Rs. 5,19,25,158/- made under section 68 of the Act was justified, considering the onus of proof regarding the source of the amount was discharged by the assessee and the addition was sustained on mere suspicion without adequate opportunity to the assessee to make submissions.2. ISSUE-WISE DETAILED ANALYSISIssue (a): Validity of Assumption of Jurisdiction under Sections 147/148Relevant Legal Framework and Precedents: The reopening of assessment under sections 147/148 of the Act requires that the AO must have 'reason to believe' that income chargeable to tax has escaped assessment. This belief must be based on tangible material and not mere suspicion or conjecture. The Supreme Court and various High Courts have consistently held that reopening on mere suspicion is impermissible and the reasons recorded must be cogent and supported by material facts.Court's Interpretation and Reasoning: The Tribunal noted that the AO initiated reassessment proceedings relying on information received from the Deputy Director of Income-tax (Investigation), which alleged involvement of a Chartered Accountant (Tarun Goyal) in money laundering activities through various companies. The AO's reasons recorded under section 148 primarily reflected suspicion regarding money laundering and the involvement of Tarun Goyal in purchase and formation of companies. However, the AO failed to establish any direct or indirect link between the assessee, who is an individual running a proprietorship concern, and Tarun Goyal or the suspicious transactions.The Tribunal observed that the reasons recorded were undated, not cogent, and largely related to companies, whereas the assessee's business structure was a proprietorship. The AO did not bring any material on record connecting the assessee to the alleged money laundering or suspicious transactions. The reopening appeared to be a roving enquiry based on suspicion rather than a reasoned belief supported by evidence.Key Evidence and Findings: The AO relied on information from the Investigation Wing and certain banking transactions linked to Tarun Goyal. However, the details of bank branches and accounts mentioned in the reasons were factually incorrect or unrelated to the assessee's transactions. The assessee had maintained proper books of account and disclosed all transactions. The AO did not dispose of the objections raised by the assessee regarding the reasons recorded before initiating reassessment.Application of Law to Facts: Applying the principle that reopening must be backed by tangible material and not mere suspicion, the Tribunal found that the AO's reasons did not cross the threshold of 'reason to believe.' The reliance on suspicion without cogent material violated settled legal principles.Treatment of Competing Arguments: The Revenue contended that the reopening was based on credible information received from CBI and Investigation Wing and that the AO had followed due process. The Tribunal rejected this, emphasizing that the AO must demonstrate a direct link to the assessee and not initiate proceedings on suspicion alone.Conclusion: The assumption of jurisdiction under sections 147/148 was held to be invalid and the reassessment proceedings were quashed as bad in law ab initio.Issue (b): Validity of Notice under Section 148 and Sanction under Section 151Relevant Legal Framework and Precedents: Section 148 requires that notice for reopening must be issued within the prescribed time limit under section 149. Sanction under section 151 must be granted after proper application of mind and cannot be a mere formality.Court's Interpretation and Reasoning: The assessee challenged the issuance of notice beyond the statutory time and the arbitrary sanction under section 151. The Tribunal noted that the AO did not properly dispose of the objections raised by the assessee, including the issue of undated reasons and non-application of mind while granting sanction.Key Evidence and Findings: The assessee's objections on procedural grounds were not adequately addressed by the AO. The reasons recorded were undated and the sanction appeared to be granted mechanically.Application of Law to Facts: The procedural lapses in issuance of notice and sanction further vitiated the reopening proceedings.Treatment of Competing Arguments: The Revenue asserted due process was followed; however, the Tribunal found the AO's disposal of objections insufficient and the sanction questionable.Conclusion: The notice and sanction were held to be invalid, supporting the quashing of reassessment.Issue (c): Sufficiency and Cogency of Reasons Recorded for ReopeningRelevant Legal Framework and Precedents: The reasons recorded must disclose tangible material and must be specific to the assessee to justify reopening. The Supreme Court has emphasized that suspicion or vague allegations do not suffice.Court's Interpretation and Reasoning: The Tribunal found that the reasons recorded were vague, undated, and related to companies, not the individual assessee. The AO failed to establish any nexus between the assessee and the suspicious transactions or persons involved. The reasons were largely based on suspicion and conjecture.Key Evidence and Findings: The AO's reliance on information about Tarun Goyal and his companies was not linked to the assessee's proprietorship concern. The details of bank accounts and branches were factually incorrect or unrelated. The assessee's books of account were complete and disclosed all transactions.Application of Law to Facts: The Tribunal applied the principle that reopening must be supported by cogent reasons and material facts. The absence of such material rendered the reasons recorded legally insufficient.Treatment of Competing Arguments: The Revenue's argument that information from investigative agencies justified reopening was rejected due to lack of direct connection to the assessee.Conclusion: The reasons recorded were held to be legally insufficient, invalidating the reopening.Issue (d): Justification of Addition under Section 68Relevant Legal Framework and Precedents: Under section 68, unexplained cash credits can be added to income if the assessee fails to satisfactorily explain the nature and source of the credit. The onus is on the assessee to prove the genuineness of the transactions.Court's Interpretation and Reasoning: Since the Tribunal quashed the reassessment proceedings on jurisdictional grounds, it did not delve into the merits of the addition under section 68. However, the assessee contended that the onus was discharged and the addition was based on suspicion, without adequate opportunity given for submissions.Key Evidence and Findings: The assessee had disclosed the relevant bank transactions and maintained proper records. The AO's rejection was based on suspicion and conjecture.Application of Law to Facts: The Tribunal observed that since the reassessment itself was invalid, the addition under section 68 became academic and was not adjudicated upon.Treatment of Competing Arguments: The Revenue relied on the lower authorities' findings, but the Tribunal refrained from examining the merits due to invalid jurisdiction.Conclusion: The addition under section 68 was not considered due to the quashing of reassessment proceedings.3. SIGNIFICANT HOLDINGSThe Tribunal held:'Without recording the proper reasons for reopening the assessment backed by cogent material to support, the initiation of proceedings is bad in law and further we observed that AO has not disposed off the main objections separately before initiating the reassessment proceedings.''It is evident that the AO had, perhaps, no tangible material available with him to form a belief that income, otherwise chargeable to tax, had escaped assessment. The phraseology used by the AO reveals that he 'suspected' that income chargeable to tax had escaped assessment. Therefore, according to us, this approach of the AO breached the other well-established principle of law that suspicion and conjecture cannot form the basis for triggering reassessment proceedings qua an assessee.'The Tribunal established the core principle that reopening of assessment under sections 147/148 requires a reasoned belief based on tangible material and not mere suspicion or conjecture. It emphasized that the AO must properly address objections and record cogent reasons specifically linking the assessee to the alleged escapement of income.The final determination was that the reassessment proceedings initiated under section 148 were invalid and quashed accordingly. Consequently, the appeal was allowed on jurisdictional grounds, rendering the merits of additions under section 68 academic and not adjudicated.