2025 (9) TMI 210 - AT - Income Tax

Reopening under u/s 147 invalid where AO's u/s 151 approval and u/s 149 reasons were mechanical and unsupported

ITAT held that reopening of assessment u/s 147 was invalid where AO's approval u/s 151 and reasons for issuing notice u/s 149 were mechanical and ... Reopening of assessment u/s 147 - Period of limitation - as alleged approval by competent authority u/s 151 has been provided in a mechanical manner HELD THAT:- Where the survey was conducted on 27/09/2018 and since fours have elapsed from the end of the impugned assessment year 2012-13 and in order to issue notice u/s 149 of the Act and satisfy the timelines so specified which in turn require the AO in order to satisfy the condition that income has escaped assessment or likely to escapement assessment of Rs 1,00,000/- or more, he has stated that “he has reasons to believe that the income declared by the assessee has been understated to the extent of more than Rs. 1,00,000/-”. There is no material available on record which show a nexus and relevancy to the opinion formed by the AO regarding quantification of income which has escaped assessment or likely to escape assessment exceeding Rs 1,00,000/-. No reasons but to hold that in absence of any tangible material so brought on record by the AO which can prima facie demonstrate the incurrence of expenditure on showroom exceeding Rs 1,00,000/-, AO doesn’t have requisite authority to invoke his jurisdiction for reassessment u/s 147 and thus, the notice issued under section 148 is hereby set-aside as the same doesn’t satisfy the conditions so specified u/s 147 r/w 149 of the Act. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer validly assumed jurisdiction under Section 147/148 by recording reasons based on survey action and purported 'incriminating documents' without specifying tangible material connecting such material to escapement of income for the relevant assessment year exceeding the statutory threshold. 2. Whether the approval by the competent authority under Section 151 for issuance of notice under Section 148 was valid where the reasons/impounded material relied upon were not disclosed or specified in the recorded reasons. 3. Whether the recorded reasons satisfied the requirement of a prima facie nexus between the tangible material and the formation of belief as to quantification of escaped income (statutory minimum) for reopening after the lapse of the assessment year. 4. Whether the appellate authority erred in refusing to admit additional evidence and whether the powers of the appellate authority under Section 250(4) and Rule 46A permit admission of such evidence notwithstanding technical noncompliance. 5. On the merits (treated subject to jurisdictional outcome): whether additions made by the Assessing Officer-(a) unexplained capital/ increase in capital (Rs. 4,80,000), (b) disallowance of certain expenses (Rs. 13,651), and (c) addition on account of household expenses (Rs. 50,000)-were sustainable in assessment when books, vouchers and other documentary evidences were not produced before the AO. ISSUE-WISE DETAILED ANALYSIS Issue 1-3: Validity of Reopening under Section 147/148 and Approval under Section 151 Legal framework: The power to reopen assessments under Section 147 is a potent power constrained by statutory prescription: the Assessing Officer must form a belief, supported by reasons, that income chargeable to tax has escaped assessment. For reassessments beyond the normal period, the reasons must show nexus between tangible material (information/documents) and the opinion regarding escapement/quantification (statutory threshold). Approval under Section 151 must be accorded on the basis of the stated reasons/evidence. Precedent treatment: The Court relied on established authorities that require reasons to be based on tangible material and to demonstrate an objective link between material and the belief of escapement; reopening cannot be based on mere suspicion or conclusory statements. Prior coordinate and High Court decisions were followed for the proposition that survey report or generic references to 'incriminating documents' are insufficient unless contents or nexus are disclosed in the reasons. Interpretation and reasoning: The reasons recorded by the AO referred generically to 'certain incriminating documents' found during a survey and to the assessee's statement admitting renovation/construction, and noted that books of account were not maintained. However: (a) the reasons did not identify or describe the impounded/'incriminating' material or link its contents to expenditure or income specifically attributable to the assessment year; (b) the assessee's own statement indicated construction across multiple years (showroom in 2007; shed installation 2012-2015; house construction from 2013), so no prima facie evidence that expenditure exceeding Rs.1,00,000 related to the year in question; (c) no contemporaneous inspection report, valuation, quantification or other tangible material was specified to demonstrate that unexplained expenditure for the impugned year exceeded the statutory threshold. The Tribunal emphasized that reasons must 'speak' clearly and cannot be supplemented by post-hoc inferences or materials not recorded in the reasons. Ratio vs. Obiter: Ratio - the requirement that reasons for reopening must specify tangible material and demonstrate nexus to escaped income/quantum; mere reference to impounded documents or a statement of non-maintenance of books is insufficient without disclosure of what those documents are and how they relate to the escapement in the relevant year. Obiter - observations on the passage of time between the assessment year and survey and on routine/machinery approvals when material is absent. Conclusions: The AO's reasons did not satisfy statutory requirements for reopening under Section 147 read with Section 149: absence of specification of impounded material and lack of nexus/quantification meant the belief was no more than suspicion. Consequently, the notice under Section 148 was invalid and the approval under Section 151, being founded on the same unspecific material, was effectively a mechanical grant and did not cure the deficiency. The Tribunal set aside the notice and reassessment proceedings for lack of jurisdictional foundation. Issue 4: Admission of Additional Evidence before the Appellate Authority Legal framework: Appellate authorities have powers to admit additional evidence under Section 250(4) (and concomitant procedural rules), but admission is subject to established tests of relevance, authenticity and explanation for non-production before the AO. Rule-based technicalities cannot be ignored, but appellate powers are not unfettered; the application must satisfy requisite standards. Precedent treatment: The Tribunal noted established principles that technicalities should not defeat the cause of justice, but also recognized that admission requires proper explanation and authentication of the evidence. Interpretation and reasoning: In the present matter, issues about the admissibility of additional evidence (capital account, vouchers etc.) were raised before the CIT(A). The Tribunal, having determined that jurisdiction to reopen was absent, treated the question of admission of additional evidence as academic. The record as examined by the CIT(A) suggested inadequate explanation/authentication for the proffered capital account and lack of proper verification. Ratio vs. Obiter: Obiter - guidance that appellate authorities' powers are coterminous with AO's powers subject to procedural safeguards; admission must be preceded by satisfactory reasons and authentication. Ratio - not directly decided because jurisdictional ruling made the point academic. Conclusions: The Tribunal did not adjudicate the admissibility merits in substance because the jurisdictional defect rendered reassessment proceedings academic; the rejection by CIT(A) remains unexamined in detail but is rendered moot by quashing of the reopening. Issue 5: Merits of Additions - Unexplained Capital, Disallowance of Expenses, Household Expenditure Legal framework: Substantive additions require proof/evidence to support AO's conclusions-books, vouchers, supporting documentation or independent corroboration. If AO disallows expenses or makes additions based on unexplained investments, the AO must demonstrate basis, and assessee must be given opportunity to produce records; absence of records may justify addition only if AO's belief is supported by tangible material. Precedent treatment: The Tribunal referred to the principle that merits must be decided only when jurisdiction is validly assumed; absent valid reopening, merits become academic. Where evidence is not produced before AO, disallowances may be sustained if AO gives opportunity and records reasons. Interpretation and reasoning: The AO made additions by (a) treating difference between closing capital and profit as unexplained capital introduced (rounded to Rs.4,80,000); (b) disallowing 1/6th of certain salary and other expenses amounting to Rs.13,651 on the basis that bills/vouchers were not produced; and (c) adding Rs.50,000 as household expenses. The assessee contended capital was opening balance carried forward and produced a capital account only at appellate stage. CIT(A) found capital accounts unauthenticated and not admitted as additional evidence; AO had provided opportunities which were not availed. However, because the Tribunal set aside the reopening for lack of jurisdiction, these findings were rendered academic and were not adjudicated further on merits. Ratio vs. Obiter: Ratio - where reopening is invalid, substantive additions arising solely from reassessment are to be treated as moot. Obiter - observations that AO must give opportunity to produce records and that additional evidence must be authenticated to challenge disallowances. Conclusions: As the notice under Section 148 and consequent reassessment were set aside for lack of valid reasons and requisite nexus to escapement in the relevant year, the substantive additions were rendered academic and no adjudication on their correctness was necessary; the appeal was allowed on jurisdictional grounds and reassessment proceedings were quashed.