2025 (9) TMI 1238 - AT - Income Tax

Reassessment under Section 147 quashed where AO relied on opinion, flawed search facts, and ignored assessee's objections

Quality Enabled Remote Solutions (P) Ltd. Versus ITO, Ward 20 (3), New Delhi.

ITAT Delhi (AT) held that the reopening was invalid because the AO acted on an opinion rather than forming the requisite 'reason to believe' that income ... Validity of reopening of assessment - Reason to believe v/s opinion - opinion based on the investigation evidence found during search and seizure operation conducted in the case of Jain Brothers as per which the Assessing Officer came to know that Jain Brothers were providing accommodation entries through dummy companies to various beneficiaries in the form of share capital/premium/application/loan including assessee HELD THAT:- We observe that AO has proceeded to reopen the assessment forming an opinion not the belief that assessee has obtained accommodation entries from the Jain Brothers and has also not dealt with the objections raised by the assessee, has only proceeded to complete the assessment without dealing with the above objections. As relying on ANKITA A. CHOKSEY VERSUS INCOME TAX OFFICER-19 (1) (1) & OTHERS [2019 (1) TMI 862 - BOMBAY HIGH COURT] as held condition precedent of reason to believe that income chargeable to tax has escaped assessment on correct facts, must be satisfied by the Assessing Officer so as to have jurisdiction to issue the reopening notice. In the present case, the Assessing Officer has proceeded on fundamentally wrong facts to come to the reasonable belief/conclusion that income chargeable to tax has escaped assessment. Thus, Assessing Officer has only formed opinion not the belief to reopen the assessment. Accordingly, we quash the assessment and allow the appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer validly assumed jurisdiction under section 147/148 to reopen assessment where reasons recorded relied on information from a search in third-party proceedings identifying the assessee as a beneficiary of alleged accommodation entries. 2. Whether the 'reasons recorded' constituted a genuine belief as required for reopening, or merely an opinion/suspicion insufficient to confer jurisdiction. 3. Whether the Assessing Officer's failure to deal with the assessee's specific factual objections to the reasons recorded vitiates the reopening and consequent assessment. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of jurisdiction to reopen assessment based on third-party search information Legal framework: Reopening under section 147/148 requires the Assessing Officer to have reason to believe that income chargeable to tax has escaped assessment; reasons must be recorded and there must be a nexus between material relied upon and the belief of escapement. Precedent Treatment: The Court applied prevailing authorities that emphasize the requirement of a reasoned belief and that receipt of third-party information does not automatically validate reopening unless the AO forms the requisite belief on proper facts and deals with contrary explanations. Interpretation and reasoning: The AO relied on information from an investigation into third parties indicating that dummy companies provided accommodation entries and that the assessee's name appeared as a beneficiary to the extent of Rs. 3.6/3.7 crores. However, the assessee had furnished its books and accounts (showing opening stock, purchases and sales for the year) and specifically explained that the amounts represented sale proceeds of legitimately held shares. The Tribunal found that the AO proceeded on a factual matrix fundamentally at odds with material on record supplied by the assessee and did not reconcile or meaningfully address that divergence before issuing notice and completing assessment. Ratio vs. Obiter: Ratio - reopening based solely on third-party search information, without forming a documented belief after confronting and dealing with the assessee's contrary factual submissions, is impermissible. Obiter - general observations that information from searches can form the basis for reopening if properly interrogated and proximate to escapement. Conclusions: The reopening lacked jurisdiction because the AO failed to form a belief grounded in the correct facts; third-party information alone did not establish escapement when the assessee had provided contemporaneous accounting records and explanations matching disclosed transactions. Issue 2 - Distinction between 'opinion/suspicion' and 'belief' in reasons recorded Legal framework: The statutory scheme requires a genuine 'belief' that income has escaped assessment; courts have drawn a distinction between mere suspicion/opinion and a belief formed after due enquiry and corroborative material. Precedent Treatment: The Tribunal relied on binding and persuasive precedents that invalidate reopenings founded on mere opinion or suspicion, especially where the AO fails to engage with material contradictions highlighted by the assessee. Interpretation and reasoning: The reasons recorded by the AO were held to reflect formation of an opinion rather than a considered belief. The AO did not address the assessee's documented position (opening stock and transactions substantiating sales), nor did the AO demonstrate due diligence in reconciling the seized-document information with the assessee's books. The AO's statement in disposing of objections asserted belief but the surrounding record showed lack of engagement with the divergent factual matrix. Ratio vs. Obiter: Ratio - formation of a belief requires consideration and resolution of available contrary facts; absence of such consideration converts purported belief into mere opinion/suspicion and invalidates jurisdiction. Obiter - commenting that where fresh tangible evidence exists and is properly correlated with the assessee's records, a belief can validly arise. Conclusions: The reasons recorded evidenced opinion/suspicion, not a legally sufficient belief; therefore issuance of notice under section 148 was without jurisdiction. Issue 3 - Failure to deal with objections and effect on validity of assessment Legal framework: When objections are filed to reopening, the AO is required to consider and answer material factual points raised by the assessee; judicial review assesses whether the AO dealt with such objections meaningfully before proceeding. Precedent Treatment: Authorities cited establish that non-disposal or non-consideration of pointed factual objections that negate the basis for reopening renders the subsequent notice and assessment invalid. Interpretation and reasoning: The assessee had specifically identified entries in audited schedules (opening stock, purchases, sales) that accounted for the impugned amounts and claimed no undisclosed accommodation entry. The AO did not confront these assertions in a manner that would sustain a belief of escapement. The Tribunal noted the AO's disposal paragraph asserted due diligence but did not show resolution of the contradictory facts presented; thus the AO proceeded without properly dealing with the objections. Ratio vs. Obiter: Ratio - failure to address material objections pointing to an alternative and documented explanation for the impugned amounts vitiates reopening and the assessment made thereafter. Obiter - procedural propriety requires specific engagement with conflicting evidence before continuing with assessment proceedings. Conclusions: The AO's failure to address the assessee's objections and reconcile them with the search information was fatal to jurisdiction; the reopening and assessment were quashed. Overall Conclusion The Tribunal concluded that the AO did not form the requisite belief to reopen the assessment - having proceeded on an incorrect factual foundation and without dealing with the assessee's documentary explanations - and therefore the reopening under section 147/148 and the resulting assessment were invalid and were set aside. Cross-reference: Issues 1-3 are interrelated and jointly underpin the conclusion that jurisdiction to reopen was not lawfully exercised.