2025 (10) TMI 577 - AT - Income Tax

Reassessment under Section 148 void ab initio for lack of independent mind; Section 68 addition disallowed on documentary proof

Brand India Real Estate Pvt. Ltd. Versus Income Tax Officer, Ward-6 (1), Jaipur.

ITAT JAIPUR set aside reassessment proceedings under section 148 as void ab initio, holding the AO lacked independent application of mind and merely ... Validity of reopening of assessment - reassessment proceedings was initiated solely on the basis of report of DDIT (Inv.) Unit 1(3), Kolkata - allegation of non independent application of mind - Addition u/s 68 - addition by treating share capital and premium thereon received from the various parties as bogus - HELD THAT:- In the present case, the reassessment proceedings was initiated solely on the basis of report of DDIT (Inv.) Unit 1(3), Kolkata and without making the independent inquiry by the AO at his own hands or even without applying his own mind on the information so received. There is catena of judicial pronouncements on this issue which clearly supports the assessee’s case on the lack of jurisdiction with the AO who had merely adopted reasons to believe on the basis of the report of other authorities and that there is total non-application of mind in recording the reasons for assumption of jurisdiction. Reassessment proceedings initiated are hereby quashed on account of non application of independent mind by AO, formation of belief on borrowed satisfaction of other Wing of the department and change of opinion. Accordingly the proceedings u/s 148 are held to be void ab initio and consequentially the notice u/s 148 as well as assessment and appeal orders of lower authorities are quashed. Thus Ground no. 2 is allowed. Addition of share application money / share capital - Assessee provided all the documentary evidences so as to prove the identity, credit worthiness and genuineness of the transaction by placing all the records such as PAN, Application made for Shares, Financial Statements and Bank statements of the investor companies which were not at all doubted by ld. AO. But all such vital evidence has been ignored solely on the basis of statements of third party recorded by some other officials during the course of search operation conducted and that too that statement was retracted. Thus, even otherwise the Bench noted that so far as merits of the case of the assessee, the revenue emphasized on the statement of Shri Mukesh Banka recorded in the search. That statement was retracted by him vide retraction statement filed on 04.09.2019 before the ld. DDIT, Kolkata. Therefore, even if we consider the merits of the dispute, the same has already been verified in the first round in an order passed u/s. 143(3) of the Act and based on the search of Banka Group the reliance was placed on the statement of Shri Mukesh Banka who has retracted the statement. Thus, even on these merits, in the case of PCIT Vs. M/s. Esspal International P. Ltd. [2024 (9) TMI 652 - RAJASTHAN HIGH COURT] held that merely based on the retracted statement no addition can be made. Respectfully following the finding of Apex Court in the case of CIT vs. Lovely Export Pvt. Ltd. [2008 (1) TMI 575 - SC ORDER] and M/s. Esspal International P. Ltd. [2024 (9) TMI 652 - RAJASTHAN HIGH COURT] even on merits addition cannot be sustained. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether reassessment proceedings initiated beyond four years under section 147/148 are valid where the original assessment under section 143(3) had considered the same primary facts - i.e., whether the Assessing Officer had 'reason to believe' that income had escaped assessment by reason of failure to disclose fully and truly all material facts, or whether reopening amounted to impermissible change of opinion/borrowed satisfaction. 2. Whether information/reports from the investigation wing (DDIT/ITO (Inv.)) and statements recorded during search proceedings can constitute independent 'reason to believe' for reopening when the Assessing Officer did not make independent inquiries, did not place such material in the reasons, or mechanically relied on that information. 3. Whether sanction/approval under section 151 (or the statutory sanction procedure) was validly and meaningfully recorded (i.e., whether higher authority applied independent mind or merely rubber-stamped), and whether absence/non-production of sanction record vitiates reopening. 4. Whether credit entries shown as share capital and share premium can be treated as unexplained income (cash credit under section 68) where the assessee produced share applications, bank evidences, ITRs and audited financials of subscribers establishing identity, genuineness and creditworthiness; and whether the department must prove source-of-source or can add the amounts in the assessee's hands. 5. Whether reliance on statements/evidence gathered behind the assessee's back (e.g. statement of a third party recorded under section 132) without furnishing the statement to the assessee or affording opportunity for confrontation/cross-examination violates principles of natural justice and renders additions unsustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 147/148 (change of opinion vs. fresh material) Legal framework: Reopening beyond four years requires the AO to have 'reason to believe' that income has escaped assessment and that such escapement arose by reason of failure to disclose fully and truly all material facts; this is a jurisdictional precondition and not a mere formality. Precedent treatment: The Court relied on settled Supreme Court and High Court authorities holding that mere change of opinion, re-appreciation of facts, or error in original assessment does not justify reopening beyond four years (e.g., precedents explaining that once primary facts are disclosed the onus ends and AO cannot review his earlier conclusion). Interpretation and reasoning: The Court examined the original 143(3) assessment record and found that the same primary facts concerning share subscriptions had been placed before and considered by the original AO (share application forms, bank entries, ITRs, audited accounts). The reasons recorded for reopening did not identify any new primary facts withheld by the assessee; rather, reopening flowed from information received from investigation units and amounted to a re-examination of the same material. The reasons lacked any rational nexus showing that the assessee had failed to disclose material facts - they instead reflected suspicion and re-interpretation. Ratio vs. Obiter: Ratio - Reopening in these circumstances amounted to impermissible change of opinion/borrowed satisfaction and was jurisdictionally invalid. Obiter - Observations on the need for self-explanatory reasons and the limits of reassessment power. Conclusion: The Court held the reopening under section 147/148 to be invalid insofar as it was predicated on a mere change of opinion without fresh tangible material or failure of disclosure by the assessee; the proceedings were quashed on that ground. Issue 2 - Reliance on investigation reports/borrowed satisfaction without independent inquiry Legal framework: 'Reason to believe' must be the AO's own reasoned belief based on material in his possession; information from investigation wing, by itself, does not suffice unless the AO independently applies his mind, conducts inquiries as necessary, and records an intelligible nexus between the material and the belief. Precedent treatment: Cited authorities establish that the AO cannot act on 'borrowed satisfaction' of the investigation wing, that reasons must show application of mind and a rational link to objective material, and that mere suspicion or direction from another officer is insufficient. Interpretation and reasoning: The recorded reasons repeatedly stated that enquiries were already made by the investigation unit and 'no further enquiry is required.' The AO neither described the investigative material nor annexed it to the reasons; the AO did not perform independent verification (for example, by comparing the investigation inputs to the assessee's balance sheet or bank records). The reasons therefore amounted to a mechanical adoption of reports and failed the statutory test of being the AO's own reasons to believe. Ratio vs. Obiter: Ratio - Reliance solely on investigation reports without independent application of mind renders the reasons and reopening invalid. Obiter - Practical guidance that referenced investigation reports should be paraphrased or annexed and that AO must make independent enquiries where necessary. Conclusion: The Court found the AO's reliance on third-party investigation material without independent examination to be unlawful; the reopening was invalidated for lack of AO's own(reasoned) satisfaction. Issue 3 - Validity of sanction/approval under section 151 (rubber-stamp vs. considered sanction) Legal framework: Statutory sanction (section 151) is a mandatory condition for reopening in specified cases; the sanctioning authority must form an independent satisfaction and the sanction record should be meaningful (not a mere stamp or 'yes'). Precedent treatment: Authorities require that the sanctioning officer apply independent mind and record reasons; mechanical or rubber-stamp approvals are invalid. Interpretation and reasoning: The sanction/approval documents were not placed before the assessee; the reasons recorded indicated that sanction would be 'obtained separately' and there was no evidence that the sanctioning authority examined the assessment record or applied independent mind. The Court treated non-production and absence of a reasoned sanction as further evidence of a mechanical process. Ratio vs. Obiter: Ratio - Where sanction is not shown to be meaningfully recorded or is not produced, that vitiates the reopening process. Obiter - Emphasis that sanction should contain discernible application of mind. Conclusion: The Court held the sanctioning step deficient and corroborative of the invalidity of the reopening, thereby supporting quashing of the reassessment. Issue 4 - Treatment of share capital and share premium as unexplained income under section 68 (onus of assessee; source-of-source) Legal framework: Under section 68 the assessee must explain the nature and source of credited amounts; where identity, genuineness and creditworthiness of the subscriber are established by appropriate documents (share application forms, bank evidences, ITRs, audited accounts), the assessee discharges initial onus and the AO must rebut that explanation by independent material. Precedent treatment: High Court/Tribunal authorities hold that if subscribers are identifiable, assessed to tax, and payments are through banking channels and corroborated in their books/returns, such amounts cannot be treated as the assessee's unexplained income; the department must, if necessary, proceed against the subscribers themselves. Interpretation and reasoning: The assessee produced share application forms, bank statements corroborating payments, ITRs and audited reports of the subscriber companies. The AO did not produce any direct evidence contradicting those documents and relied instead on generalized investigative claims and an alleged statement of a third party (which was retracted). The AO blurred the form/nature of alleged accommodation entries and made additions without specifying the legal basis or establishing that the share applicants' transactions were benami or conduits of the assessee's own funds. The Court reiterated that AO cannot require the assessee to prove the source-of-source where the immediate source and identity are satisfactorily explained. Ratio vs. Obiter: Ratio - Where identity, genuineness and creditworthiness of shareholders are proved by documentary evidence and not disproved by AO with specific material, addition under section 68 is not sustainable; the remedy of the revenue is to investigate and reopen assessments of the purported subscribers. Obiter - Observations on the irrelevance of assessing source-of-source at the stage where the immediate source is satisfactorily explained. Conclusion: The Court held the addition of share capital and premium as undisclosed income unsustainable on merits, and that the assessee had discharged its onus under section 68; thus additions were deleted in any event. Issue 5 - Natural justice: non-production of investigation material/third-party statements and denial of opportunity for confrontation/cross-examination Legal framework: Principles of natural justice require that material relied upon by the AO (including statements or summaries gathered behind the assessee's back) be communicated so that the assessee can rebut and cross-examine; failure to disclose such material may vitiate the assessment. Precedent treatment: Courts have held that where material is relied upon but not furnished, or where additions rest primarily on statements recorded in search/survey without providing copies or opportunity for cross-examination, the assessment is vulnerable. Interpretation and reasoning: The AO referred to a statement of an alleged entry operator but did not furnish the statement to the assessee; the assessee obtained a retraction affidavit from that person. The AO did not provide the substance of investigative material in reasons or show that the assessee had an opportunity to test that evidence. The Court found violation of natural justice principles and that the AO's reliance on undisclosed material was impermissible. Ratio vs. Obiter: Ratio - Reliance on undisclosed investigative statements without providing them to the assessee and affording opportunity of confrontation vitiates the assessment. Obiter - Courts' expectation that investigative materials underpinning reasons should be made available or paraphrased in reasons. Conclusion: The Court concluded that reliance on undisclosed/unanalyzed investigative material, coupled with denial of opportunity to confront witnesses, rendered the additions and proceedings unsustainable. Overall Conclusion The Court concluded that (i) reopening under section 147/148 was invalid because it amounted to a change of opinion and was based on borrowed satisfaction from investigation units without independent application of mind; (ii) sanction under section 151 was not shown to be meaningfully recorded; (iii) material relied upon by the AO (investigation reports and third-party statements) was not placed before the assessee and opportunity for confrontation was not afforded, breaching natural justice; and (iv) on merits, the assessee had discharged its onus under section 68 by producing documentary evidence of identity, genuineness and creditworthiness of share subscribers - therefore the addition of share capital and share premium as undisclosed income was unsustainable. The reassessment and consequential additions were accordingly quashed/deleted.