2025 (11) TMI 1001 - AT - Income Tax

Reassessment invalid for borrowing satisfaction from investigation; additions under section 69 deleted as amounts were advances

ITAT DELHI - AT dismissed the revenue's appeal, holding the reassessment defective due to 'borrowed satisfaction' from investigation reports. The AO ... Addition on account of unexplained money received u/s 69 - assessee has taken accommodation entry - AO has borrowed the findings of the Investigation Wing and observed that the assessee has dealt with certain transactions/Bogus entries - HELD THAT:- Assessee has dealt with certain transactions with M/s MKD Construction Pvt. Ltd. and without making proper verification, he has proceeded to record the reasons to reopen the assessment and also proceeded to complete the reassessment proceedings insisting on the assessee to supply the recent address and communication address of M/s MKD Construction Pvt. Ltd. even though the main purpose of reopening the assessment is only on the basis of investigation wing report on the same party. This itself shows that the AO has proceeded to reopen the assessment with the borrowed satisfaction. We observe that as per the Balance Sheet and information supplied by the assessee to AO as well as to First Appellate Authority, it clearly shows that assessee has advanced the alleged amount to M/s MKD Construction Pvt. Ltd. and not as per the conclusion of the AO that assessee has received loan/accommodation entry from them. All the abovesaid information is already supplied before AO he has not appreciated the relevant information available on record, proceeded to make the addition with the wrong understanding of the facts that assessee had received loan/accommodation entry from M/s. MKD Construction Pvt. Ltd.. Therefore, we do not see any reason to disturb the findings of the ld. CIT (A). Appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether reopening of assessment under section 148 was valid where the Assessing Officer relied on investigation wing information alleging a third party to be a sham/accommodation entry provider and recorded reasons to believe without independent verification. 2. Whether an addition of Rs. 1,90,00,000 as unexplained money/accommodation entry under section 69 is sustainable where contemporaneous books, tax audit note and bank statement entries indicate the assessee advanced that amount as a loan/advance to the alleged third party. 3. Whether reliance by the Assessing Officer on a third-party investigation report (borrowed satisfaction) without appreciating documentary evidence placed on record by the assessee justifies sustaining an addition. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reopening under section 148 based on investigation wing report Legal framework: Reopening of assessment requires a valid 'reason to believe' that income chargeable to tax has escaped assessment; such reasons must be formed by the Assessing Officer on material and cannot be mere adoption of another authority's conclusion without independent satisfaction. Precedent Treatment: No specific precedents are cited in the text of the judgment. The Court treated the investigative report as material but examined whether the AO independently formed satisfaction. Interpretation and reasoning: The Court examined the sequence and content of the AO's action: AO received a report from the Investigation Wing declaring the third party to be a sham/accommodation provider and proceeded to record reasons to reopen. The AO also sought the third party's recent address and communications during reassessment proceedings despite the reopening being premised on the Investigation Wing's findings about that same party. The Court interpreted these facts as indicia that the AO had 'borrowed' the satisfaction of the Investigation Wing rather than forming an independent reason to believe based on an AO's own assessment of the materials. Ratio vs. Obiter: Ratio - Reopening under section 148 cannot properly rest on a mere adoption of another authority's conclusion where the Assessing Officer has not independently examined or appreciated the available documents and has relied on borrowed satisfaction; such reopening is vitiated. Conclusions: The Court concluded the reopening was tainted by borrowed satisfaction and lacked proper appreciation of the assessee's documents; therefore, the foundation of reassessment was defective in that respect. Issue 2 - Sustainability of addition under section 69 as unexplained money/accommodation entry where records show loan advanced Legal framework: Section 69 permits addition where money or assets are found and the assessee offers no satisfactory explanation regarding their nature and source; conversely, where the assessee furnishes adequate documentary evidence to explain a transaction, additions are not warranted. Precedent Treatment: The judgment does not refer to external judicial precedents; it applies statutory principles requiring documentary proof to explain alleged unexplained receipts. Interpretation and reasoning: The Court analyzed the documentary record submitted to the AO and the First Appellate Authority: (a) tax audit report note explicitly disclosing a short-term loan/advance of Rs. 1.90 crore to the third party as on 31.03.2012; (b) bank statement entries showing debit in the assessee's account in favour of the third party; (c) balance sheet and other details furnished during assessment proceedings. The AO's basis for addition was the belief that the assessee had received, not advanced, Rs. 1.90 crore from the third party. The Court found this to be a misreading of the assessee's own filed documents - the exact amount in question appears as an advance given by the assessee rather than as receipt. The Court held that where clear documentary evidence explains the transaction as an advance/loan, the addition under section 69 on account of unexplained money/accommodation entry is not justified. Ratio vs. Obiter: Ratio - Documentary evidence in the form of books, tax audit notes and bank statements that satisfactorily explain a transaction as an advance/loan negates treating the same amount as unexplained accommodation entry and precludes addition under section 69. Conclusions: The Court upheld the First Appellate Authority's deletion of the addition, concluding the AO's addition was founded on an incorrect factual premise (receipt instead of payment) and therefore unsustainable. Issue 3 - Legitimacy of treating transactions with a party declared sham solely because the party is alleged to be an accommodation provider Legal framework: An allegation that a counterparty is a sham/accommodation provider may support scrutiny, but tax consequences for the assessee require independent proof that the assessee was the beneficiary of the accommodation entry; mere association with an alleged sham does not automatically convert otherwise documented transactions into unexplained income. Precedent Treatment: The Court did not cite authorities but applied principle that the characterisation of transactions depends on the assessee's evidence and the actual documentary record rather than on imputations arising from third-party investigation alone. Interpretation and reasoning: The AO's reliance on the Investigation Wing's characterization of the counterparty as a sham was insufficient, in the Court's view, to override contemporaneous documents showing the assessee had advanced funds. The Court emphasized that the burden on the revenue to demonstrate that the assessee actually received accommodation entries was not discharged merely by pointing to the counterparty's alleged status. The Court regarded the AO's failure to appreciate the assessees' filings and tax audit particulars as decisive. Ratio vs. Obiter: Ratio - Transactions with a party alleged to be a sham cannot be treated as accommodation entries vis-à-vis the assessee without examination of the assessee's documentary explanation; the mere fact that the counterparty is suspected of being a sham does not, without more, render the assessee's documented loan/payment as unexplained money under section 69. Conclusions: The Court held that the existence of an investigation report against the third party did not warrant treating the assessee's documented advance as an accommodation entry in absence of any independent infirmity in the assessee's documents. Cross-references and Interplay among Issues The Court's conclusion on Issue 1 (invalid reopening grounded on borrowed satisfaction) and Issue 2 (documentary proof showing payment/advance) are interlinked: defective initiation of reassessment and the AO's misapprehension of documentary evidence combined to render the addition unsustainable. The Court expressly relied on the First Appellate Authority's factual findings which recorded and relied upon the tax audit note and bank statements to reach the legal conclusion under section 69. Final Disposition The Court dismissed the Revenue's appeal and affirmed deletion of the addition of Rs. 1,90,00,000, holding that (a) the AO had borrowed satisfaction from an investigative agency without independent appreciation; (b) the assessee's contemporaneous records satisfactorily explained the transaction as an advance/loan; and (c) consequently the section 69 addition for unexplained money/accommodation entry was unsustainable.