2025 (11) TMI 1906 - AT - Income Tax

Reopening of assessment under Section 147 held invalid for lack of reasoned objections disposal and speculative escapement belief

ITAT Delhi (AT) held that the reopening of assessment u/s 147 was invalid. The AO failed to dispose of the assessee's objections dated 19/12/2018, ... Reopening of assessment u/s 147 - Addition as commission income - Effect of non-disposing of objections - HELD THAT:- As A.O. has not disposed the objection filed by the Assessee vide letter dated 19/12/2018, we find no reason to upheld the assessment order and order of the Ld. CIT(A). Accordingly, we allow the Ground of the Assessee. Eligibility of reason to believe - reasons recorded fail to establish a direct nexus between the alleged discrepancies in the transactions and the escapement of income - In our opinion, without a clear and direct connection between the facts and the alleged escapement of income, the reasons recorded remains speculative, therefore, the reopening cannot be justified. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether reassessment under section 147 is valid where the addition made in the reassessment order is entirely unrelated to the reasons recorded for reopening (A.Y. 2011-12). 1.2 Whether failure of the Assessing Officer to dispose of the assessee's objections to reopening by a separate speaking order, as mandated in law, vitiates the reassessment proceedings (both years). 1.3 Whether reassessment based solely on 'borrowed satisfaction' and generalized information from another authority, without independent enquiry, tangible material, or a live nexus between the recorded reasons and alleged escapement of income, is valid under section 147 (A.Y. 2012-13). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of reassessment where addition is unrelated to recorded reasons (A.Y. 2011-12) Interpretation and reasoning 2.1 The reasons recorded for reopening stated that the assessee had received Rs. 98 crores from specified companies as accommodation entries. No addition was, however, made on this alleged accommodation entry in the reassessment order. 2.2 Instead, the Assessing Officer made an addition of Rs. 2,76,00,000/- on account of 'commission income' computed at 1% of aggregate bank debits and credits of Rs. 276,00,00,000/-, which was not the subject of the recorded reasons. 2.3 The Tribunal noted that the addition was 'entirely unrelated' to the ground on which the assessment was reopened. 2.4 Relying on the ratio of the jurisdictional High Court in decisions including Sunlight Tour and Travel Pvt. Ltd. and Jaguar Buildcon (P.) Ltd., the Tribunal reiterated that: (i) section 147 permits reopening only in exceptional cases and must be strictly construed; (ii) if the ground on which assessment is reopened does not survive or is not pursued, there is no warrant to expand reassessment to other issues; and (iii) Explanation 3 to section 147 only enables assessment of other issues that come to notice in the course of valid reassessment proceedings, but does not authorize reassessment where no addition is made on the very issue for which reopening was initiated. Conclusions 2.5 As no addition was made in respect of the issue forming the basis of the recorded reasons, and the actual addition pertained to an unconnected ground, the reassessment was held to be invalid in law. Ground 2.0 (A.Y. 2011-12) was allowed and the reassessment quashed. Issue 2 - Non-disposal of objections to reopening by a speaking order (both years) Legal framework (as discussed) 2.6 The Tribunal referred to the binding procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO, requiring that: (i) upon request, reasons for reopening must be furnished; (ii) the assessee is entitled to file objections; and (iii) the Assessing Officer must dispose of such objections by a separate speaking order before proceeding with reassessment. 2.7 The Tribunal also cited decisions including Nimitaya Hotel & Resorts Ltd., as well as other High Court authorities, emphasizing that failure to follow the GKN procedure causes prejudice to the assessee and vitiates the reassessment. Interpretation and reasoning - A.Y. 2011-12 2.8 The assessee received the recorded reasons on 13/11/2018 and filed objections on 19/12/2018 challenging the initiation of proceedings under section 147. 2.9 The assessee specifically contended that these objections were never disposed of by a speaking order before completion of the reassessment. 2.10 The Revenue did not dispute this factual assertion and produced no material to show that the objections had been dealt with separately in accordance with GKN Driveshafts. 2.11 Following the coordinate bench decision in Nimitaya Hotel & Resorts Ltd., the Tribunal held that proceeding directly to complete reassessment without disposing of the objections prejudices the assessee's right to challenge such rejection before a higher forum and renders the reassessment unsustainable. Interpretation and reasoning - A.Y. 2012-13 2.12 For A.Y. 2012-13, the assessee filed objections vide letter dated 18/12/2019 against initiation of proceedings under section 147. 2.13 The Tribunal noted that this ground was identical to Ground 7.0 for A.Y. 2011-12 and that there was no material to show compliance with the requirement of passing a speaking order disposing of objections before finalizing the reassessment. 2.14 Applying its reasoning for A.Y. 2011-12 mutatis mutandis, the Tribunal held that the failure to follow the GKN Driveshafts procedure equally vitiated the reassessment for A.Y. 2012-13. Conclusions 2.15 In both assessment years, the Assessing Officer's omission to dispose of the assessee's objections by a separate speaking order before completing reassessment was held to be contrary to the binding mandate of the Supreme Court and to cause serious prejudice to the assessee. 2.16 Ground 7.0 was allowed for both years, and the reassessment orders were held unsustainable on this independent jurisdictional/ procedural ground. Issue 3 - Reopening based on borrowed satisfaction and absence of tangible material or live nexus to escapement of income (A.Y. 2012-13) Interpretation and reasoning 2.17 The reasons recorded for A.Y. 2012-13 were founded on information received from DCIT/CIT(A) that, pursuant to a search under section 132 on M3M India Group, it was noted in the appraisal report that the assessee had purchased lands during the relevant year at discounted prices below circle rate. 2.18 The Tribunal found that the Assessing Officer: (i) did not undertake any independent enquiry or verification to substantiate this information; (ii) merely reproduced the contents of the letter in the reasons to believe; and (iii) failed to articulate how such alleged transactions resulted in escapement of income in the assessee's hands. 2.19 The reasons did not demonstrate a clear, direct nexus between the alleged discrepancies in land transactions and any specific item of income alleged to have escaped assessment; they remained generic and inferential. 2.20 Relying on the jurisdictional High Court decisions in Meenakshi Overseas and K.R. Pulp and Papers Ltd., as well as the reasoning summarized therein, the Tribunal reiterated that: - 'Reasons to believe' must be based on tangible material examined by the Assessing Officer; - Mechanical reliance on investigation/other authority reports without independent application of mind amounts to 'borrowed satisfaction'; - Vague, general, non-specific information or conclusions without particulars of the nature and quantum of alleged escapement is insufficient to assume jurisdiction under section 147. 2.21 The Tribunal emphasized, following these precedents, that suspicion, however strong, cannot substitute the statutory requirement of a reasoned belief backed by concrete material linking the information to actual escapement of income. Conclusions 2.22 As the recorded reasons were found to be based on borrowed satisfaction from an external report, unsupported by independent enquiry, and lacking a live nexus between the factual material and alleged escapement of income, the conditions precedent for valid assumption of jurisdiction under section 147 were held to be not satisfied. 2.23 Ground Nos. 6.1 and 6.2 for A.Y. 2012-13 were allowed, and the reopening was held unjustified on this substantive jurisdictional ground. Overall Outcome (both years) 2.24 For A.Y. 2011-12, reassessment was held invalid as: (i) the addition made was unrelated to the recorded reasons; and (ii) objections to reopening were not disposed of by a speaking order. The addition on account of commission income was consequently deleted; the appeal was partly allowed and remaining grounds rendered academic. 2.25 For A.Y. 2012-13, reassessment was quashed as: (i) the reopening was based on borrowed satisfaction without tangible material or nexus to escapement; and (ii) objections to reopening were not disposed of in accordance with GKN Driveshafts. The addition on account of commission income was deleted, and other grounds were not adjudicated. Both appeals were allowed.