Reassessment under s.147 invalid where no addition on recorded reason; addition under s.56(vii) also quashed

ITAT Delhi-AT allowed the assessee's appeal, quashing the reassessment under s.147. The AO reopened the assessment to examine the alleged unexplained source of investment in shares based on Investigation Wing information. The assessee had disclosed the share investment in its balance sheet and ITR, and the purchase was through banking channels. However, no addition was ultimately made on the stated reason; instead, addition was made under s.56(vii) as deemed income. Relying on Ranbaxy Laboratories (Del HC), ITAT held such reassessment beyond jurisdiction and invalid.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the reassessment proceedings initiated under sections 147/148 were valid when the reasons recorded referred to unexplained source of investment in shares, but the eventual addition was made under section 56(vii) as deemed income.

1.2 Whether the information received from the Investigation Wing, reproduced in the reasons for reopening, constituted a proper basis for "reason to believe" when there was no independent application of mind by the Assessing Officer and the investment in shares was already disclosed in the return of income.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of reassessment under sections 147/148 and requirement of proper "reason to believe"

Legal framework (as discussed)

2.1 The Court referred to the scheme of section 147/148 of the Act and the requirement that the Assessing Officer must have a tangible, substantive and specific belief that income has escaped assessment, formed on specific information relatable to the assessee and supported by application of mind. It also noted the proposition that at the stage of reopening only a prima facie view is required and sufficiency of material is not to be examined, as relied upon from the decision in Raymond Woollen Mills Ltd. Vs. ITO. The Court further relied on the principle laid down by the jurisdictional High Court in Ranbaxy Laboratories Ltd. Vs. CIT that reassessment must be based on the ground for which jurisdiction was assumed and that additions on issues not forming the basis of reopening, where no valid assumption of jurisdiction exists, are not sustainable.

Interpretation and reasoning

2.2 The Court examined the recorded reasons and found that the Assessing Officer first downloaded and examined the assessee's return in the light of information from the Investigation Wing regarding purchase of shares of two companies at face value, despite their substantial asset base, and the Investigation Wing's opinion about possible applicability of section 56(vii) or other provisions and introduction of unaccounted money.

2.3 In the "analysis of information" portion of the reasons, the Assessing Officer stated that the information was required to be examined for the purpose of finding the "source of the purchase of shares worth Rs. 56,94,000/-" on 21.05.2010 and recorded that the source of purchase remained unexplained and could not be reconciled with the return of income, leading to a belief of escapement of income of Rs. 56,94,000/-.

2.4 The assessee demonstrated from its return and balance sheet that it had disclosed total investments of Rs. 307.62 lakhs, which included the impugned investment of Rs. 56,94,000/- in shares of the two companies, acquired through banking channels from different sellers. This disclosure was also specifically pointed out to the Assessing Officer in reply dated 28.09.2018.

2.5 The Court noted that the foundational premise in the recorded reasons was that the "source" of the investment of Rs. 56,94,000/- was unexplained, thus treating it as an unexplained investment. However, the eventual assessment did not question or make any addition on account of unexplained source of investment; instead, addition was made under the deeming provisions of section 56(vii) of the Act on a different footing.

2.6 The Court held that there was a clear divergence between the reason recorded for reopening and the issue on which the addition was actually made. The assumption of jurisdiction was for examining alleged unexplained source of investment, whereas the addition was made under section 56(vii). On these facts, as per the ratio of Ranbaxy Laboratories Ltd. Vs. CIT, such reassessment is not sustainable because for the additions actually made, there was no valid assumption of jurisdiction under section 147.

2.7 The Court also accepted the contention that the Assessing Officer had merely reproduced the information received from the Investigation Wing without any independent verification or application of mind to establish a nexus between the material and alleged escapement of income, particularly when the investment was already reflected in the return of income. The reasons failed to demonstrate a proper link between the tangible material and a reasoned belief of escapement of income.

Conclusions

2.8 The Court concluded that the reassessment proceedings under sections 147/148 were not validly initiated with respect to the additions ultimately made under section 56(vii) of the Act, as there was no valid assumption of jurisdiction for such additions and the foundational reasons related only to alleged unexplained source of investment.

2.9 The impugned addition made under section 56(vii) was held to be unsustainable and was quashed, and the appeal of the assessee was allowed.

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