2025 (12) TMI 1692 - AT - Income Tax

Reassessment reopening based only on Investigation Wing inputs, without seized incriminating material or enquiry, quashed as 'borrowed satisfaction'

Reassessment under ss. 147/148 based solely on Investigation Wing inputs, without any seized material or independent enquiry, was held to be founded on ... Reassessment completed u/s 147 based on the information received from Investigation Wing - reasons to believe or suspect - Borrowed satisfaction or independent application of mind - HELD THAT:- From the recording of the reasons by the present AO shows that he has only received the information without there being any seized material. It is also relevant to note that the present AY being unabated, the AO must have initiated proceedings u/s 153C, since there was no material forwarded by the investigation wing, the AO merely recorded the reasons for initiating the reassessment proceedings, he merely borrowed the satisfaction from the mere observations of the investigation wing for the reason that similar forfeiture was also claimed by the assessee in their profit and loss account. The investigation wing has only indicated that there may be chances of similar transactions. AO, on receipt of such information, in our view, he should have investigated and after addressing the objections only he should have proceeded to issue the notice u/s 148. He has proceeded to obtain jurisdiction without properly investigating the case of the assessee, in particular, with the borrowed satisfaction and without there being any material supplied by the investigation wing. Based on mere observations of the wing, he has proceeded to initiate the proceedings. Assessee submitted the confirmations from the vendors before the AO in reply to the notice u/s 142(1) dated 4.11.2019. It is also fact on record that the assessee had claimed the same as expenses in their books. The AO should have made the investigation at this stage. He failed to do the same and proceeded to issue the notice u/s 148 on the borrowed satisfaction recorded by the investigation merely because one of the group companies had indulged in such activities. There is absolutely no material with the AO to initiate proceedings u/s 147 of Act. CIT(A) had rejected the additional evidence on the basis that this was not submitted before AO, we observed that the assessee had already submitted the same in reply to the notice u/s 142(1) of Act. CIT(A) has proceeded to carry out the forensic examination at the appellate stage and tried to prove that these were fabricated and not reliable documents. We find that these were already submitted before the Assessing Officer and the AO had not carried out any investigations at that stage and proceeded to initiate the reassessment proceeding with the borrowed satisfaction. This is clearly an initiation of proceedings without the jurisdiction at the initiation stage itself, therefore, the proceedings is nothing but void ab initio. We observe that the AO neither initiated the proceedings with the due process of law u/s 153C nor under the provisions of section 147/148 of the Act. Therefore, we are inclined to allow the grounds raised by the assessee on the jurisdictional issue without going into the merits of the case. Forfeiture of the expenses claimed by the assessee, it has already claimed them as business expenditure considering the fact that it is in the business of real estate. The information was part of the ROI income filed by the assessee. Adhoc disallowances, we observed that the assessee had incurred expenses like Legal and professional, ROC expenses, accounting expenses, late deposit of TDS and interest expenses written off. On careful verification of the expenses, we are of the view that these are business expenses incurred for the purpose of business. Except late deposit of TDS, this is also only fine and not penal in nature. Therefore, the AO should have verified the details of the expenses, since the assessee had not filed the details before AO, but the same should have been verified by the Ld. CIT(A) at the appellate stage. No expenses can be disallowed on the adhoc basis. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether reassessment proceedings initiated under section 147/148 were without jurisdiction where the Assessing Officer acted on investigation-wing 'observations' arising from a search in another group entity, without any seized material or independent enquiry establishing a live nexus with escapement of income in the assessee's case. (ii) Whether, on the facts noted by the Court, the Assessing Officer ought to have proceeded (if at all) under section 153C rather than section 147 for an unabated year, and whether failure to follow the due process rendered the reassessment void. (iii) Whether an ad hoc disallowance of expenses (25%) could be sustained in the absence of item-wise verification and justification (recorded as incidental/academic after the jurisdictional finding). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Jurisdictional validity of reopening under section 147/148 on investigation-wing input Legal framework (as considered in the decision): The Court examined the 'reasons recorded' for reopening, the requirement that the belief of escapement must be founded on material having a nexus with the assessee, and the impermissibility of initiating reassessment on 'borrowed satisfaction' without independent application of mind and verification. Interpretation and reasoning: The Court found that the search action referred to in the reasons was conducted in another group entity and not in the assessee's case, and the reasons did not show that any seized material pertaining to the assessee had been forwarded. The Court noted that the investigation wing's communication, as reflected in the record, conveyed only an observation that similar transactions/modus operandi existed in group cases, coupled with the fact that the assessee had claimed a forfeiture expense in its profit and loss account. The Court held that it was unclear whether any seized material was supplied at all, and the Assessing Officer proceeded merely on the wing's observations, without proper investigation, without independently addressing the assessee's position, and without establishing a live nexus between specific material and escapement of income in the assessee's hands. The Court also noted that the assessee had, in fact, filed confirmations from vendors during earlier proceedings, and the Assessing Officer should have investigated at that stage instead of initiating reassessment on borrowed satisfaction. Conclusions: The Court held there was 'absolutely no material' with the Assessing Officer to initiate proceedings under section 147 on the basis recorded, and the initiation itself lacked jurisdiction; the reassessment was therefore void ab initio. Issue (ii): Effect of not following section 153C process for an unabated year (and simultaneous lack of jurisdiction under section 147) Legal framework (as considered in the decision): The Court treated the year as 'unabated' and examined whether, given that the triggering information arose from a search in another person's case, the lawful course required action under section 153C rather than section 147. Interpretation and reasoning: The Court reasoned that where information arises from a search in another person's case, proceedings should be initiated under section 153C when the statutory conditions are met. On the Court's reading of the record, no material was forwarded that could sustain such action, yet the Assessing Officer still proceeded under section 147 based on the investigation wing's general observations. The Court held that the Assessing Officer neither demonstrated compliance with the due process contemplated for section 153C nor established the foundational material necessary to assume jurisdiction under section 147/148. Conclusions: The Court held that the Assessing Officer did not initiate proceedings with due process under section 153C, and also lacked jurisdiction under section 147/148 on the recorded reasons. On this jurisdictional ground, the appeal was allowed without adjudicating the merits. Issue (iii): Sustainability of ad hoc disallowance of expenses (treated as academic) Legal framework (as considered in the decision): The Court considered the principle that expenses cannot be disallowed on a purely ad hoc basis without verification and reasoned justification. Interpretation and reasoning: The Court observed that the expenses described (including legal/professional and other routine business expenses) were of a business nature and required verification rather than estimation. The Court also noted that, even if details were not filed before the Assessing Officer, the appellate authority should have verified them at the appellate stage, and a blanket 25% disallowance was not justified. Conclusions: The Court stated that no expenses can be disallowed on an ad hoc basis, but expressly treated these observations as 'academic' because the reassessment itself was held invalid for want of jurisdiction.