2010 (9) TMI 752 - HC - Income Tax

Penalty - Income escaping assessment - It was on the premise that the assessee had filed the Income-tax return only till the assessment year 1993-94 and thereafter she had not filed the return - It has held that the very notice issued under section 148 of the Act was illegal and thus quashed the assessment on this ground - It is an admitted case that during the search no books of account or documents or money or bullion or jewellery or any other valuable articles or things were found - there was no particulars coming forward namely who are the dummy subscribers whether shares from the so-called dummy subscribers were transferred in the name of the assessee or assessee remains the benami owners thereof and is in the control and possession of those shares etc - This is even not recorded in the Reasons to Believe by the Assessing Officer - Appeal are accordingly dismissed

Summary

Issues Involved:
1. Validity of proceedings initiated under section 147 of the Income-tax Act.
2. Merits of the addition of Rs. 23,50,000 to the assessee's income.

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated under Section 147 of the Income-tax Act:

The primary issue was whether the notice issued under section 148 of the Income-tax Act, which initiates proceedings under section 147, was valid. The Tribunal found that the notice was based solely on the assessee's statement recorded under section 132(4) during a search, which was later retracted. The Tribunal noted that no books of account, documents, money, bullion, jewelry, or other valuable articles or things were found during the search.

The Tribunal held that the Assessing Officer (AO) did not act on the basis of the statement in its entirety, as the AO accepted the cash payment part but not the timing of the payment, which the assessee claimed was made in the financial year 1994-95. The Tribunal concluded that if the statement was to be accepted, the addition should have been made in the assessment year 1995-96, not 1994-95. Therefore, the Tribunal quashed the assessment on the ground that the notice under section 148 was illegal.

The High Court agreed with the Tribunal's approach, emphasizing that the statement under section 132(4) alone, especially when retracted and uncorroborated by other evidence, could not justify the issuance of the notice under section 148. The Court noted that the "Reasons to Believe" recorded by the AO did not mention any material other than the statement, which was insufficient to form a valid basis for reopening the assessment.

2. Merits of the Addition of Rs. 23,50,000 to the Assessee's Income:

On the merits, the AO had added Rs. 23,50,000 to the assessee's income, alleging that this amount was paid in cash to repurchase shares from bogus shareholders. The CIT (Appeals) found that the AO did not provide any basis or justification for this specific amount, especially when the statement indicated a total of Rs. 29,10,000 for the relevant financial year.

The CIT (Appeals) remitted the case back to the AO for further examination, criticizing the AO's reliance on discussions in the assessment orders of the group companies without confronting the assessee with the material. However, since the Tribunal quashed the proceedings under section 147, it did not address the merits of the addition.

The High Court upheld the Tribunal's decision, agreeing that the assessment could not be sustained based on the invalid notice under section 148. The Court emphasized that the retraction of the statement and the lack of corroborative evidence rendered the AO's action unjustifiable. The Court also noted that remitting the case back to the AO would not serve any purpose given the fundamental flaw in the initiation of proceedings.

Conclusion:

The High Court dismissed the appeals, affirming the Tribunal's decision to quash the assessment. The Court found that the notice under section 148 was invalid due to reliance on a retracted and uncorroborated statement, and the subsequent addition to the assessee's income lacked a proper basis. The judgment underscores the necessity of concrete evidence and proper procedural adherence in tax assessments.