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2025 (4) TMI 978 - AT - Income TaxValidity of reopening of assessment - reason to believe -allegation of borrowed satisfaction - no enquiry/investigation on receipt of information from the Investigation Wing - GDR receipts - HELD THAT - Firstly the AO must have reason to believe that income chargeable to tax has escaped assessment; and secondly he must also have a reason to believe that such escapement of income has occurred by reason of failure on the part of the assessee either to make a return of income under section 139 or in response to notice issued under sub-section (1) of section 142 or section 148; or to disclose fully and truly all material facts necessary for his assessment for that purpose. In the instant case it is a not a case where the assessee has not filed a return of income therefore the first limb of the proviso is not relevant. What needs to be examined is the satisfaction of the second limb of the proviso as to whether there is a failure on part of the assessee to disclose fully and truly all material facts necessary for its assessment. The aforementioned requirements of law are held to be conditions precedent for invoking the jurisdiction of the AO to reopen the assessment under section 147 of the Act and both the conditions are cumulative and must co-exist and in event of any of the conditions not been satisfied the very initiation of proceedings under section 147 of the Act shall be wholly without jurisdiction. Second part of the reasons so recorded the Assessing officer has talked about the information collected/received by him and basis which he has recorded the reasons of income having escaped assessment. General modus operandi involved whereby the proprietary concerns receive payments from the beneficiary companies through various modes like RTGS /CHEQUES /BANK TRASNFERS/ and the amount is immediately withdrawn as cash and returned to the beneficiaries after charging certain commission from the beneficiaries. The so called modus operandi where so found and adopted by the assessee has not been specified mode and manner of payments by the assessee the particulars of the bank account where the payment is remitted/transferred by the assessee the quantum of payment and the factum of withdrawal and hand over of cash to the assessee has not been specified as so found by the DDIT Investigation. It is not that the whole of the investigation report has to be reproduced in the reasons so recorded at the same time relevant portion thereof and how the information so found and reported in the said report and linkage thereof with the assessee should be specified in order to hold the said information as a tangible piece of information in possession of the Assessing officer. However nothing has been specified in the reasons so recorded. We find that these are general descriptions and how the same are relevant and tangible in the case of the assessee is not borne out from the reasons so recorded. CIT(A) has held that the Assessing officer was in possession of tangible material in form of a report from the Investigation Wing and has thus tried to support the reasons so recorded by way of supplementing the same. It is a settled position that the reasons are required to be read as they were recorded by the Assessing officer and no substitution or that matter supplementation is possible. It may be that the Assessing officer was in receipt of the report of the Investigation Wing however just having the report in his possession is not sufficient unless he brings out the relevant facts and bearing thereof in the hands of the assessee in the reasons so recorded which has evidently not happened in the instant case. Third part of the reasons so recorded the Assessing officer has claimed to have carried out the analysis of the information so collected/received by him and all that he has stated was that the assessee had received many bogus entries from Rohit Trading and has made payment. There is nothing in the reasons so recorded that he has carried out any such enquiry/investigation on receipt of information from the Investigation Wing and the answer to all these questions is therefore not in affirmative. Thereafter in part five of the reasons so recorded where he says that the assessment records 360 degree report and financial statements are the basis for arriving at the belief that income has escaped assessment is merely a generic statement without any substance and corroboration. We therefore find that there is nothing on record that the Assessing officer has actually carried out any analysis/verification of the information so received and it is case of mechanical recording of reasons to believe that income has escaped assessment without due application of mind. We therefore find merit in the contention advanced by the ld AR that the reasons have been recorded merely basis receipt of information (even the same is not discernable from the reasons so recorded) from the Investigation Wing without any independent examination and application of mind by the Assessing officer and the same clearly lacks the jurisdictional requirements as so provided in the statute which requires the satisfaction of the Assessing officer and the reasons to believe that income has escaped assessment in the hands of the assessee. Sixth and seventh/concluding part of the reasons so recorded the Assessing officer has recorded his findings on the applicability of requirement of true and full disclosure of material facts in terms of proviso to section 147 of the Act as fours years have elapsed from the end of the relevant assessment year. It has been stated by the Assessing officer that he has carefully considered the assessment records containing the submissions made by the assessee in response to various notices issued during the assessment/reassessment proceedings and have noted that the assessee has not fully and truly disclosed the material facts necessary for his assessment for the year under consideration. It has been further stated by the Assessing officer that it is true that the assessee has filed a copy of annual report and audited P L A/c and balance sheet along with return of income where various information/ material were disclosed however the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. Thus in the instant case AO has simply relied upon the report of Investigation Wing without carrying out any preliminary enquiry and investigation and establishing the necessary nexus between material and formation of belief that income has escaped assessment. There is clearly no tangible material in possession of the Assessing officer and no independent application of mind by the Assessing officer. There is no specific failure in terms of material facts not truly and fully disclosed as can be discernable from the reasons so recorded. The whole exercise thus shows a mechanical approach on part of the Assessing officer to issue notice u/s 148 of the Act merely on receipt of information from the Investigation Wing on 26/03/2018 and issue of notice on last date of the limitation period i.e 31/03/2018 without carrying out any further examination/verification. AO doesn t have the legal basis to acquire jurisdiction for reassessment u/s 147 and thus the notice so issued under section 148 is hereby quashed and consequent reassessment proceedings are thus liable to be set-aside. Decided in favour of assessee.
The core legal questions considered by the Tribunal in these cross appeals pertain primarily to the validity of reopening assessment proceedings under section 147 of the Income Tax Act, 1961, for Assessment Year 2011-12. The issues include whether the Assessing Officer (AO) had a valid "reason to believe" that income had escaped assessment, particularly in light of the proviso to section 147 applicable after four years from the end of the relevant assessment year; whether the reopening was based on a mere change of opinion or on tangible material; the adequacy and sufficiency of reasons recorded for reopening; the application of Explanation 1 to section 147 concerning disclosure of material facts; the legitimacy of additions made on account of alleged bogus purchases; and the treatment of Global Depository Receipts (GDR) receipts under section 68 of the Act.
Regarding the reopening of assessment under section 147, the Tribunal examined the legal framework which mandates that where an assessment under section 143(3) or section 147 has been completed and the reopening is sought after four years from the end of the relevant assessment year, the AO must have reason to believe not only that income chargeable to tax has escaped assessment but also that such escapement is due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. Both conditions are cumulative and indispensable. The Tribunal referred extensively to judicial precedents including the Supreme Court's ruling in Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P.) Ltd., which clarified that the AO's "reason to believe" need not be final proof but must be based on tangible material on which a reasonable person could form such belief. The Tribunal also considered decisions emphasizing that the reasons recorded must disclose the AO's mind, must be clear, unambiguous, and must establish a vital link between the material evidence and the conclusion that income has escaped assessment. Supplementation of reasons post hoc or reliance on borrowed satisfaction without independent application of mind is impermissible. In the present case, the AO initiated reassessment proceedings first on 26/03/2017 on the issue of exchange rate gains on GDR proceeds and completed reassessment on 12/10/2017. Subsequently, on receipt of information from the Investigation Wing dated 26/03/2018 alleging bogus purchases from proprietary concerns, the AO issued a fresh notice under section 148 on 31/03/2018. The AO also expanded the scope of inquiry to include GDR receipts, which the assessee contended had already been examined in the earlier reassessment. The Tribunal analyzed whether the reopening on the basis of the second notice was valid. The Tribunal found that the reasons recorded by the AO for reopening on the issue of bogus purchases were vague and conclusory, primarily reproducing information from the Investigation Wing without specifying the particulars of transactions, the identity of entry operators, or the manner in which the purchases were bogus. The AO did not demonstrate independent application of mind or any verification or enquiry beyond receipt of the report. The reasons failed to disclose what material facts were not disclosed by the assessee or how the alleged non-disclosure led to escapement of income. The Tribunal noted the AO's own admission that the assessee had filed audited financial statements and returns disclosing purchases from the concerned parties. The AO's reliance on Explanation 1 to section 147, which states that production of books of accounts does not necessarily amount to full disclosure if material evidence could have been discovered with due diligence, was found insufficient in absence of any demonstration that such material facts were embedded or concealed. On the issue of extending the reassessment to GDR receipts beyond the reasons recorded, the Tribunal observed that the AO's justification that information from foreign authorities was received after the first reassessment order was factually incorrect. The assessee produced documentary evidence showing that information from Singapore and UK authorities was already available with the department prior to the initial reassessment order dated 12/10/2017. The Tribunal held that reopening on the GDR issue in the second reassessment constituted a prohibited change of opinion, as no new material had come to the AO's notice. The Tribunal relied on judicial precedents holding that reopening on the basis of information already on record or a mere change of opinion is impermissible. The Tribunal also considered the submissions that the reopening was based on borrowed satisfaction from the Investigation Wing without independent application of mind by the AO. Citing multiple High Court decisions, the Tribunal emphasized that the AO must apply his own mind to the material and record reasons demonstrating the nexus between the material and the belief of escapement of income. Mere reproduction of investigation reports or directions from superiors does not satisfy the requirement. The Tribunal found the AO's reasons in this case to be mechanical and lacking the requisite application of mind, thus invalidating the reopening. Regarding the additions made on account of alleged bogus purchases, the AO made an addition of 20% of total purchases from two trading companies, which the CIT(A) reduced to 15%. The Tribunal declined to adjudicate these merit-based additions as the reopening itself was held invalid, rendering the additions unsustainable. Similarly, the addition on account of GDR receipts was deleted by the CIT(A) and the Revenue's appeal on this issue was dismissed as infructuous. The Tribunal underscored the procedural safeguards prescribed by the Supreme Court and High Courts, including the requirement that the AO must communicate the reasons for reopening to the assessee, allow objections, and dispose of them by a speaking order. The AO failed to address the assessee's specific objections that all material facts were disclosed, thereby violating principles of natural justice and transparency. The Tribunal noted that the reasons recorded must be self-explanatory and cannot be supplemented by affidavits or oral submissions during appellate proceedings. In conclusion, the Tribunal held that the reopening of assessment under section 147 read with section 148 was invalid as the AO lacked valid reason to believe escapement of income due to failure on part of the assessee to fully and truly disclose material facts. The reasons recorded were vague, conclusory, and based on borrowed satisfaction without independent application of mind. The extension of reassessment to the GDR issue was a mere change of opinion without new material. The reassessment proceedings were thus quashed, and consequential additions set aside. The appeals on merits of additions were dismissed as academic. Key legal principles established or reaffirmed include:
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