2025 (6) TMI 950 - AT - Income Tax

Reopening of assessment - reason to believe - independent application of mind or borrowed satisfaction - unexplained cash credit u/s 68 - information was received by the ld. AO that assessee has ploughed back his own funds through accommodation entries - HELD THAT - AO has noted the information received from the DDIT (Investigation) in the reasons recorded and nowhere recorded his satisfaction therefore find merit in the contention of the assessee that the reasons have been recorded by the AO without any independent application of mind and accordingly the reopening is invalid and nullity in the eyes of law. Reasons recorded are based upon presumption and surmises without recording a clear-cut finding as to escapement of income. The case of the assessee is squarely covered by the decision of the co-ordinate bench in the case of M/s Sakaar Commercial Pvt. Ltd. 2023 (1) TMI 28 - ITAT KOLKATA wherein similar issue has been decided in favour of the assessee as held reasons of non-recording of any reason to believe and re-opening the case on borrowed satisfaction. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the delay of 196 days in filing the appeal by the assessee is liable to be condoned on bona fide grounds;

(b) Whether the reopening of the assessment under section 147 of the Income Tax Act, 1961 (hereinafter "the Act") was validly exercised by the Assessing Officer (AO); specifically, whether the AO had recorded a valid reason to believe that income had escaped assessment;

(c) Whether the reasons recorded by the AO for reopening were based on independent application of mind or merely on presumption, surmises, or borrowed satisfaction from investigation reports;

(d) Whether the reopening notice issued under section 148 of the Act was legally sustainable in the absence of proper reasons recorded and satisfaction by the AO;

(e) Whether the additions made by the AO treating the amount of Rs. 25 lakhs received from M/s Pramodanah Goods Pvt. Ltd. as unexplained cash credit under section 68 of the Act were justified.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Condonation of Delay in Filing Appeal

The assessee filed the appeal with a delay of 196 days. The condonation petition explained that the delay arose due to transfer of the company's registered office from Kolkata to Mumbai, resulting in confusion regarding the proper jurisdiction for filing the appeal. Conflicting advice from different counsels about whether the appeal should be filed in Mumbai or Kolkata jurisdiction contributed to the delay.

The Tribunal, after considering the facts and rival contentions, held that the delay was genuine and for bona fide reasons. The Tribunal exercised its discretion to condone the delay, thereby allowing the appeal to be admitted despite the delay.

(b) Validity of Reopening under Section 147 of the Act

The reopening of the assessment was initiated by the AO by issuing notice under section 148 of the Act, based on information received from the DDIT (Investigation) Wing, alleging that the assessee had ploughed back his own funds through accommodation entries from M/s Pramodanah Goods Pvt. Ltd., amounting to Rs. 25 lakhs.

The assessee challenged the reopening as invalid, contending that the AO had not recorded any independent satisfaction or reason to believe that income had escaped assessment. The reasons recorded merely reproduced the information received from the Investigation Wing without any application of mind or corroboration with the assessee's return or accounts.

The Tribunal examined the reasons recorded by the AO and found that:

• The AO had noted the information from the Investigation Wing but did not record any independent satisfaction or reason to believe that income had escaped assessment;
• The reasons were based on presumption and surmises, lacking a clear-cut finding;
• There was no demonstration of a live link between the material received and the formation of belief that income had escaped assessment;
• The reopening was therefore held to be invalid and a nullity in the eyes of law.

Legal Framework and Precedents

The Tribunal relied on the legal framework under section 147 and 148 of the Act, which require the AO to record a valid reason to believe that income has escaped assessment before reopening an assessment.

Precedents cited include:

• The decision of the co-ordinate bench in the case of M/s Sakaar Commercial Pvt. Ltd., where reopening was quashed due to lack of independent application of mind and reasons being based on borrowed satisfaction;
• The decision of the Gauhati bench in MLB Commercial Pvt. Ltd., which held that suspicion or information from investigation reports is insufficient without the AO satisfying himself about the veracity of such information;
• The Delhi High Court decision in Meenakshi Overseas Pvt. Ltd., which emphasized that reasons failing to demonstrate a link between tangible material and formation of reason to believe render reassessment unjustified.

Application of Law to Facts

The Tribunal applied these principles to the facts, noting that the AO had not independently verified or correlated the information with the assessee's records and had merely reproduced the investigation report. The absence of a recorded satisfaction or reason to believe invalidated the reopening.

Treatment of Competing Arguments

The Revenue argued that the reopening was justified based on information from the Investigation Wing. However, the Tribunal found this argument insufficient in the absence of independent application of mind and proper recording of reasons by the AO. The assessee's contention that the reopening was based on borrowed satisfaction was accepted.

Conclusion on Reopening

The reopening of the assessment under section 147 was quashed as illegal and void.

(c) Addition under Section 68 of the Act

The AO treated the Rs. 25 lakhs received from M/s Pramodanah Goods Pvt. Ltd. as unexplained cash credit under section 68, since the assessee did not comply with notices or satisfactorily explain the nature of the receipt.

However, since the reopening itself was held invalid, the additions consequent to the reopening order were also set aside. The Tribunal did not delve into the substantive merits of the addition under section 68, as the foundational reopening was quashed.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The reasons recorded are based upon presumption and surmises without recording a clear-cut finding as to escapement of income."

"The Assessing Officer did not correlate the information received by him from the Investigation Wing with the Income-Tax Return/accounts of the assessee. He reopened the assessment on the basis of borrowed satisfaction without verifying about the genuineness of the information received."

"Such an information from Investigation Wing may give the Assessing Officer the reasons to suspect, but the same does not constitute reasons to believe, until and unless the Assessing Officer satisfies himself about veracity of the information received."

"The necessary ingredients of forming belief by the Assessing Officer of escapement of income are missing in this case. Therefore, the reopening of the assessment being bad in law, the assessment order is quashed."

"Where there is no independent application of mind by the AO to tangible material and conclusion of AO was reproduction of the investigation report, reasons failing to demonstrate link between tangible material and formation of reason to believe that income has escaped assessment, the reassessment is unjustified."

"The delay in filing the appeal is genuine and for bonafide reasons and therefore, the same is condoned."

Accordingly, the Tribunal allowed the appeal of the assessee on the legal issue of invalid reopening and set aside the impugned orders.