2025 (7) TMI 452 - HC - Income Tax

Validity of revision u/s 263 - reassessment order was passed u/s 143(3) r/w section 147 reckoning the income and making an addition - Tribunal allowed the assessee s appeal - alleged transaction of accommodation entry for which the assessee was stated to be a beneficiary - HELD THAT - Dates and events will clearly show that the assessee has been exposed to multiple proceedings for the very same assessment. Be that as it may when we carefully go through the materials placed on record as well as the reasoning given by the learned Tribunal we find that the decision taken by the learned Tribunal was fully justified in the facts and circumstances of the case. Order passed pursuant to the second revisional order u/s 263 has been quashed by the learned Tribunal which has been upheld by this Court. The reasons to believe for reopening the assessment has been recorded by the assessing officer and on going through it we find that the name of the assessee does not feature in the body of the reasons but the assessee has been shown as a beneficiary in the reasons for reopening in paragraph details of enquiries made . There is no specific allegation as against the assessee and as to how layering of funds had taken place. This aspect of the matter was considered by the learned Tribunal and found that the AO never disclosed the details of layers through which the alleged money has been reached into bank account of the assessee nor any information was shared in respect of any documentary evidence for the alleged transaction of accommodation entry for which the assessee was stated to be a beneficiary. This finding of Tribunal is well justified. Apart from that we also find that no specific reasons have been mentioned by the AO as to the nature of the transaction of accommodation entry qua the assessee and this aspect was examined by the learned Tribunal and it was observed that the AO does not disclosed as to whether it is an income or expenses or an allowance or share capital or loan etc. It is not in dispute that the assessee has produced the books of accounts and the bank statement to demonstrate that there was no transaction with the alleged accommodation entry provider. The factual aspect of the matter as regards the share capital and the share premium was examined by the assessing officer in detail and the documents and details furnished by the assessee were accepted while passing the assessment order. The attempt to revise the said order by way of a second revisional order u/s 263 proved futile as the assessee was successful before the Tribunal as well as before this Court. Thus the learned Tribunal on considering the factual position had rightly granted relief to the assessee. At this juncture it would be of relevance to take note of the decision of this Court in the case of Prasant Desai 2025 (6) TMI 984 - CALCUTTA HIGH COURT wherein also there was an allegation of layering. In fact the case on hand is much stronger to that of the case of the assessee Prasant Desai in the above decision. The court took note of the factual position and also the decision of Lakhmani Mewal Das 1976 (3) TMI 1 - SUPREME COURT wherein held that the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. No substantial question of law.

Summary

1. The primary legal questions considered by the Court were:

a. Whether the Income Tax Appellate Tribunal (ITAT) erred in law and on facts by rejecting the revenue's appeal without adjudicating the merits.

b. Whether the ITAT's order was perverse for failing to distinguish between the issues considered under section 263 and those forming the basis for reassessment under section 147, specifically regarding verification of identity and genuineness of share capital transactions versus alleged accommodation entries credited through layering.

c. Whether the ITAT wrongly relied on Supreme Court precedent relating to initiation of reassessment proceedings under section 147 pending proceedings under section 154, thereby misapplying the law.

2. Issue-wise Detailed Analysis:

Issue (a): Legality of ITAT's rejection of the revenue's appeal without adjudicating merits

The legal framework involves the powers of the ITAT to adjudicate appeals under the Income Tax Act, 1961, particularly under section 260A. The revenue contended that the ITAT improperly dismissed its appeal without examining the substantive merits.

The Court examined the procedural history: the assessee's original return declared a loss; the assessment officer added share capital on grounds of non-compliance with section 131; subsequent revisional proceedings under section 263 directed de novo assessment; reassessment was completed with acceptance of documents and statements; a second revisional order under section 263 was passed ex parte; reassessment notices under section 148 and 142(1) were issued based on information alleging accommodation entries; the assessee denied transactions with the alleged provider; and ultimately, the ITAT allowed the assessee's appeal.

The Court found that the ITAT had thoroughly considered the facts and the procedural history and had not simply rejected the appeal without adjudication. The Tribunal's order was based on detailed factual analysis and appreciation of evidence, including verification of share capital transactions and rejection of unsubstantiated allegations of accommodation entries.

The Court emphasized that the ITAT's decision was supported by the factual findings and was not a mere procedural dismissal. Thus, the ITAT's approach was justified both in law and fact.

Issue (b): Distinction between issues under section 263 and reassessment under section 147

The revenue argued that the ITAT failed to recognize that the order under section 263 directed verification limited to identity, creditworthiness, and genuineness of share capital transactions, whereas reassessment under section 147 was initiated on a different issue-an alleged accommodation entry of Rs. 2,48,50,000 credited through layering by a third party.

The Court examined the reasons recorded by the assessing officer for reopening the assessment. It noted that the assessee's name did not appear specifically in the reasons, only as a beneficiary in a general description of enquiries. No specific allegations or documentary evidence were disclosed regarding the layering or the nature of the alleged accommodation entry transaction.

The Court found that the assessing officer failed to specify whether the alleged accommodation entry was income, expense, share capital, loan, or otherwise. The assessee had produced bank statements and books of accounts denying any transaction with the alleged provider. The detailed enquiry under section 131 and acceptance of explanations in the second round of assessment further supported the genuineness of the share capital transactions.

The Court held that the ITAT correctly observed that the reassessment proceedings under section 147 were not justified on the basis of vague and unsubstantiated allegations. The distinction between the limited scope of the section 263 order and the broader reassessment notice was material, and the ITAT's failure to entertain the revenue's appeal on this ground was justified.

Issue (c): Reliance on Supreme Court precedent regarding reassessment initiation

The revenue challenged the ITAT's reliance on a Supreme Court decision that dealt with the initiation of reassessment proceedings under section 147 pending proceedings under section 154, arguing that it was inapplicable to the facts of the present case.

The Court noted that the ITAT's reliance on the precedent was in the context of procedural propriety and the requirement of valid reasons for reopening assessments. The Supreme Court's principle that reasons for formation of belief must have a rational nexus with the alleged escapement of income was relevant and applicable.

The Court found no misapplication of the precedent by the ITAT. The principle that reopening must be based on relevant and material information directly linked to the belief of escapement was foundational and was rightly invoked by the Tribunal to assess the validity of the reopening.

3. Significant Holdings:

The Court upheld the ITAT's decision allowing the assessee's appeal and dismissing the revenue's appeal. The crucial legal reasoning includes the following verbatim excerpt from the Court's judgment:

"The reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts."

The Court confirmed the core principle that reopening of assessments under section 147 must be supported by specific, relevant, and material information forming a rational nexus with the belief of escapement of income.

The Court also established that multiple rounds of proceedings on the same issue must be based on fresh and cogent reasons; otherwise, the revisional powers under section 263 cannot be exercised repeatedly without justification.

On the facts, the Court concluded that the assessing officer failed to provide specific reasons or documentary evidence to justify reopening on the alleged accommodation entry. The assessee's production of detailed documents, bank statements, and statements under section 131 was accepted as demonstrating the genuineness of the transactions.

Accordingly, the Court found no substantial question of law arose and dismissed the appeal, thereby affirming the ITAT's order.