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2025 (7) TMI 505 - AT - Income TaxReopening of assessment u/s 147 - reasons to believe - independent application of mind or borrowed satisfaction - statements were recorded from alleged entry operators - What sufficient material on record AO had to prove that the assessee has concealed particulars of its income - HELD THAT - In the instant case the notice u/s 148 was issued. Certain statements were recorded from alleged entry operators by the Investigation Wing of the Income Tax Department which were forwarded to the ld AO and which alone triggered the initiation of reassessment proceedings of the assessee vide issuance of notice u/s 148 of the Act. Hence this is a clear case of borrowed satisfaction on the part of the ld AO. The statements recorded by the Investigation Wing were not forwarded to the assessee either by the Investigation Wing or by the ld AO in the readable format. It is pertinent to note that the certain impounded documents at the time of survey comprising blank share transfer forms undated delivery notes blank receipts of investing companies and power of attorney. It is not relatable to the year under consideration at all which facts has been duly appreciated by the ld CIT(A). Hence there is no question of making any addition on account of share capital or share premium during the year under consideration. In our considered opinion the ld CIT(A) had rightly deleted the same. AO had sought to reject the books of account of the assessee u/s 145(3) and proceeded to make several additions based on the very same books of account in the form of commission and sundry creditors - Having resorted to reject the books and resorting to estimating the profits from business no separate addition could be made on account of sundry creditors as they are also connected with the business. Hence the same has been rightly deleted by the ld CIT(A). Profit estimation of Rs. 50 lakhs was made by the ld AO based on the gross profit rate of 20% as against the declared gross profit rate of 11.3 % by the assessee - AO insisted for furnishing quarterly GP and NP rate which were not furnished by the assessee. Accordingly the estimated profit rate was made by the ld AO. Even if the books were rejected u/s 145(3) of the Act by pointing out certain defects the ld AO is duty bound to bring on record comparable instances depending the nature of business carried out by the assessee and resort to estimation of profit percentage. There is no question for making adhoc addition of Rs. 50 lacs directly. We hold that this is not a fit case for rejection of book results u/s 145(3) of the Act. Hence the estimation profit addition of Rs. 50 lacs has been rightly deleted by the ld CIT(A). The very basis of reopening is borrowed satisfaction and insufficient and incorrect information. Hence we hold that the ld CIT(A) had rightly quashed the reassessment proceedings in the instant case apart from deleting the addition on merits. Accordingly grounds raised by the revenue are dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Reassessment Proceedings under Section 147/148 Relevant legal framework and precedents: Section 147/148 of the Income-tax Act allows reopening of assessment if the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment. The validity of reopening depends on the existence of "reason to believe" based on tangible material on record. Borrowed satisfaction, i.e., relying solely on information or satisfaction recorded by another authority without independent application of mind, is impermissible. The law requires that the AO must independently form the belief based on material before him. Court's interpretation and reasoning: The AO initiated reassessment based on statements recorded by the Investigation Wing and certain impounded documents during a survey under section 133A. However, the statements were illegible and not properly furnished to the assessee, and the impounded documents were unrelated to the assessment year. The AO's reasons for reopening were essentially information received from the Investigation Wing without independent verification or documentary evidence relating to the relevant year. The CIT(A) found that the AO did not apply independent mind and that the reasons recorded were mere information, amounting to borrowed satisfaction. Key evidence and findings: The impounded documents (blank share transfer forms, undated delivery notes, blank receipts, power of attorney) were not connected to the relevant assessment year. The statements were illegible and not properly shared with the assessee, depriving the assessee of an opportunity to effectively challenge the reopening. The AO could not produce legible copies despite directions. Application of law to facts: The absence of clear, relevant, and contemporaneous documentary evidence and the reliance on illegible statements and unrelated documents meant that the AO lacked valid reasons to form the belief required for reopening. The reopening notice issued under section 148 was therefore invalid. Treatment of competing arguments: The Revenue argued that statements recorded from alleged entry operators justified reopening. However, the Tribunal noted that these statements were not properly furnished and were illegible, and the impounded documents were unrelated. The assessee's contention that these parties had no transactions with the assessee was accepted, negating any live link to income escape. Conclusion: The reassessment proceedings were rightly quashed by the CIT(A) for lack of valid reasons and independent application of mind by the AO. The reopening was based on borrowed satisfaction and insufficient material. Issue 2: Legitimacy of Additions on Account of Share Application/Share Premium Relevant legal framework and precedents: Additions on account of unexplained share application money or share premium require proof of genuineness of transactions and identity and creditworthiness of investors. Mere suspicion or information from third parties is insufficient. Court's interpretation and reasoning: The AO made additions totaling Rs. 3,82,49,000 on account of share application/share premium based on the impounded documents and statements. The CIT(A) observed that the impounded documents were not relatable to the relevant year and that the companies involved were earlier held to be entry operators with no established creditworthiness. The assessee failed to prove the genuineness of share subscription. Key evidence and findings: No documentary evidence was found during the survey for the relevant year. The AO's reliance on information from the Investigation Wing without independent verification was insufficient. Application of law to facts: Without credible documentary evidence and proof of genuineness, the addition on account of share application/share premium could not be sustained. Treatment of competing arguments: The Revenue relied on impounded documents and statements; the assessee challenged their relevance and connection to the year under consideration. The Tribunal sided with the assessee. Conclusion: The addition on account of share application/share premium was rightly deleted by the CIT(A). Issue 3: Rejection of Books of Account under Section 145(3) and Related Additions Relevant legal framework and precedents: Section 145(3) permits rejection of books of account if they are not maintained regularly or are inaccurate. However, if books are rejected, the AO must estimate income based on reliable and comparable data, not arbitrarily. Court's interpretation and reasoning: The AO sought to reject the books under section 145(3) and made additions on account of sundry creditors and estimated profits (Rs. 50 lakhs based on a 20% gross profit rate as against declared 11.3%). The CIT(A) noted that the AO made additions based on the same books he purported to reject, which is contradictory. Further, the AO failed to bring on record comparable instances or reliable data to justify the estimated profit addition. Key evidence and findings: The AO did not furnish quarterly gross profit and net profit rates as requested. The estimation was ad hoc and not supported by comparable business data. Application of law to facts: Rejecting books and simultaneously relying on them to make additions is inconsistent. Estimation of income must be based on sound data and comparable instances, which was absent here. Treatment of competing arguments: The Revenue justified estimation due to nondisclosure of quarterly profit rates. The Tribunal held that this did not justify arbitrary addition without supporting material. Conclusion: The additions on account of sundry creditors and estimated profits were rightly deleted by the CIT(A), and the rejection of books was not warranted. Issue 4: Overall Validity of Reassessment and Merits of Additions Court's interpretation and reasoning: Since reassessment proceedings were quashed for lack of valid reasons, there was no need to adjudicate other grounds on merits. The CIT(A) had also deleted the additions on merits. Application of law to facts: The reassessment being invalid, the additions made therein could not stand. Conclusion: The Tribunal upheld the quashing of reassessment and dismissal of additions, dismissing the Revenue's appeal. 3. SIGNIFICANT HOLDINGS The Tribunal held: "The reasons recorded by the Assessing Officer are mere information received from the ADIT (Investigation). No documentary evidence was found and impounded during the survey related to the year under consideration. The statement scanned and incorporated in the assessment order is illegible and the Assessing Officer could not locate the legible copy despite repeated directions. There is no evidence on the record to show that any incriminating documentary evidence was impounded during the survey for the year under consideration to hold that the share subscription is received from the entry operators." "The Assessing Officer referred to the information received from the ADIT(Investigation) and other directions as 'reasons' on the basis of which he proceeded to issue notice under section 148 of the Act. These cannot be the reasons for proceeding under section 147/148 of the Act. There is no evidence on the record to suggest that the Assessing Officer applied his mind to the information and independently arrived at the belief that on the basis of the material which he had before him income had escaped the assessment. Resultantly, the initiation of proceedings under section 147 and issuance of notice under section 148 of the Act are hereby quashed." Core principles established include:
Final determinations:
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