2025 (5) TMI 879 - AT - Income Tax

Reopening of assessment on the basis of approval granted by PCIT in mechanical manner without application of mind - information received from ITO Inv. Unit-1 Kolkata - unexplained cash credit u/s 68 - HELD THAT - There is no satisfaction recorded by the AO for formation of belief and the AO has done only reproduction of the information received and concluded on that basis. We note from the above that the AO has not applied his independent mind to the information received from ITO (Inv.) Kolkata. We observe that the information received was extracted in the reasons recorded as they were received even without verifying the same whether those were correct or not and the assessment was reopened u/s 147. We also observe that there was total non-application of mind by the AO to the information received and he has only acted on the basis of borrowed satisfaction to reopen the assessment which is not permissible under the Act. In our opinion the AO has to exercise powers as conferred upon him by section 147 r.w.s. 148 of the Act with great care and caution as by exercising the reassessment jurisdiction u/s. 147 the AO unsettles the already completed assessment putting the assessee to a huge inconvenience and harassment. In the present case the AO has incorrectly reopened the assessment by not even verifying the facts that there was no such bank account of the assessee with ICICI Bank. Therefore reopening of assessment is void ab initio and invalid in the eyes of law on the ground of non-application or independent application of mind to the information received from the wing as well as on barrowed satisfaction. Even on merit the case of the assessee is strong. The amounts have been received against sale of investments that were acquired in earlier year and duly disclosed in books of accounts and the returns of income. We note that the assessee in support of sale submitted copies of invoices ledger of parties bank statement highlighting receipt names addresses and PANs of the purchasers and their bank statements. There were no immediate cash deposits into their account. No defects have been found in the evidences adduced by the assessee. As such the assessee duly discharged its onus to prove the genuineness of the transactions. Moreover since the amount has been received against sale of investments the purchase of which has been accepted and therefore the amount received against sales cannot be doubted. The addition on account of Unexplained cash in hand was for the reason that the Ld. AO missed to consider the cash withdrawals from IDBI bank. Furthermore a cash flow statement duly certified by a Chartered Accountant was also filed in remand proceedings certifying that the assessee had made cash withdrawal from account at IDBI bank and also reconciled the cash in hand as on 31.03.2009. No adverse remarks have been made by Ld. AO. Considering these facts we are of the considered opinion that the even the addition on merit has been wrongly sustained by the ld CIT(A). Appeal of the assessee is allowed.

The core legal questions considered by the Tribunal in this appeal primarily revolve around the validity of reopening the assessment under section 147 of the Income-tax Act and the correctness of the additions made to the assessee's income on merit. The key issues are:

1. Whether the reopening of assessment was validly initiated by the Assessing Officer (AO) with proper satisfaction and independent application of mind, or whether it was based on borrowed satisfaction from information received without verification.

2. Whether the approval granted by the Pr. Chief Commissioner of Income Tax (Pr. CIT) for issuing notice under section 148 was given in a mechanical manner without application of mind, and whether the notice issued prior to receipt of such approval is valid.

3. Whether the reasons recorded by the AO for reopening were vague, ambiguous, and deficient in particulars such as details of transactions, dates, and parties involved, thereby rendering the reopening invalid.

4. On merit, whether the additions made by the AO treating amounts received as unexplained cash credits under sections 68 and 69 of the Act were justified, considering the assessee's explanation and supporting evidences.

Issue-wise Detailed Analysis:

Validity of Reopening under Section 147 - Application of Mind and Borrowed Satisfaction

The legal framework mandates that reopening of assessment under section 147 can only be done if the AO forms a genuine satisfaction that income has escaped assessment. This satisfaction must be based on tangible material and must reflect an independent application of mind. Borrowed satisfaction, i.e., mere reproduction of information received from other authorities without verification or independent scrutiny, is impermissible.

The Tribunal examined the reasons recorded by the AO which were essentially a verbatim reproduction of information received from the ITO (Investigation), Unit-1, Kolkata, stating that the assessee had received Rs. 3.64 crores after cash deposits in individual or proprietorship accounts maintained with ICICI Bank. The AO concluded that this amount escaped assessment without independently verifying the facts or details of transactions, parties, or dates. The AO also erroneously stated that the assessee had a bank account with ICICI Bank, which was factually incorrect.

The Tribunal found that the AO did not apply independent mind but merely acted on borrowed satisfaction, which is contrary to established precedents including the decisions cited by the assessee's counsel such as CIT vs. Insecticides (India) Ltd., Commissioner of Income-tax vs. SFIL Stock Broking Ltd., and PCIT vs. Meenakshi Overseas Pvt Ltd. These authorities emphasize that reasons recorded must disclose the AO's mind clearly and must be based on evidence, not mere conclusions or reproduction of investigation reports.

Consequently, the Tribunal held that the reopening was void ab initio due to non-application of independent mind, rendering the reopening invalid.

Validity of Pr. CIT's Approval and Timing of Notice under Section 148

The legal requirement is that prior approval of the Pr. CIT must be obtained before issuance of notice under section 148. The approval must be a considered satisfaction, not mechanical or routine.

The assessee contended that the approval letter dated 29.03.2016 was communicated to the AO after the notice under section 148 was issued on 28.03.2016, and that the approval was mechanical and without application of mind. The Tribunal observed that issuing notice prior to receipt of approval is irregular. Further, the approval itself was found to be mechanical as it merely stated satisfaction without elaboration.

The Tribunal relied on the decision of the Hon'ble Delhi High Court in Capital Broadways Pvt. Ltd. vs. ITO, which holds that mechanical approval without application of mind is invalid and vitiates the reopening. Thus, the approval and consequent notice issuance were held invalid.

Deficiency and Vagueness in Reasons Recorded

The reasons recorded by the AO lacked crucial particulars such as exact dates of transactions, mode of payments, identities of parties involved, and details of amounts received. The Tribunal emphasized that reasons must be clear, unambiguous, and self-explanatory to disclose the AO's mind and link the conclusion to evidence.

The Tribunal cited the Bombay High Court's decision in Hindustan Lever Ltd. vs. ACIT, which mandates that reasons cannot be supplemented or altered later and must stand on their own. The absence of such particulars and reliance on vague information rendered the reasons insufficient and inadequate for valid reopening.

Merits of Additions under Sections 68 and 69

On merits, the AO had made additions treating Rs. 11.55 crores received from sale of shares as unexplained cash credit under section 68, Rs. 4.86 crores as unexplained bank deposits under section 69, and Rs. 42 lakhs as unexplained cash in hand under section 68.

The assessee submitted detailed evidences including sale invoices, ledger accounts, bank statements, PAN details of parties, and confirmations from buyers. The AO conducted remand proceedings wherein 25 out of 29 parties responded to notices under section 133(6) furnishing necessary documents. The AO found no adverse findings against the genuineness of transactions.

The assessee also produced a cash flow statement certified by a Chartered Accountant explaining cash withdrawals and reconciling cash in hand. The AO did not dispute these evidences in remand proceedings.

The Tribunal concluded that the assessee had discharged the onus to prove the genuineness of transactions and that the additions on merit were unsustainable. The amounts received were against sale of investments acquired in earlier years and duly disclosed, and thus could not be treated as unexplained credits or deposits.

Treatment of Competing Arguments

The Revenue argued that the information received was clear and justified reopening and additions, and that detailed verification would be done during reassessment. The Tribunal rejected this, holding that the reasons recorded must themselves demonstrate satisfaction and independent mind, not be a mere starting point for investigation.

The Revenue's reliance on the information as sufficient was held inadequate, and the Tribunal emphasized that reopening is a serious step requiring cogent reasons and independent application of mind, which were absent here.

Conclusions

The Tribunal quashed the reopening of assessment as invalid and void ab initio due to non-application of independent mind, borrowed satisfaction, defective and vague reasons, and invalid approval by the Pr. CIT. The consequential order passed under section 147 was also set aside.

On merits, the Tribunal held that the additions made by the AO were not justified as the assessee had satisfactorily explained the sources of funds with documentary evidence and the AO's findings on remand did not disprove the genuineness of transactions.

The appeal was accordingly allowed in favor of the assessee.

Significant Holdings:

"The reopening of assessment cannot be allowed on the basis of sanctity, vague reasons, wherein the ld. AO has not mentioned in the reasons recorded the details of transactions and also the details of persons / entity from whom the money was received by the assessee."

"The AO has not applied his independent mind to the information received from ITO (Inv.), Kolkata. The information received was extracted in the reasons recorded as they were received even without verifying the same whether those were correct or not and the assessment was reopened u/s 147 of the Act."

"The reasons recorded by the Assessing Officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. The reasons are required to be read as they were recorded by the Assessing Officer. No substitution or deletion is permissible."

"The Assessing Officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment."

"The amounts have been received against sale of investments that were acquired in earlier year and duly disclosed in books of accounts and the returns of income... the assessee duly discharged its onus to prove the genuineness of the transactions."

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