2025 (6) TMI 415 - HC - Income Tax

Reopening of assessment u/s 147 - reasons to believe - Assessee had obtained share capital from unsubstantiated subscribers - ITAT treating the assessment order passed u/s 147 r/w Section 143 (3) as void-ab-initio - specific and tangible material gathered during investigation proceedings conducted after a search and seizure action u/s 132 in the case of the Assessee group. Whether ITAT was correct in ruling that the Assessment Order passed by the AO was void ab initio even though the AO had formed his reason to believe for escapement of income based on enquiries conducted by the Income Tax Department and the statements of the Directors of the investors companies? - HELD THAT - In the present case the AO did not have any tangible material at the stage of issuance of the notice u/s 148 of the Act. His reasons for issuing the notice was based on certain information from Investigation Wing. The AO did not have any specific details regarding the income that was alleged to have escaped assessment. AO also did not undertake any enquiries to ascertain the facts that lead to form the reasons to believe that the Assessee s income had escaped assessment. It is also material to note that no incriminating material was found during the search conducted u/s 132 in the case of the Assessee and its related entities. The only information stated to have been found during the search was that the Assessee had issued shares at a premium during the previous year relevant to AY 2009-10. It is also not in dispute that during the original proceedings the AO had issued a questionnaire dated 21.06.2011 whereby the AO called upon the Assessee to submit the details of subscribers paid up capital and also the details of shares allotted during the year under consideration. Assessee had furnished the response to the said questionnaire and had submitted the share application money share application form proof of identity copy of PAN and copy of ITR as well as the bank statements of the share applicants. Thus the identity as well as the creditworthiness of the applicants was duly scrutinized. The copy of the ITR of the share applicants would reflect their capacity to subscribe to the shares. Thus the income declared by the companies could not furnish any reasons for the AO to believe that the Assessee s income had escaped assessment. In the present case the reasons recorded by the AO did not specify the names of any particular share applicants the details of the cheques or the amount paid. It is also necessary to note that issue of share capital and the details of various share holders had already been examined during the assessment proceedings. Therefore the AO was required to have some additional information beyond what had already been examined in order to form reasons to believe that the Assessee s income had escaped assessment. It is material to note that the CIT(A) had also examined the issues on merits and had found that the allegations that the Assessee had obtained share capital from unsubstantiated subscribers was not established. ITAT concluded that there was no failure on the part of the Assessee in disclosing fully and truly all material facts necessary for completion of the assessment. In the given facts there was no explanation recorded as to how the Assessee failed to make full true and all material disclosure of all the facts and therefore upheld the impugned order passed by the CIT(A). The conclusion of the ITAT must be read in the context that the fact the Assessee had furnished all information including the details of the share applicants PAN number as well as their ITRs to establish the genuineness and creditworthiness of the entities. The reassessment proceedings would indicate that same was examined during the original assessment proceedings. ITAT s finding regarding the requirement of clear recording as to how the Assessee had failed to truly disclose all material facts is required to be understood in the aforesaid context. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the learned ITAT was correct in treating the reassessment order passed under Section 147 read with Section 143(3) of the Income Tax Act, 1961 as void ab initio, despite the Assessing Officer (AO) having formed a reason to believe regarding escapement of income based on enquiries conducted by the Department and statements of directors of investor companies.

- Whether the reopening of assessment beyond four years from the end of the relevant assessment year was valid under the proviso to Section 147 of the Act, considering the requirement of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

- Whether the reasons recorded by the AO for reopening the assessment were based on tangible and credible material or were vague, general, and not confronted to the assessee, thus amounting to a change of opinion or mere suspicion.

- Whether the addition made under Section 68 of the Act on account of unexplained share capital and share premium received by the assessee was justified on merits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Reopening of Assessment under Section 147 beyond Four Years

Relevant Legal Framework and Precedents: Section 147 of the Income Tax Act empowers the AO to reopen an assessment if he has reason to believe that income has escaped assessment. However, the proviso to Section 147 restricts reopening beyond four years from the end of the relevant AY unless there is failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The Supreme Court in several decisions has held that reopening cannot be based on mere suspicion or change of opinion but must be founded on tangible and credible material. The AO must have bona fide and reasonable reasons to believe, not mere reasons to suspect.

Key precedents include CIT v. Multiplex Trading and Industrial Co. Ltd., which emphasized that reopening after four years requires specific failure of disclosure by the assessee, and Raymond Woollen Mills Ltd. v. ITO, which held that sufficiency of material for reopening is to be judged at the stage of reopening and not on merits.

Court's Interpretation and Reasoning: The Court examined the reasons recorded by the AO for reopening, which referred to enquiries by the Investigation Wing and statements of directors of investor companies alleging accommodation entries and bogus share capital. However, the reasons were found to be vague and general, lacking specific details such as names of companies, dates of enquiries, and particulars of incriminating material. The AO did not independently verify or confront the assessee with the material. The reasons also contained factual inaccuracies, including incorrect figures relating to share capital and premium.

The Court noted that the AO had already scrutinized the share capital details during the original assessment, where the assessee had furnished comprehensive documents including share application forms, PAN, bank statements, and income tax returns of the investing companies. No adverse inference was drawn at that stage, and the AO had accepted the genuineness of the documents.

Application of Law to Facts and Treatment of Competing Arguments:

The Revenue argued that the reopening was based on new tangible material unearthed during post-search investigations and statements of directors admitting to accommodation entries, thus satisfying the requirement of reason to believe. The assessee countered that no incriminating material was found during the search relating to share capital, and all relevant facts were disclosed during the original assessment. The Court found that the AO's reasons did not specify how the assessee had failed to disclose material facts and were based on unverified and untested information. The material was not confronted to the assessee, violating principles of natural justice.

Conclusion: The Court upheld the findings of the CIT(A) and ITAT that the reopening was invalid as the statutory conditions under the proviso to Section 147 were not satisfied. The reassessment order was rightly declared void ab initio.

Issue 2: Formation of Reason to Believe by AO Based on Investigation Wing Material

Relevant Legal Framework and Precedents: The AO must form a reason to believe based on credible and tangible material, not mere suspicion or information that is not independently verified. The Supreme Court in The Income-Tax Officer, I Ward, District VI, Calcutta v. Lakhmani Mewal Das clarified that reasons to believe cannot be conflated with reasons to suspect. Material must have a live nexus with the belief that income has escaped assessment.

Court's Interpretation and Reasoning: The AO relied heavily on information and statements obtained by the Investigation Wing, including assertions that many investor companies were paper companies providing accommodation entries. However, the Court found that the AO did not apply his own mind or independently verify the material. Statements of three persons recorded by the Investigation Wing, which formed the basis for adverse inference, were not confronted to the assessee, and no opportunity for cross-examination was provided, violating principles of natural justice and rendering such material inadmissible.

Application of Law to Facts and Treatment of Competing Arguments:

The Revenue contended that the investigation material and statements were sufficient to form a reason to believe. The assessee argued that such material was not part of the original assessment and was not confronted to them, thus not forming a valid basis for reopening. The Court agreed with the assessee, emphasizing that the AO's reliance on untested and unverified information without application of mind or confrontation was improper.

Conclusion: The Court found that the AO's reasons were based on vague, unverified material and mechanical acceptance of investigation reports, which was insufficient to form a valid reason to believe for reopening.

Issue 3: Whether the Assessee Failed to Disclose Fully and Truly all Material Facts Necessary for Assessment

Relevant Legal Framework and Precedents: The proviso to Section 147 requires that for reopening beyond four years, the assessee must have failed to disclose fully and truly all material facts. The Supreme Court in New Delhi Television Ltd. v. DCIT held that if the assessee has disclosed all primary facts and the AO has formed a view, reopening on the same material is impermissible. Sabh Infrastructure Ltd. v. ACIT emphasized that reasons must specify which facts were not disclosed.

Court's Interpretation and Reasoning: The Court noted that during the original assessment, the assessee had submitted extensive documentation regarding share capital and shareholders, which was accepted by the AO. The AO did not record any dissatisfaction or suspicion during the original assessment. The reasons for reopening did not specify any particular material fact that was not disclosed. The CIT(A) and ITAT found no failure on the part of the assessee to make full and true disclosure.

Application of Law to Facts and Treatment of Competing Arguments:

The Revenue argued that the disclosure was not true and complete as the nature of transactions was misrepresented, relying on precedents where false or misleading disclosures justified reopening. The assessee submitted that all relevant facts were disclosed and verified during the original assessment and that the reopening was an attempt to revisit the same material. The Court held that without specific identification of undisclosed facts, reopening was impermissible.

Conclusion: The Court upheld the concurrent findings that the assessee had not failed to disclose material facts fully and truly, and thus reopening was invalid.

Issue 4: Merits of Addition under Section 68 on Account of Unexplained Share Capital

Relevant Legal Framework and Precedents: Section 68 deals with unexplained cash credits, including share capital, where the assessee must explain the nature and source of such credits. The genuineness of the shareholders and creditworthiness is relevant. Judicial precedents hold that documentary evidence must be tested and the source of funds traced.

Court's Interpretation and Reasoning: The CIT(A) and ITAT examined the evidence submitted by the assessee, including incorporation documents, PANs, bank statements, income tax returns, and confirmations from shareholders. They found that many of the investor companies were registered NBFCs with RBI, had filed returns, and existed prior to the assessee's incorporation. The AO did not conduct independent inquiries with the respective AOs or ROC to disprove the genuineness. The statements relied upon by the AO were not confronted to the assessee and were recorded outside assessment proceedings without opportunity for cross-examination.

Application of Law to Facts and Treatment of Competing Arguments:

The Revenue contended that the share capital was from accommodation entry providers and thus bogus, relying on statements and investigation reports. The assessee countered that the evidence showed genuine investors and that no incriminating material was found during search or investigation. The Court found the AO's reliance on untested statements and vague enquiries insufficient to sustain the addition.

Conclusion: The addition under Section 68 was rightly deleted by the CIT(A) and upheld by the ITAT due to lack of substantiation and failure to comply with principles of natural justice.

3. SIGNIFICANT HOLDINGS

"The reasons recorded by the AO did not specify which material facts the assessee did not disclose during the original proceedings. The reasons contain scanty, general, vague observations and do not refer to any objective, tangible relevant material. No specific evidence has been highlighted to arrive at an opinion that either the companies are bogus and non-existent or the money received represented unaccounted income."

"The AO did not apply his own mind to the information and examine the foundation / accuracy of such material of the information. The AO accepted the plea on the basis of vague information in a mechanical manner. The reasons recorded reflect that the AO did not independently apply his mind to the information received from the Investigation Wing to arrive at a belief that income of the assessee company had escaped assessment."

"Any material collected at the back of the assessee and not confronted and no opportunity given to cross examine the same, such material cannot be relied upon against the assessee."

"Where the assessee had disclosed all primary facts and the AO had formed his view, subsequent proceedings on the same material are not sustainable merely because the revenue now seeks to draw a different inference."

"The reopening of assessment beyond four years from the end of the relevant assessment year requires a clear and specific recording of failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment."

Final determinations:

- The reassessment order passed under Section 147 read with Section 143(3) was void ab initio due to invalid assumption of jurisdiction.

- The AO did not have tangible and specific reasons to believe that income had escaped assessment beyond the material considered in the original assessment.

- The assessee had fully and truly disclosed all material facts necessary for assessment during the original proceedings.

- The addition under Section 68 on account of unexplained share capital was not sustainable on merits due to lack of substantiation and procedural infirmities.

- The appeal filed by the Revenue was dismissed.