2025 (6) TMI 1987 - AT - Income Tax

Reopening of assessment u/s 147 - notice after the expiry of four years - period of limitation - assessment has been made u/s 153A - HELD THAT - First proviso to Section 148 of the Act as applicable at the relevant period where an assessment under sub-section (3) of section 143 or 148 has been made for the relevant assessment year no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Thus if two conditions first assessment has been made u/s 143(3)/148 of the Act and second four years from the relevant assessment year expired then action u/s 148 can be taken only on failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. Now in the instant case four years has been expired and an assessment has been made u/s 153A of the Act thus action u/s 148 can only be taken if there is failure on the part of assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year which is not even mentioned in the reasons recorded by the AO and such failure renders the entire proceeding vitiated. The same is thus quashed.

The core legal questions considered by the Tribunal in this appeal arising from the reassessment proceedings under Sections 147/148/153A of the Income Tax Act, 1961 for Assessment Year 2013-14 are as follows:

1. Whether the addition of Rs. 7,13,63,040/- made under Section 68 of the Act on account of unexplained cash credit received from M/s Truthful Devcon Pvt. Ltd. is justified, considering the assessee's claim of sale of shares and payment of tax on long-term capital gains.

2. Whether the reopening of assessment under Section 147/148 of the Act after completion under Section 153A is valid, particularly whether the Assessing Officer had "reason to believe" and complied with the statutory preconditions for reopening beyond four years, including the requirement of failure to disclose fully and truly all material facts.

3. Whether the approval granted under Section 151 for initiation of reassessment proceedings was valid and free from mechanical or non-application of mind, given alleged procedural and factual inaccuracies in the approval and reasons recorded.

4. Whether reliance on the investigation wing's report without independent verification or cross-examination of implicated persons renders the reassessment proceedings invalid.

5. The burden of proof and onus on the assessee to establish the genuineness, creditworthiness, and identity of the parties involved in the transaction under scrutiny.

Issue 1: Legitimacy of Addition Under Section 68 on Cash Credit from M/s Truthful Devcon Pvt. Ltd.

The legal framework requires that unexplained cash credits can be added to income under Section 68 unless the assessee satisfactorily explains the nature and source of such credits, including the identity and genuineness of the parties involved.

The AO found that the amount of Rs. 7,13,63,040/- credited from M/s Truthful Devcon Pvt. Ltd. was unexplained, relying on investigation reports that the company was a conduit for accommodation entries operated by entry operators. The AO noted that the assessee admitted receipt of the amount as consideration for sale of shares of M/s Saransh Developers Pvt. Ltd., but the AO doubted the genuineness of the transaction and the parties involved.

The assessee contended that the shares were legitimately sold, the management of the company was transferred, and long-term capital gains were declared and taxed at 20%. The CIT(A) examined the submissions and evidence, including the assessee's statement under Section 131 and the MCA filings showing transfer of shares and management. The CIT(A) noted that the AO's adverse findings against persons involved in the management did not directly implicate the assessee or negate the genuineness of the transaction.

On application of law to facts, the CIT(A) held that since the assessee had declared and paid tax on the long-term capital gains arising from the sale of shares, and there was no direct adverse finding against the assessee's transaction or the company sold, the addition under Section 68 was not justified. The CIT(A) thus deleted the addition.

The Tribunal did not disturb this finding, effectively affirming that the assessee discharged the onus to explain the cash credit and that the transaction was genuine.

Issue 2: Validity of Reopening Assessment under Section 147/148 after Assessment under Section 153A

The reopening of assessment beyond four years from the end of the relevant assessment year requires, under the first proviso to Section 148, that the income chargeable to tax has escaped assessment due to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

The AO initiated reassessment based on information received from the Investigation Wing, Kolkata, alleging that M/s Truthful Devcon Pvt. Ltd.'s bank account was used for layering funds through shell companies controlled by entry operators. The AO recorded reasons to believe that the assessee had undisclosed income and obtained approval under Section 151 for reopening.

The assessee challenged the reopening on grounds that no new material was available beyond what was examined during assessment under Section 153A, that the reopening was a mere change of opinion, and that the reasons recorded did not specify failure to disclose fully and truly all material facts, a mandatory precondition for reopening after four years.

The CIT(A) upheld the reopening, holding that the information from the Investigation Wing constituted new material, and that the AO had sufficient tangible material to form a reason to believe. The CIT(A) rejected the contention of borrowed satisfaction and change of opinion.

However, the Tribunal analyzed the statutory provisions and judicial precedents extensively. It noted that the assessment under Section 153A was completed on 30.12.2018, and the reassessment notice under Section 148 was issued on 30.03.2019, beyond four years from the end of the assessment year. Therefore, the first proviso to Section 148 applied.

The Tribunal emphasized that the proviso requires a failure by the assessee to disclose fully and truly all material facts, and that such failure must be recorded in the reasons for reopening. The Tribunal found that the reasons recorded by the AO did not mention any such failure on the part of the assessee. The AO's reasons merely referred to information received from the Investigation Wing without demonstrating nondisclosure by the assessee.

Accordingly, the Tribunal held that the reopening was invalid and vitiated for non-compliance with the statutory precondition, rendering the reassessment proceedings null and void.

Issue 3: Validity of Approval under Section 151 and Non-application of Mind

The approval of the Principal Commissioner of Income Tax (PCIT) under Section 151 is a prerequisite for reopening assessments beyond four years. The approval must be based on application of mind and must record satisfaction with the reasons for reopening.

The assessee contended that the approval was mechanical and non-application of mind, pointing out that mandatory fields in the approval form were left blank or incorrectly filled, such as prior assessment details and income figures. The approval memo lacked any indication of consideration of the material or reasons.

The assessee relied on judicial precedents holding that mere rubber-stamping without reasons or consideration renders the approval invalid.

The Tribunal, while permitting the assessee to raise this ground despite not appealing earlier, found merit in the contention that the approval was a mechanical exercise without application of mind, as the approval did not address inconsistencies or errors in the reasons recorded. This procedural lapse further vitiated the reassessment proceedings.

Issue 4: Reliance on Investigation Wing's Report without Independent Verification or Cross-Examination

The AO relied heavily on the report from the DDIT (Investigation Wing), Kolkata, which alleged that the company M/s Truthful Devcon Pvt. Ltd. was used for accommodation entries. The AO did not independently verify the transactions or cross-examine the persons implicated, such as Shri Ashish Begwani, whose statement was relied upon.

The assessee argued that this reliance without opportunity for cross-examination violated principles of natural justice and rendered the reassessment invalid.

The Tribunal noted that judicial precedents require that adverse findings based on statements or reports must be tested by cross-examination or independent verification. The failure to do so was fatal to the reassessment proceedings.

Issue 5: Onus on Assessee to Prove Genuineness, Creditworthiness, and Identity

The legal position is settled that the assessee bears the onus to prove the identity, genuineness, and creditworthiness of the parties involved in unexplained cash credits under Section 68.

In the instant case, the assessee furnished evidence of shareholding, transfer of management, tax payment on declared long-term capital gains, and statements explaining the transactions. The CIT(A) accepted these explanations, and the Tribunal did not disturb this finding.

Thus, the onus was held to be satisfactorily discharged by the assessee.

Significant Holdings:

"In view of our finding on legal issue, the other grounds have become academic and need no adjudication."

"Where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year."

"The reasons must have a live link with the formation of the belief."

"The approval granted under section 151 thus runs contrary to the ratio of judgment of the Hon'ble Bombay High Court in the case of Smt. Kalpane Shantilal Haria. The Pr.CIT has been weighed and endorsed the action of reopening under section 151 apparently without any application of mind to such deficiencies in approval memo."

"The failure to record in the reasons that the assessee has failed to fully and truly disclose the facts (first proviso to section 147), which is a condition precedent for reopening of assessments beyond a period of four years for already assessed assessments, renders the entire proceeding vitiated."

"The assessee sold shares and transferred the management of the company and has also paid tax on the Long Term Capital Gain earned on sale of shares which was 20% of the LTCG. Therefore, it cannot be justified to hold the appellant beneficiary of the accommodation entry through M/s Truthful Devcon Pvt. Ltd."

The Tribunal ultimately quashed the reassessment proceedings on the ground that the reopening was invalid for non-compliance with statutory preconditions, including failure to record nondisclosure of material facts, and on procedural grounds including mechanical approval under Section 151. The Tribunal upheld the deletion of addition on merits, recognizing the genuineness of the share sale transaction and tax compliance by the assessee.

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