Reopening u/s 147/148. Post mortem exercise of analysing materials will not cure an order invalid due to non satisfaction of jurisdictional requirement

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Reopening of a case u/s 147/148, a post mortem exercise of analysing materials produced subsequently will not cure an inherently defective reopening order from invalidity due to non satisfaction of jurisdictional requirement. ITAT Delhi has relied on Delhi High Court judgment and quashed the reassessment proceedings and allowed the legal issue in dispute raised by the Assessee

Case Law Details:
ITA No. 5273/Del/2013 Assessment Year : 2002-03
M/s Pankaj Gas Cylinders Ltd. vs. ACIT
Date of Order/Judgment : 03-05-2016

Important Judgments Referred:
ITA No. 545/2015  Pr. CIT-4 vs. G&G Pharma India Ltd. Delhi High Court

Brief Facts of the Case:
In the case of the assessee, the reassessment proceedings were initiated u/s 147 by issue of notice u/s 148 on the basis of information received from the Directorate of Investigation wherein it was stated that certain persons were indulged in providing accommodation entries/ bogus share application money / bogus capital gain and the name of the assessee appeared in the list of such beneficiaries as having received accommodation entry under the garb of share application money/ share capital. The Assessing Officer rejected all the contentions of the assessee and he treated an amount of Rs. 15 lacs shown by the assessee as share application money received from various parties as assessee’s undisclosed income adding it u/s. 68.

The assessee appealed before the CIT(A), challenging the validity of reassessment as well as the additions in dispute. However CIT(A) dismissed the appeal of the assesseee.

Contentions of the Assessee:
The assessee challenged the validity of reopening u/s. 148 of the Income Tax Act, 1961 by alleging that action of the AO was illegal, because it was lacking tangible material / reasonable cause and justification. The action of the Revenue Authorities was in absence of nexus between alleged information and tentative inference; non application of mind much less independent application of mind; total lack of clarity on nature of transaction in reasons recorded. 

Important Excerpts from ITAT Judgment:

we are of the view that AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. In our view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. Our view is supported by the following judgment/decision:-

Pr. CIT vs. G&G Pharma India Ltd. in ITA No. 545/2015 dated 8.10.2015 of the Delhi High Court wherein the Hon’ble Court has adjudicated the issue as under:-

“12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated: “I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money in its bank account by way of above accommodation entries.” The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: “it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries”. In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case. 

13. Mr. Sawhney took the Court through the order of the CIT(A) to show how the CIT (A) discussed the materials produced during the hearing of the appeal. The Court would like to observe that this is in the nature of a post mortem exercise after the event of reopening of the assessment has taken place. While the CIT may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the Assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity .

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