CIT(A) reduced income on appeal which showed non application of mind by AO in recording reasons

CIT(A) reduced income on appeal which clearly showed non application of mind by AO while recording the reasons, which made reopening bad in law

ABCAUS Case Law Citation:
ABCAUS 3244 (2020) (02) ITAT

Important case law relied upon by the parties:
Ganga Saran & Sons P. Ltd. Vs. ITO (1981) 130 ITR 1 (SC)
PCIT Vs. Meenakshi Overseas Ltd. 395 ITR 677(Del.)
DCIT Vs. Greal Wall Marketing Pvt. Ltd.
Shri Raj Kumar Goel Vs. ITO ITA
Classic Flour & Food Processing Pvt. Ltd. Vs. CIT
Jet Airways (I) limited 331 ITR 236 (Bom),
PCIT Vs. Shodiman Investments (P) Ltd. (2018) 93 153 (Bom)
KSS Petron Pvt. Ltd. Vs. ACIT
PCIT Vs. Tupperware India Pvt. Ltd. (2016) 236 Taxman 494
DCIT Vs. National Bank for Agriculture and Rural Development

In this case, appeal was filed by the assessee against the order passed by the Commissioner of Income Tax (Appeals) arising out of an assessment order passed by the Assessing Officer (AO) u/s 147/143(3) of the Income Tax Act, 1961 (the Act).

The solitary grievance of the assessee in this appeal was that reopening of assessment by assessing officer u/s 147 of the Act was bad in law and therefore it should be quashed.

The return of the assessee was processed u/s 143(1) of the Act. Later on, the assessee’s case was reopened u/s 147/148 of the Act after recording the reasons.

In response to notice u/s 148 of the Act, the assessee filed his return of income. During the course of assessment proceedings, the assessee raised objection against the initiation of proceedings u/s 147 of the Act. The objection raised by the assessee was duly disposed of by the assessing officer.

The assessee had sold an immoveable property. The property was sold to to a Private Limited Company through its director. There was a large difference between the value as per stamp duty valuation and the sale consideration. Therefore, AO made addition on account of undisclosed long term capital gain (LTCG) to the tune of the difference.

Aggrieved by the stand so taken by the AO, the assessee carried the matter in appeal before the CIT(A) who dismissed the assessee’s technical ground of reopening u/s 147/148 of the Act and held that the AO had discharged his duty before initiating the re-opening proceedings u/s 147 of the Act. However, the CIT(A) also adjudicated the assessee’s appeal on merits observing the following

Before the Tribunal the assessee contended that the AO without application of mind, after receipt of information from ITO (hq.) simply reopened the assessment.

The Tribunal stated that when the validity of the order u/s. 147 of the Act depends upon the AO assuming jurisdiction as contemplated by law to make an order of assessment u/s. 147 of the Act and for that it is necessary that the conditions laid down in the said section viz., AO should record “reason to believe” that the income chargeable to tax for that assessment year has escaped assessment. If this condition is not satisfied at the first place, then it cannot be said that AO has validly assumed jurisdiction u/s. 147 of the Act.

Therefore, according to the Tribunal, the moot question for consideration was whether on the basis of the reasons recorded by the AO to reopen the assessment it could be said that AO on the basis of whatever material before it, had reasons which he had indicated in his “reasons recorded” which warranted holding a belief that income chargeable to tax had escaped assessment.

The Tribunal further stated that the reasons recorded by AO to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed while adjudicating the legal issue of AO’s usurpation of jurisdiction u/s. 147 of the Act.

The Tribunal observed that as per the reasons recorded by the AO, he after getting the information from the ITO(hq.) should apply his mind and to examine based on this information that income had escaped assessment. But the AO had not applied his mind and it was a borrowed satisfaction only. According to the Tribunal, based on the information, the AO ought to have conducted further enquiry to examine whether there was tangible material which suggested that income had escaped assessment, which he had not done, therefore based of the borrowed satisfaction he had reopened the assessment.

The Tribunal further stated that the reasons should not be recorded based on surmise and guess work. The AO in his reasons recorded stated that it appeared that agreement to sale were an afterthought. However, the AO failed to state in his reasons that how and why these agreements were an afterthought and did not have legal sanctions.

The Tribunal opined that as per the reasons recorded by the Assessing Officer there was actually no reason for him to have formed a belief about the escapement of any income of the assessee from the assessment, but the assessment was reopened by him to verify or to conduct further enquiry or to examine certain particulars furnished by the assessee in the return of income. The reasons recorded were based on information received and there was no independent application of mind by AO.

According to the Tribunal,  the information received could only be a basis to ignite/trigger “reason to suspect” for which reopening could not be made for further examination to be carried out by him in order to strengthen the suspicion to an extent which can form the belief in his mind that income chargeable to tax had escaped assessment.

Further, no quantification of income escaping assessment had been spelt out by the AO in the reasons recorded for justifying reopening u/s. 147 of the Act. Mere allegations leveled by the ITO(hq.) could only raise suspicion in the mind of the AO which was not the sufficient/requirement of law for reopening of assessment.

The Tribunal stated that the ‘reasons to believe’ is not synonymous to ‘reason to suspect’. ‘Reason to suspect’ based on an information can trigger an enquiry to find out whether there is any substance or material to substantiate that there was merit in the information adduced by the ITO(hq.), and thereafter the AO had to take an independent decision to re-open or not. And the AO should not act on dictate of any other authority because then it would be borrowed satisfaction.

The Tribunal also noted that aggrieved by the order of AO, the assessee had filed appeal before CIT(A), who directed the Assessing Officer to refer the matter to DVO. DVO estimated fair market value of property at a price less than the circle rate. Therefore CIT(A) directed the AO to compute the Long Term Capital gain by taking DVO valuation.

Thus, the alleged Income escaping assessment as per reasons recorded by AO was  reduced byt he CIT(A) which clearly showed that there was non application of mind by assessing officer, while recording the reasons, which made the reopening bad in law.

The Tribunal opined that the reasons recorded by AO did not stand the test as laid by plethora of judicial precedence which was necessary to assume jurisdiction u/s 147 of the Act. Therefore, the reasons recorded by the AO to justify reopening the assessment u/s. 147 failed and, therefore, the very assumption of jurisdiction to reassess the assessee failed

Therefore, the Tribunal quashed the reopening and consequent reassessment order framed.

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