Mere third party statement of accommodation entries not sufficient to reopen assessment

Mere third party statement of accommodation entries not sufficient to reopen assessment in the absence of any nexus of statement to alleged share applicants-ITAT

third party statement not sufficient to reopen

ABCAUS Case Law Citation:
ABCAUS 1279 (2017) (06) ITAT

The Grievance:
The appellant assessee was aggrieved by the order passed by the Commissioner of Income Tax  (Appeals) [CIT(A)] approving the reassessment framed by the Assessing Officer (‘AO’) u/s 147 and addition of Rs. Rs. 23 lacs u/s 68 of the Income tax Act, 1961 (‘the Act’) to the income of the assessee on account of bogus accommodation entries in the form of share application money.

Assessment Year : 2004-05
Date/Month of Pronouncement: June, 2017

Brief Facts of the Case:
There was a search operation conducted u/s 132 on a third person (‘third party’) who admitted to having provided accommodation entries in the form of gifts, loans and share application money from financial Year 1999-2000 to 2005-06 in exchange of cash against commission in the range of 2 – 3.5%.

It was seen that various concerns controlled by a particular person introduced unaccounted money in the form of shares allotted to the said third party and his family members.

Accordingly, The AO formed a belief that the share application money received by the appellant assessee company being part of the group company of the particular person was involved in introducing unaccounted money in the form of bogus share capital and consequently income assessable to tax has escaped assessment.

It was observed that the paid up capital and reserves increased by Rs. 39,15,048/- which led the AO to believe that the assessee introduced unaccounted income in the books in the form of bogus Share Application money / Share Capital. Accordingly, the case was reopened under Section 147 of the Act.

The assessee objected to reopening on the ground that no application money was ever received from the said third party/group during the relevant year. Further, the assessee explained that Share Application money of Rs. 23.00 Lacs was received from two applicants and to confirm the same, notices u/s 133(6) were issued to the two applicants and certain details were called from the assessee also.

However, the AO came to the conclusion that the said amount of Rs.23.00 Lacs was bogus transaction and therefore framed the assessment u/s 143(3) read with Section 147 by adding Rs. 23 lacs to the income of the assessee u/s 68.

Aggrieved, the assessee contested the same before CIT(A) who upheld the addition. Aggrieved, the assessee was in appeal before ITAT.

Contentions of the appellant assessee:
The reopening was challenged on legal ground by stating that the reopening had been done merely on the basis of the statement of a third party where the said party admitted to have entered into accommodation entries by way of share application money with the assessee in sharp contrast to the fact that the assessee never received any share application money from the said party / group in the impugned AY and therefore, the very basis of reopening stood vitiated and reflects non-application of mind on the part of the AO.

It was also submitted that on similar facts and circumstances, reopening had been quashed by the Tribunal in assessee’s own case for AY 2003-04.

Contention of the Respondent Revenue:
Departmental representative contended that the original return was processed u/s 143(1) and therefore, only one condition viz. reasons to believe that the income has escaped assessment was required to be fulfilled by the AO to initiate reassessment and nothing more which apparently had been fulfilled and therefore, the reopening was perfectly valid.

It was submitted that the third party categorically admitted to having provided accommodation entries in the form of Share Application money in exchange of cash, which in itself, was sufficient to reopen the assessment at the stage of reopening.

Observations made by the Tribunal:
The ITAT observed that it is well settled principle that the AO must be in possession of some tangible material so as to justify the reopening and that material should lead to formation of belief on the part of the AO that certain income has escaped assessment and also the material should have live link with the formation of the belief, which was missing in the instant case.

It was seen that from the material on record, it was clear that the assessee had not received any share application money from the said group rather it had received share application money from two different persons. The revenue could not bring on record any linkage of these two persons with the third party or his group.

It was observed that the only basis of initiating reassessment proceedings was the statement made by the third party who admitted to having advanced accommodation entries to the assessee in exchange for cash against commission. But, no nexus was found between his statements vis-à-vis assessee’s share applicants. Therefore, the ITAT opined that prima facie the primary condition of initiating reassessment proceedings in the instant case was not fulfilled.

The Tribunal set aside the assessment order as devoid of valid jurisdiction.

third party statement not sufficient to reopen

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