Forming opinion on the basis of information received by Investigation wing not satisfaction of the AO to reopen the case u/s 147 – ITAT

Forming opinion on the basis of information received by Investigation wing does not amount to satisfaction of the AO to reopen the case u/s 147 – ITAT

ABCAUS Case Law Citation:
975 2016 (07) ITAT
Assessment Year: 2004-05
Date/Month of Judgment: July 2016

Important Case Laws/Judgments  Cited:
Pr. Commissioner of Income Tax- 4 vs. G & G Pharma Limited (Delhi High Court)
Chhugamal Rajpal vs. S.P. Chaliha – (1971) 79 ITR 603 (SC)
USG Buildwell Pvt. Ltd. vs. ACIT ITAT Delhi
ITO vs. M/s. Roopali Marketing Ltd. ITAT Delhi

Brief Facts of the Case:
Reassessment proceedings u/s 147/148 of the Income Tax Act, 1961 were initiated against the appellant assessee company on the basis of information received from the Investigation Wing, New Delhi that assessee was one of the beneficiaries of the bogus accommodation entries.

The AO from the bank statement noticed that prior to clearance of cheques issued to the assessee company there were credit entries of approximately equivalent amount in cash and in none of the accounts, there was sufficient balance on any day but the cheques have been honoured by way of cash deposit or transfer entry.

According to the AO, the onus lied on the director of the private limited companies from where funds were arranged to prove the identity, genuineness and creditworthiness of the funds of such provider u/s 68 and the assessee has failed to produce such persons for cross-examination nor furnished any document. AO held that it was established by Investigation Wing that the parties with whom the assessee had transactions operate through paper companies and have no real identity. Accordingly, he treated the amount received as assessee’s income from undisclosed sources and made addition u/s 68.

Assessee carried the matter before the CIT (A) who has dismissed the appeal.

Question before the Tribunal:
Whether the AO can initiate proceedings u/s 147/148 of the Act on the basis of certain communication received from his superior revenue authorities, namely, Addl. Director of Income-tax (Inv.), Unit-1, New Delhi showing that the assessee has been provided with accommodation entry ?

Contentions of the Assessee:
The assessee contended that the AO without applying his mind and without being satisfied himself as required u/s 147 of the Act proceeded to reopen the proceedings which are bad in law.

Observations made by the Tribunal:
The Tribunal observed that as a settled principle of law the AO is required to reach at an independent conclusion by applying his own mind that he has reason to believe that the income of the assessee has escaped assessment to assume the jurisdiction for reopening of the assessment u/s 147 / 148 of the Act.

Held:
The Tribunal quashed the initiation of the proceedings u/s 147 for reopening and consequent assessment framed u/s 143(3)/ 147 on account of being not sustainable in the eyes of law on the following grounds:

(i) AO merely acted in mechanical manner on receipt of information from Addl. Director of Income-tax (Inv.), Unit-1, New Delhi that he has reason to believe that incomehas escaped assessmentdue to failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment;

(ii) forming an opinion merely on the basis of information supplied to the AO by Addl. Director of Income-tax (Inv.), Unit-1, New Delhi that an entry operator had provided accommodation entries to the assessee did not amount to satisfaction of the AO to reopen the case u/s 147;

(iii) before initiating the proceedings u/s 147/148, the AO had not preferred to examine the entry operator even on whose alleged statement, Addl. Director Income-tax (Inv.) sent intimation rather taken his statement as gospel truth.

(iv) AO has candidly incorporated in assessment order that, “it is established by Investigation Wing that the parties with whom the assessee had transactions operate through paper companies and have no real identity.” and this fact proved that he had not preferred to investigate the matter himself to reopen the case.

(v) In view of the law laid down by the Hon’ble Supreme Court and Delhi High Courts in Chhugamal Rajpal vs. S.P. Chaliha and G & G Pharma India Ltd., the initiation of proceedings u/s 147 was itself bad in law.