Repetition in calculating amount of escaped income was non-application of mind by AO – High Court

Repetition in calculating amount of escaped income was non-application of mind by the AO who persisted with his mistaken belief in rejecting objections but also in adding the entire amount to the returned income – High Court

ABCAUS Case Law Citation:
ABCAUS 2412 (2018) 07 HC

The instant appeal was filed by the Income Tax Department (Revenue) against the order passed by the Income Tax Appellate Tribunal (‘ITAT’) in holding that the reassessment initiated u/s 148 of the Income Tax Act, 1961 (Act) was not justified in law.

The directorate of Income Tax (Inv.), had carried out an enquiry about the persons /companies engaged in the business of providing accommodation entries to various companies. Information has been received along with the statements of persons who had admitted that they were in the business of providing accommodation entries and they were not doing any business but were engaged in the activity of providing accommodation entries to other concerns. These persons used to issue cheques in lieu of cash received after deducting their commission and these cheques were generally issued as share application money/ unsecured loans.

As per the information received by the AO the assessee’s name appeared in the list of persons who allegedly received the accommodation entries.

The AO based on the report of the DIT(Investigation) served a notice on the assessee under Section 148 of the Act specifying an amount and stating that he had reasons to believe that amount of income specified had escaped assessment.

The objections raised by the Assessee were rejected by the AO and assessment order was passed under Section 144 read with Section 147 of the Act by making an addition of the amount specified in the notice u/s 148 to the declared income of the assessee.

The Assessee went in appeal before the CIT (A), who allowed the appeal filed by the assessee. The CIT (A) held that the re-opening of the assessment was “without any satisfaction, without verifying the information received from Directorate of Investigation” and that the “AO had not applied his mind. There was no satisfaction on the part of the AO regarding escapement of any income.

The ITAT dismissed the appeal of the Revenue. The ITAT concurred with the CIT (A) that the jurisdictional requirement for re-opening of the assessment under Section 147 read with Section 148 of the Act had not been satisfied. In particular, the ITAT observed that the AO had not given details what was stated by the so-called entry operators in respect of the entries related to the assessee. Further, from the table of accommodation entries as attached to the notice u/s 148, the ITAT found that there were five instances, where entries had been repeated.

The Hon’ble High Court observed that the in the reasons for reopening the assessment there was a repetition of at least five entries. In other words the total amount constituting the so-called accommodation entries was incorrect.

The Hon’ble High Court opined that on the face of reasons recorded, there was a non-application of mind by the AO. What was further unacceptable was that the AO persisted with his “belief” that the said amount had escaped assessment not only at the stage of rejecting the Assessee’s objections but also in the re-assessment proceedings where he proceeded to add the entire amount to the returned income of the Assessee which was a classic case of non-application of mind by the AO.

It was observed that in a recent judgment, the Court had observed that ‘reasons to believe’ are not in fact reasons but only conclusions, one after the other.

The Court held that the expression ‘accommodation entry’ was used to describe the information set out without explaining the basis for arriving at such a conclusion. The basis of the statement that the said entry was given to the assessee on his paying “unaccounted cash” was not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” was even more mysterious. Clearly the source for all these conclusions, one after the other, was the Investigation report of the DIT. Nothing from that report was set out to enable the reader to appreciate how the conclusions flow therefrom.

It was further observed that the crucial link between the information made available to the AO and the formation of belief was absent. The Court opined that the reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

The Court went on to state that the reopening of assessment under Section 147 is a potent power not to be lightly exercised. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of Section 147 (1) of the Act.

In view of the above, the Hon’ble High Court opined that that the reasons recorded by the AO for reopening the assessment under Section 147 of the Act did not meet the requirement of the law. The ITAT was, therefore, perfectly justified in confirming the order of the CIT (A) and holding the reopening of the assessment to be bad in law.

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