Without further examining info from Investigation, AO can not conclude that income escaped assessment

AO should examined return of income and carry out initial investigation before coming to the conclusion that income has escaped assessment – ITAT

ABCAUS Case Law Citation:
ABCAUS 2680 (2018) (12) ITAT

Important Case Laws Cited/relied upon:
M/s. Allied Gems Corporation
PCIT v/s M/s Shodiman Investments P Ltd.
Narain Dutt Sharma v. Income-tax Officer
M/s Shodiman Investments

The instant appeal was filed by the assessee against the order of CIT(A) in rejecting the objection of the appellant in connection with recording of wrong facts for initiation of reassessment proceedings.

The Assessing Officer (AO) based received information from the Investigation Wing of the department about a search conducted on a business group wherein it was inferred that the appellant assessee was beneficiary of accommodation entries. The AO also observed that the assessee did not file her original return and hence notice u/s 148 of the Income Tax Act, 1961 (the act) was issued.

During scrutiny proceedings, the appellant was asked to prove genuineness of purchases made from the searched parties. In response, the appellant submitted copies of the bills, bank statements, stock records etc.

The AO alleged that he had sent his Inspector to the office address of the above named party where no such office was found and hence the AO inferred that the appellant had purchased goods from some other party and took accommodation bills from the above named party.

Accordingly he disallowed a sum of 25% of alleged unverifiable purchases and added the same to income of the appellant.

The appellant objected to reopening before AO which was rejected by him by stating that in the information received, he only had the name of the proprietory concern of the assessee and did not have details about PAN and name of proprietor and hence in the reasons, it was mentioned that the assessee did not file original return.

The CIT (A) reduced the disallowance to 15% and granted relief for 10% of such purchases.

The assessee submitted that as per the reasons recorded for reopening, the AO stated that the appellant did not file her original return u/s 139(1) on the basis of AST system of the department whereas the correct fact was that the appellant had filed her regular return. It proved that the AO acted merely on the basis of information passed on by Investigation wing and he did not apply his mind before issuing notice u/s 148 of the Act.

It was also submitted that the information for transaction of purchases from searched party was received by the AO from Investigation wing but after receiving the same the AO did not make any independent enquiry about the true facts of the case and therefore, it had been wrongly observed that no return was filed by the assessee. Therefore the notice so issued was purely on the basis of receipt of certain information and merely on this basis the case was reopened. Under such circumstances all the proceedings undertaken u/s 147 & 148 were liable to be quashed.

It was also contended the proceedings were undertaken beyond four years of the end of the relevant year and there was no failure on the part of the assessee in disclosing all relevant facts.

The Tribunal observed that the Assessing Officer (AO), had not just formed an opinion but has finally concluded that the assessee has benefitted by obtaining accommodation entries on the basis certain information received from the Investigation Wing alone.

It was also observed that the AO had stated that since the assessee had not filed the return of income as per AST system of the department, he had reasons to believe that income had escaped assessment.

The Tribunal opined that such an approach of the AO where, based on information received in context of a third party, even before issuance of notice u/s 148 had concluded that assessee has obtained accommodation entries and income to that extent has escaped assessment is not a correct approach in the eyes of law.

The Tribunal noted that it was an undisputed fact that the assessee had filed return of income showing purchases and which were the only purchases during the year and which were alleged to be accommodation entry as per the reasons issued u/s 148 of the Act. The assessee had shown the corresponding sales and reported a gross profit of 8.66%.

The Tribunal stated that as held by the Hon’ble High Court, the material in possession of the AO had to be further linked by any reason to come to conclusion that the assessee had indulged in any activity which could give rise to reason to believe that income chargeable to tax has escaped assessment.

Unless the AO carries out the further examination after receipt of initial information from the Investigation wing, he can not conclude that income has escaped assessment.

The Tribunal observed that it was a fact that the assessee had filed her return of income. The AO should have examined her return of income and carried out initial investigation before coming to the conclusion that income has escaped assessment.

In the entirety of facts and circumstances of the case, the Tribunal held that the notice issued under section 148 cannot be sustained and the same was held to be bad in law. Accordingly, the reassessment proceedings were quashed and set-aside.

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