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In a recent judgment, Delhi High Court has ruled that re-opening of assessment u/s 147/148 of the Income tax Act, 1961 merely on the basis of report from Investigation Wing not justified where assessment u/s 143(2) had already been completed earlier and issue had already been examined.

Case Details:
ITA No. 356/2013 ; AY: 2001-02
Commissioner of Income Tax (Appellant) vs M/s Multiplex Trading & Industrial Co. Ltd  (Respondent)
Date of Order : 20-09-2015
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru

Facts of the Case(s):
The controversy relates to the reopening of assessment u/s 147/148 de notice dated 07-11-2008 in respect of transactions that had been previously examined and verified by him during the assessment proceedings u/s 143(2) and assessment order issued dated 31-12-2003. The assessment was re-opened based on information received by the AO from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators in the form of unsecured loans. The assessee challenged to the initiation of re-assessment proceedings as well as the addition made for unexplained credit. According to the Assessee, the reasons recorded were wrong; without application of mind; and there was no tangible evidence, which indicated that income of the Assessee had escaped assessment. However, AO did not dispose of the objections filed by the Assessee and proceeded to reassess the income of the Assessee by passing assessment order dated 31-12-2008, making an addition on account of unexplained cash credit u/s 68 in the name of Richie Rich. Both, the CIT(A) and the Tribunal rejected the order passed.

Excerpts from the Judgment:

The first and foremost issue to be addressed is whether the AO could assume jurisdiction to reopen the assessment based on the information received from the Investigation Wing of the department. It is now well settled that the AO can reopen the assessment if he has reason to believe the Assessee’s income has escaped assessment. However, his reasons to believe must not be based on surmises, conjectures or occasioned by change in opinion but must be based on some tangible and credible material on the basis of which a reasonable belief could be formed that income of an assessee has escaped assessment. The language of Section 147 requires the AO to have a reason to believe and not a reason to suspect. The reason to believe that income of an Assessee has escaped assessment must be bonafide and reasonable. It is also settled that the material on which the AO forms his opinion must not be the same material which had been considered at the time of the initial assessment, as in that case, the proceedings under Section 147 of the Act would amount to reviewing the assessment order merely on a change of opinion, which is not permissible.

By virtue of the proviso to Section 147 of the Act, an assessment, which has been concluded under section 143(3) of the Act - that is, the return filed by the Assessee was scrutinised and verified by the AO - cannot be reopened after the expiry of four years from the end of the relevant assessment year unless the condition as specified under the proviso to Section 147, is met; that is, the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return, either under Section 139(1) of the Act or pursuant to a notice under Section 142(1) of the Act, or is occasioned by the failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessment.

The Supreme Court in CIT v. Kelvinator of India Ltd.: 320 ITR 561 (SC) emphasised that the expression “reason to believe” as used in Section 147 of the Act must be read in context of the scheme of the Act and cannot be interpreted in a manner as conferring arbitrary power on the AO. Thus, such ‘reason to believe’ must be based on ‘tangible material’ and not on a change of opinion.

In the present case the material on the basis of which the AO has formed such opinion is a report from the Investigation Wing of the department. This would certainly be fresh material and cannot be considered to be the same material which was available with the AO at the time of initial assessment proceedings.

Indisputably, the issue regarding unsecured loans from Richie Rich had been examined by the AO in the initial assessment and the Assessee had provided all the necessary evidences to establish the genuineness of the transactions. In view of the same, it has been contended that the conditions as contained in the proviso to Section 147 have not been met as there has been no failure on the part of the Assessee to either file the return of income or to disclose fully and truly all material facts.

In CIT v. Burlop Dealers Ltd.: (1971) AIR 1635, the Supreme Court referred to the above passage from its decision in Calcutta Discount Company (supra) and held that if an Assessee has disclosed primary facts relevant to the assessment, he is under no obligation to instruct the Income Tax Officer about the inference, which the Income Tax Officer may draw from those facts.

The aforesaid decisions of the Supreme Court in Burlop Dealers Ltd. (supra) and ITO v. Madnani Engineering Works Ltd. (supra) were noticed by this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra). The Court has held that once the Assessee had disclosed all facts which have been examined by the AO during the assessment proceedings, it would not be open for the AO to allege that the Assessee had not truly and fully disclosed all material facts. In our view, the decision in the case of M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) must be understood in the context of the facts of that case. It is also relevant to note that in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) the reasons recorded by the AO did not even mention that the Assessee had failed to disclose truly and fully all material facts necessary for the assessment. The said decision cannot be read as an authority for the proposition that if the AO, based on tangible material obtained subsequent to the conclusion of the assessment, forms a belief that the income of an Assessee has escaped assessment on account of bogus entries passed by the Assessee in its books of accounts, the AO would, nonetheless, be precluded from reopening of the assessment after expiry of four years from the end of the relevant assessment year since the issue had been examined in the initial assessment.

In our view, the question whether the Assessee could have been stated to disclosed fully and truly all material facts have to be examined in the light of facts of each case and also the reasons that led the AO to believe that income of an Assessee has escaped assessment. In a case where the primary facts have been truly disclosed and the issue is only with respect to the inference drawn, the AO would not have the jurisdiction to reopen assessment. But in cases where the primary facts as asserted by the Assessee for framing of assessment are subsequently discovered as false, the reopening of assessment may be justified.

Assessee had not claimed to have received any funds from Richie Rich as share capital. Further, the Assessee had also provided confirmation of the loans received as well as other details, during the said proceedings. It would also be relevant to note that the loans availed had been returned through banking channels during the period and this was also confirmed independently to the AO. In the given circumstances, the least that was required for the AO was to independently apply his mind to ascertain that the information provided was credible and sufficient for drawing a reasonable inference that the income of the Assessee had escaped assessment on account of failure on the part of the Assessee to disclose truly and fully all material facts. Clearly, the examination of facts required at the threshold to form such a belief would be more detailed if the said transaction in question had already been subjected to scrutiny during the initial assessment.

In the present case, it does not appear that the AO applied its mind to the material available including the records of the earlier assessment proceedings. This is also apparent from the fact that during the assessment proceedings, the AO did not confront the Assessee with any new material or examine any other evidence other than what was already available in the initial assessment period.

There is yet another safeguard provided to the Assessee which was sought to be side-stepped by the AO. The Supreme Court in the case of G.K.N Driveshafts (India) Ltd. v. ITO: (2003) 259 ITR 19 (SC); (2003) 1 SCC 72 had held that if an Assessee if so desirous, could seek reasons for issuance of notice under Section 148 of the Act and the AO would be bound to furnish the same within a reasonable time. The Court further held that that the noticee would be entitled to file objections against the issuance of the notice and the AO would be bound to dispose of the same by passing a speaking order.

….. the objections filed by the Assessee were not disposed of by the AO and he proceeded to frame the assessment. This Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) had observed that the requirements regarding recording the reasons to believe; communicating the same to the Assessee; permitting the Assessee to file the objections; and passing a speaking order disposing of the objections are all designed to ensure that the AO does not reopen assessments, which have been finalized, on his mere whim and fancy and that he does so only on the basis of lawful reasons. It was further held that a deviation from the directions issued by the Supreme Court in G.K.N Driveshafts (India) Ltd. (supra) would entail nullifying the proceedings. ……… these requirements are an integral part of the safeguards which have been inbuilt for ensuring that the assessments are reopened only for lawful reasons and in a transparent manner. If the said safeguards are flouted, it would invalidate the exercise of jurisdiction under Section 147 and 148 of the Act.

Thus, although we are in agreement with the contention advanced by the Revenue that information received by the AO regarding passing of bogus entries in its books after the conclusion of the assessment proceedings could in certain circumstances, provide tangible material for AO to reopen assessment and assume jurisdiction, but, in the facts of the present case, we are unable to accept that it would be open for the AO to proceed on the basis that income of the Assessee had escaped assessment on account of the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment.

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Reopening Assessment u/s 147 148 based on information from Investigation Wing on Matters already Examined in Completed Regular Assessment | 16-10-2015 |

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