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Re-assessment proceedings cannot be initiated based merely upon certain loose documents found during Search proceedings: ITAT

2019-TIOL-1444-ITAT-PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’ PUNE

ITA No.1545/Pun/2015
Assessment Year: 2006-07

SPARCO ENGINEERING PVT LTD
12, BHOSALE NAGAR, PUNE CITY
MAHARASHTRA – 411007
PAN NO: AACCS3886A

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE – 2(3), PUNE

Sushma Chowla, JM & Anil Chaturvedi, AM

Date of Hearing: March 26, 2019
Date of Decision: June 07, 2019

Appellant Rep by: Shri Kishore Phadke
Respondent Rep by: 
Shri Sanjeev Ghei

Income Tax – Sections 143 & 148

Keywords – Reassessment – Scrap sale – Search operation

THE assessee company is stated to be engaged in the business of manufacturing of Automobile spare parts and stated to be a part of S.M. Auto Group of Companies. The assessee had filed its return declaring total income at Rs 24.42 lacs. During the course of search proceedings, it was noted by the AO that assessee company was generating unaccounted cash by way of under-invoicing the scrap generated during production activity. He pointed to the copy of the loose papers of the sale of scrap which are placed in the Paper Book. Further it was noticed by the AO that income had escaped and accordingly notice u/s 148 was issued served on the assessee. The assessee had raised objection against the notice u/s 148 which was rejected by the AO. Thereafter, the case was taken up for scrutiny and the assessment was framed u/s 143(3) read with section 148 and the total income was determined at Rs.36,12,680/-. On appeal, the CIT(A) dismissed the appeal of the assessee.

On appeal, the Tribunal held that,

Whether reassessment proceedings can be initiated merely on the basis of the some loose papers that were found during search & evidencing the sale of scrap – NO: ITAT

++ the issue in the present case is with respect to the validity of re-opening of assessment. The Tribunal find that the Co-ordinate Bench of the Tribunal in the case of S.M. Auto Engineering Pvt. Ltd. while holding the re-opening of assessment to be bad in law has observed “…. the basic requirement of section 147 is that the AO should have ‘reasons to believe’ that the income chargeable to tax has escaped assessment. The reasons to believe as envisaged in section 147 should be of the AO and not borrowed from any other authority. The AO has to form an opinion from fresh material in his possession that there has been escapement of income. The reasons recorded does not spell out that any income chargeable to tax has escaped assessment for assessment year 2006-07. Thus, assuming jurisdiction by the Assessing Officer u/s. 147 for reopening the assessment is bad in law….” respectfully following the order of the Co-ordinate Bench of the Tribunal in the case of assessee’s sister and for similar reason hold that re-opening of assessment is invalid and therefore Tribunal set aside the order of reassessment.

Assessee’s appeal allowed

Case followed:

S.M. Auto Engineering Pvt. Ltd. (in ITA No.656/PUN/2015 vide order dated 25.04.2018)

ORDER

Per: Anil Chaturvedi:

1. This appeal filed by the assessee is emanating out of the order of Commissioner of Income Tax (A) – 12, Pune dated 14.10.2015 for the assessment year 2006-07.

2. The relevant facts as culled out from the material on record are as under :-

Assessee is company stated to be engaged in the business of manufacturing of Automobile spare parts and stated to be a part of S.M. Auto Group of Companies. Assessee had filed its return of income on 20.10.2006 declaring total income at Rs.24,42,925/-. A search and seizure action was carried out on 22.08.2012 wherein the modus operandi of under invoicing of scrap sale was detected. From the findings of search action, it was noticed that income had escaped assessment and accordingly notice u/s 148 of the Act was issued on 28.03.2013 and was served on the assessee. In response to the aforesaid notice, assessee vide letter dt.23.04.2013 submitted that the return of income filed on 20.10.2006 may be treated as return of income in response to notice u/s 148 of the Act. Thereafter, the case was taken up for scrutiny and assessment was framed u/s 143(3) r.w.s. 148 of the Act vide order dt.10.03.2014 and the total income was determined at Rs.36,12,680/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A) who vide order dated 14.10.2015 (in appeal No.PN/CIT(A)-12/DCIT Cent Cir 2(3), Pune/340/2014-15) dismissed the appeal of the assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before us and has raised the following grounds :

“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that the reopening of the assessment and the assessment framed u/s. 143(3) r.w.s. 147 are valid.

Looking to the facts and in the circumstances of the case and in law the Appellant submits that Learned CIT(A) ought to have held that the reopening of the assessment and the assessment framed u/s. 143(3) r.w.s. 147 were invalid and ought to have quashed the same.

2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs. 11,69,753 on account of Alleged Unaccounted Scrap Sales.

Looking to the facts and in the circumstances of the case and in law the Appellant submits that Learned CIT(A) ought to have held that the said additions made by the A.O. is incorrect and invalid and ought to have deleted the same.”

3. All the grounds being inter connected are considered together.

4. Before us, Ld.A.R. submitted that the reasons for re-opening of the assessment was on the basis of Report of Investigation Wing wherein it was noted that during the course of search proceedings, evidence was found to the effect that assessee company was generating unaccounted cash by way of under-invoicing the scrap generated during production activity. He pointed to the copy of the loose papers of the sale of scrap which are placed in the Paper Book. He submitted that the AO has recorded to have reason believe that income assessable to tax in excess of Rs.11 lakhs had escaped assessment during the year under consideration. He submitted that assessee has raised objection against the notice u/s 148 of the Act which was rejected by the AO vide order dated 04.01.2014 and the copy of the order is placed at Page 65 of to 80 of the Paper Book. He submitted that on the basis of the same loose papers that were found, re-opening of assessment was also made in the case of assessee’s sister concern i.e., M/s. S.M. Auto Engineering Pvt. Ltd., by issuing notice u/s 148 of the Act. He submitted that the same papers were referred in the case of its sister concern i.e., S.M. Auto Engineering Pvt. Ltd., also. In case of S.M. Auto Engineering Pvt. Ltd., the Co-ordinate Bench of the Tribunal (in ITA No.656/PUN/2015 vide order dated 25.04.2018) has held re-opening of assessment to be bad in- law. He placed on record the copy of the aforesaid order. He therefore submitted following the order of ITAT in case of assessee’s sister concern i.e., S.M. Auto Engineering Pvt. Ltd., the re-opening of assessment made in the case of assessee also needs to be held to be invalid. Ld. D.R. on the other hand supported the order of AO and Ld.CIT(A).

5. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to the validity of re-opening of assessment. Before us, it is the submission of Ld.A.R. that on the basis of same loose documents the case was re-opened in the case of S.M. Auto Engineering Pvt. Ltd. the sister concern of assessee and the Tribunal had held the reassessment to be not in accordance with law and therefore set it aside. The aforesaid contention of Ld.A.R. has not been controverted by Revenue. We find that the Co-ordinate Bench of the Tribunal in the case of S.M. Auto Engineering Pvt. Ltd., (supra) while holding the re-opening of assessment to be bad in law has observed as under :

“9. The basic requirement of section 147 is that the Assessing Officer should have ‘reasons to believe’ that the income chargeable to tax has escaped assessment. The reasons to believe as envisaged in section 147 should be of the Assessing Officer and not borrowed from any other authority. The Assessing Officer has to form an opinion from fresh material in his possession that there has been escapement of income. If the reasons have been recorded by the Assessing Officer without mentioning the fresh material in his possession which gives him reasons to believe that income has escaped assessment. The DR cannot improve the case of Revenue by interpreting or supplementing reasons recorded.

10. The Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax VS. Meenakshi Overseas (P.) Ltd. (supra) has held that where the assessment is reopened on the basis of information received from DIT(I) and there is no independent application of mind by Assessing Officer and the reasons failed to demonstrate link between the tangible material and formation of reason to believe that income has escaped assessment, reassessment is not justified. The relevant extract of the observations of Hon’ble High Court are as under :

“26. The first part of Section 147 (1) of the Act requires the AO to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre- condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment.”

11. In the present case, we find that the reasons recorded by the Assessing Officer does not speak of any fresh material in possession of Assessing Officer linking with the escapement of income, if any during assessment year 2006-07. We are of considered view that the reasons recorded does not spell out that any income chargeable to tax has escaped assessment for assessment year 2006-07. Thus, assuming jurisdiction by the Assessing Officer u/s. 147 for reopening the assessment is bad in law. We do not find any infirmity in the order of Commissioner of Income Tax (Appeals) in holding the reassessment proceedings as invalid. Accordingly, the impugned order is upheld and the appeal of Revenue is dismissed being devoid of any merit.”

6. Before us, no distinguishing feature in the facts of the present case or that of assessee’s sister concern i.e., S.M. Auto Engineering Pvt. Ltd., has been pointed out by Revenue. Further Revenue has also not placed any material to demonstrate that the order of Tribunal in assessee’s sister concern i.e., S.M. Auto Engineering Pvt. Ltd., has been set aside/stayed or overruled by Higher Judicial Forum. In view of the aforesaid facts, we following the order of the Co-ordinate Bench of the Tribunal in the case of assessee’s sister concern i.e., S.M. Auto Engineering Pvt. Ltd.. and for similar reason hold that re-opening of assessment is invalid and we therefore set aside the order of reassessment. Thus, the grounds of assessee are allowed.

7. In the result, the appeal of assessee is allowed.

(Order pronounced on 07.06.2019)

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