Reassessment invalid if not proved that advance received was undisclosed income : ITAT

ORDER

Pramod Kumar, Accountant Member – This appeal is directed against the order dated 9th December 2010, passed by the CIT(A) in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 for the assessment year 1997-98.

2. Grievance of the assessee, in substance, is that, on the facts and in the circumstances of the case, learned CIT (A) ought to have held that the reassessment proceedings are vitiated in law, and, in any event, the CIT (A) was also in error in upholding the addition of Rs. 65,91,503 received as advance against export of films.

3. Let us take up the question of validity of the reassessment proceedings first. In this case, the reasons, as recorded by the Assessing Officer for reopening of assessment, are as follows:

28.3.2001

Assessment records shows Rs. 86,91,503 to have received as advance against film exports. During the course of assessment proceedings of assessment year 1998-99, assessee filed copy of certificate dated 6.7.1998 of OBC. However, no documents have been submitted in support of nature, purpose and name of the payer. In absence of these documents or evidence, the amount claimed as advance has escaped assessment.

Sd/xx

Assessing Officer

4. The grievance against the reopening of assessment was taken up, for the first time, before this Tribunal when matter travelled in appeal before this Tribunal in the first round of proceedings. While the Tribunal admitted the said grievance, matter was remitted, for examination of the plea on merits, before the CIT (A). Learned CIT (A), in the impugned order, upheld the reassessment proceedings by observing as follows:

“6.9 It is settled law that the reason to believe is subjective and since the belief is that of the AO, the sufficiency of reasons for forming the belief is not to be judged so long as it is based on relevant material (Phool Chand Bajrang Lalv. ITO (1993) 203 ITR 456 (SC). A perusal of the reasons quoted by the AO in his remand report dated 28.07.09, shows that the appellant showed advances received amounting to Rs. 86,91,503/-. During asstt. Proceedings for A Y 98-99, a copy of a certificate from bank was filed but no documents were submitted showing the nature or purpose of advances and the name of the payer. Therefore, there was reason to believe that the advances received were unexplained. Since the advances were received in AY 97-98, the AO had reason to belief that income had escaped assessment. In view of these facts, his belief cannot be said to be based on irrelevant material.”

5. The assessee is aggrieved and is in appeal before us.

6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

7. It is well settled in law that reasons, as recorded for reopening the reassessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor anything can be deleted from the reasons so recorded. Hon’ble Bombay High Court, in the case of Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332 has, inter alia, observed that “….. It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons.” Their Lordships added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….”. Therefore, the reasons are to be examined only on the basis of the reasons as recorded. The next important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment, all that is necessary is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. While dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hon’ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437

“the reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.”

8. Let us, in the light of this legal position, revert to the facts of the case before us. All that the reasons recorded for reopening indicate is that the assessee had received advance of Rs. 86,91,503 in the previous year relevant to the assessment year 1997-98, but the mere fact that the assessee had received this advance does not imply, or even suggest, that it constitutes an income which has escaped assessment. The reasons recorded for reopening the assessment do not make out a case that the advance so received by the assessee constituted his income. As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether what was shown as an advance was infact unaccounted income of the assessee; all that is to be examined is whether the fact of the receipt of advances, per se, in could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs. 86,91,503 has escaped assessment of income because the assessee has received Rs. 86,91,503 in respect of which enough material is not on record to conclusively establish its character as advance but then such an opinion proceeds on the fallacious assumption that an advance constitute undisclosed income, and overlooks the fact that the sources of advance need not necessarily be assessee’s own income. Of course it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than merely suspect, that an income has escaped assessment.

9. In the light of these discussions, as also bearing in mind entirety of the case, we hold that the reassessment proceedings were indeed vitiated in law. We, therefore, quash the reassessment itself.

10. As the reassessment proceedings stand quashed, the correctness of additions made in the course of this reassessment is wholly an academic question. No adjudication, therefore, is called for in respect of the same.

11. In the result, the appeal is allowed in the terms indicated above.

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