Information from Investigation Wing of IT Department cannot be a Sole Basis for Re-Assessment: Delhi HC [Read Judgment]

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In Principal Commissioner of Income tax v. Meenakshi Overseas Pvt Ltd, the Delhi High Court held that re-assessment under Sections 147/148 of the Income Tax Act cannot be made only on the basis of information received from the Investigation Wing of IT Department.

The division bench comprising of Justice S.Muralidhar and Justice Chander Shekhar, while upholding the order of the ITAT, held that mere reproducing of conclusions in the investigation report would amount to ‘borrowed satisfaction’ only and the AO has to apply his own mind to arrive at conclusions.

In the instant case, AO initiated re-assessment proceedings against assessee information was received from the Director of Income Tax (Investigation), New Delhi [„DIT(I)‟] that during the year under consideration, the Assessee had received accommodation entries. Accordingly, he concluded assessment u/s 148 of the Act by making addition under section 68.

On appeal, ITAT quashed the order by holding the assessment as invalid as there does not exist any ‘reason to believe’. According to the Tribunal, the ‘reasons to believe’ are not in fact reasons but only conclusions, one after the other.

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

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.”

It was observed that the AO, in the instant case, has not made any effort to set out the portion of the investigation report which contains the information specific to the Assessee. Also, he does not examine the return already filed to ascertain if the entry has been disclosed therein.

It was therefore, concluded that the reasons to believe contain not the reasons but the conclusions of the AO one after the other. “There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a ‘borrowed satisfaction’. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.

Read the full text of the Judgment below.

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