Delhi HC upholds Income Addition deleted by CIT(A) based on True Disclosure by Asseessee [Read Order]

In a recent case, the Delhi High Court upheld the income addition deleted by CIT(A) based on true disclosure by assessee. It was found that there was no failure on the part of the Assessee in disclosing fully and truly all material facts necessary for completion of the assessment.

The Appellant , Revenue has preferred the present appeal under Section 260A of the Income Tax Act, 1961 (the Act), inter alia, impugning an order dated 31.03.2022 (impugned order) passed by the learned Income Tax Appellate Tribunal (ITAT) in ITA No.5064/Del/2017 in respect of Assessment Year (AY) 2009-10.

The Revenue had filed the aforementioned appeal against the order dated 22.05.2017 passed by the Commissioner of Income Tax (Appeals)-27, New Delhi (CIT(A)), whereby the Respondent Assessee, K.R. Pulp And Papers Ltd. appeal against the Assessment Order dated 31.12.2016 passed by the Assessing Officer (AO) under Section 143(3) read with Section 147 of the Act, was allowed and the additions made by the AO under Section 68 of the Act were deleted.

The Assessee is a public limited company and is engaged in the manufacturing of kraft paper and brown paper usually used for packaging. The Assessee filed its return of income on 26.09.2009 declaring an income of ₹1,95,97,146/- for the Financial Year (FY) 2008-09 relevant to AY 2009-10.

The Assessee‘s return was selected for scrutiny and notices under Sections 143(2) and 142(1) of the Act were issued raising queries regarding deduction claimed by the Assessee under Section 80IA of the Act. The AO framed an assessment order dated 22.11.2011 determining the Assessee‘s income at ₹5,84,39,170/- instead of ₹1,95,97,146/- by disallowing the deduction of ₹3,88,42,085/- claimed under Section 80IA of the Act. However, the said deductions were thereafter allowed by the CIT(A) and the learned ITAT.

Subsequently, on 29.03.2016, the case was reopened under Section 147 of the Act, and a notice under Section 148 of the Act was issued to the Assessee. In response, the Assessee, by the letter dated 31.03.2016, requested that the return originally filed on 26.09.2009 be treated as the return filed in response to the notice under Section 148 of the Act.

Thereafter, statutory notices were issued under Sections 143(2) and 142(1) of the Act. Upon completion of the reassessment proceedings, the AO passed an order under Section 147 read with Section 143(3) of the Act on 31.12.2016, assessing the total income of the Assessee at ₹27,28,32,150/-. The reassessment included an addition of ₹25,32,35,000/- under Section 68 of the Act on account of unexplained share capital and share premium received by the Assessee during the previous year relevant to the AY.

The Assessee preferred an appeal before the CIT(A), challenging the validity of the reassessment proceedings as well as the addition made under Section 68 of the Act by the assessment order dated 31.12.2016. By order dated 22.05.2017, the CIT(A) deleted the addition and quashed the reassessment proceedings holding that the reasons recorded for reopening the assessment did not refer to any material, much less any incriminating material, found as a result of the search conducted in the group cases, or during post-search investigation, that could establish that the Assessee had received bogus share capital.

The CIT(A) also found that the reasons recorded by the AO were general, vague, and not confronted to the Assessee, while further observing that the AO had mechanically relied upon the information from the Investigation Wing without independently applying his mind. On these grounds, the CIT(A) held that the assumption of jurisdiction under Section 147 of the Act was not sustainable and treated the reassessment order as void ab initio.

The CIT(A) further recorded that the AO had not brought any material on record to show that the share capital received had emanated from the coffers of the Assessee. The CIT(A) held that in the absence of such material, the amount received could not be treated as unexplained income of the Assessee.

The CIT(A) also noted that a substantial number of the investor companies were registered as Non-Banking Financial Companies (NBFCs)] with the Reserve Bank of India (RBI) who were filing returns of income, and had been in existence prior to the incorporation of the Assessee. On this basis, the CIT(A) concluded that there was no basis to treat them as paper companies and deleted the addition in its entirety.

Aggrieved by the order of the CIT(A), the Revenue filed an appeal before the learned ITAT. The learned ITAT vide the impugned order dismissed the appeal of the Revenue. The learned ITAT noted that the reopening had been initiated beyond the period of 4 (four) years from the end of the relevant AY, and the original assessment was already completed under Section 143(3) of the Act.

The ITAT also held that the reasons recorded by the AO did not set out as to how the Assessee had failed to make a full and true disclosure of material facts necessary for the assessment. In the absence of the same, the ITAT held that the reopening was contrary to the first proviso to Section 147 of the Act. It further noted that the Revenue had not brought any material on record to controvert the findings of the CIT(A).

Since the order of the CIT(A) was based on binding judicial precedents, the TAT upheld the same and dismissed the Revenue‘s appeal. The ITAT also held that in view of its finding that the reassessment order was void ab initio, the other grounds challenging the deletion on merits had become academic and required no adjudication.

Aggrieved by the impugned order, the Revenue has filed the present appeal before this Court contending that the learned ITAT has simply relied upon the order passed by the CIT(A), without considering the assessment order dated 31.12.2016.

The limited question before this Court for determination is - whether the ITAT was correct in ruling that the Assessment Order passed by the AO was void ab initio even though the AO had formed his reason to believe for escapement of income based on enquiries conducted by the Income Tax Department and the statements of the Directors of the investors‘ companies.

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The AO did not have any tangible material at the stage of issuance of the notice under Section 148 of the Act. His reasons for issuing the notice was based on certain information from Investigation Wing. The AO did not have any specific details regarding the income that was alleged to have escaped assessment. The AO also did not undertake any enquiries to ascertain the facts that lead to form the reasons to believe that the Assessee‘s income had escaped assessment. It is also material to note that no incriminating material was found during the search conducted under Section 132 of the Act in the case of the Assessee and its related entities. The only information stated to have been found during the search was that the Assessee had issued shares at a premium during the previous year relevant to AY 2009-10.

The CIT(A) faulted the assumption of jurisdiction by the AO under Section 147 of the Act for issuance of the notice. The CIT(A) accepted the Assessee‘s contention in this regard. In essence it is apparent reasons contain scanty, general, vague observations and not refer to any objective, tangible relevant material. Further even the figures adopted are factually incorrect and do not pertain to the instant year. No specific evidence has been highlighted to arrive at an opinion that either the companies are bogus and non existent or the money received represented unaccounted income.

It is also not in dispute that during the original proceedings, the AO had issued a questionnaire dated 21.06.2011, whereby the AO called upon the Assessee to submit the details of subscribers, paid up capital and also the details of shares allotted during the year under consideration. The Assessee had furnished the response to the said questionnaire and had submitted the share application money, share application form, proof of identity, copy of PAN and copy of ITR as well as the bank statements of the share applicants. Thus, the identity as well as the creditworthiness of the applicants was duly scrutinized. The copy of the ITR of the share applicants would reflect their capacity to subscribe to the shares. Thus, the income declared by the companies could not furnish any reasons for the AO to believe that the Assessee‘s income had escaped assessment.

A division bench of Justice Vibhu Bakhru and Justice Tejas Karia observed that the reasons recorded by the AO did not specify the names of any particular share applicants, the details of the cheques or the amount paid. It is also necessary to note that issue of share capital, and the details of various share holders had already been examined during the assessment proceedings. Therefore, the AO was required to have some additional information, beyond what had already been examined, in order to form reasons to believe that the Assessee‘s income had escaped assessment.

It is material to note that the CIT(A) had also examined the issues on merits and had found that the allegations that the Assessee had obtained share capital from unsubstantiated subscribers, was not established.

The AO was also persuaded to take an adverse inference on the basis that some of the share applicants had not responded to notice under Section 133(6) of the Act. However, the learned counsel for the Revenue fairly conceded that the Assessee had pointed out that summons under Section 133(6) of the Act had been issued at incorrect addresses and had also furnished the correct addresses, but no further summons were sent at that addresses.

The ITAT concluded that there was no failure on the part of the Assessee in disclosing fully and truly all material facts necessary for completion of the assessment. In the given facts, there was no explanation recorded as to how the Assessee failed to make full, true and all material disclosure of all the facts, and therefore, upheld the impugned order passed by the CIT(A). The conclusion of the learned ITAT must be read in the context that the fact the Assessee had furnished all information including the details of the share applicants, PAN number as well as their ITRs to establish the genuineness and creditworthiness of the entities.

The reassessment proceedings would indicate that same was examined during the original assessment proceedings. The learned ITAT‘s finding regarding the requirement of clear recording as to how the Assessee had failed to truly disclose all material facts, is required to be understood in the aforesaid context.

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