Reopening Based Solely on Third-Party Information and 'Reason to Suspect' Invalid: ITAT Quashes ₹80.59 Lakh Addition [Read Order]
Observing that the AO acted mechanically on unverified third-party information and failed to conduct an independent inquiry, the Tribunal held that the reassessment was based merely on a 'reason to suspect' which was invalid.
Reopening - Taxscan
Reopening - Taxscan
The Chandigarh Bench of the Income Tax Appellate Tribunal (ITAT) quashed the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, which had resulted in an addition of ₹80.59 Lakh for the Assessment Year (AY) 2010-11.
Vashisht Alloys (assessee), which is engaged in manufacturing metal products, was reopened on the basis of specific information received from the ADIT (Inv.), New Delhi.
The information alleged that Vashishth Alloys (a proprietorship concern of the assessee) had received ₹80.59 Lakh as an accommodation entry from M/s Rima Trading Co. (a proprietorship concern of Shri Pawan Kumar Gupta), which was allegedly involved in routing large sums of funds.
During assessment, the assessee contended that the amount was received on behalf of M/s Everest International, their consignment agent, and was related to accepted consignment sales. The assessee had already filed a full and complete disclosure during the original Section 143(3) scrutiny proceedings, which attained finality by the Tribunal's order.
The Assessing Officer (AO) and subsequently the CIT(A) rejected the assessee's explanation, primarily because notices under Section 133(6) to both Everest International and Rima Trading Co. remained un-served, leading to the confirmation of the addition.
Aggrieved by the CIT(A)’s order, the assessee filed an appeal before the ITAT. The assessee challenged the legal validity of the reopening and argued that since the reassessment was initiated beyond four years, the AO failed to establish any failure on the part of the assessee to disclose fully and truly all material facts.
The assessee contended that the AO had merely acted mechanically on the investigation wing's input without any independent inquiry.
The two-member comprising Rajpal Yadav (Vice President), and Manoj Kumar Aggarwal, (Accountant Member), concurred with the assessee's legal argument. The Bench noted that during the original scrutiny, the AO had full opportunity to examine the financial statements, including sales, consignment transactions, and bank statements with RTGS receipts.
The tribunal observed that there was no information on record regarding any cash exchange between the assessee and Rima Trading Co., which is necessary to establish the allegation of an accommodation entry.
The Bench concluded that such passive reliance on third-party intelligence would render the reopening invalid as it reflected merely a ‘reason to suspect’ rather than ‘reasons to belief’." It held that the reassessment proceedings lacked the underlying material required for the formation of a belief that income had escaped assessment.
The tribunal quashed the reassessment order, ruling that the assessee succeeds on legal grounds. The appeal filed by the assessee was allowed.
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