Reopening Of Assessment Invalid If AO Fails To Show Reason To Believe: ITAT Chennai

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) on 2 February quashed the reopening of assessment against a SEBI-registered stock broker, holding that the Assessing Officer failed to satisfy the “reason to believe” requirement under Section 147 of the Income Tax Act, 1961.

Judicial Member Abhy T. Varkey and Accountant Member S.R. Raghunatha observed that the recorded reasons were “extremely scanty and vague.” They further held:

“According to us, the reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the AO. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons.”

The taxpayer had originally filed its return declaring total income of Rs. 48,04,981. The Assessing Officer issued notice under Section 148 of the Income Tax Act on March 18, 2021, seeking to reopen the assessment on the ground that the taxpayer had received Rs. 7,15,11,173 from Orange Mist Productions Pvt. Ltd., which was allegedly involved in non-genuine business activities.

In the reassessment, the Assessing Officer added Rs. 7,15,11,173 under Section 69A (which deals with unexplained money), treating it as a bogus accommodation entry. The Commissioner of Income Tax (Appeals), NFAC, Delhi, dismissed the taxpayer's appeal.

Before the Tribunal, the assessee challenged the very jurisdiction to reopen, contending that the Assessing Officer had only a “reason to suspect” and not a “reason to believe” that income had escaped assessment.

After reproducing the reasons recorded by the Assessing Officer, the Tribunal noted that the AO merely stated that the assessee had received Rs. 7.15 crore from Orange Mist and that, after analysis of the return and Form 3CD, the officer had “reason to believe that the income has escaped assessment”.

The Bench noted:

“…The AO, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the AO cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.”

Accordingly, the Tribunal held that there was “no reference to any document or statement, or any tangible material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income”.