Basic requirement of law for reopening an assessment is application of mind by the AO to the material or information in his possession to conclude and arrive at a satisfaction therefrom that income has escaped assessment.

The present appeal has been preferred by the assessee against the order dated 07.06.2019of the Commissioner of Income Tax (Appeals)-5, Ludhiana,(in short referred to as CIT(A),passed u/s 250(6) (of Income Tax Act, 1961),(hereinafter referred to as “Act”) pertaining toassessment year (A.Y) 2011-12.

2. The brief facts relating to the case are that the assessee company is engaged in the business of manufacturing and trading of TMT Bars and other steel items. For the impugned assessment year, return of income was filed by the assessee declaring loss of Rs. 7.54 Cr as per normal provisions and income amounting to Rs. 38.43 lacs as per Section 115JB (of Income Tax Act, 1961). The assessment u/s 143(3) (of Income Tax Act, 1961) was completed at the returned income. Thereafter, the case of the assessee company was reopened u/s 147 (of Income Tax Act, 1961) and the original returned lossof Rs. 7.54 Cr was reduced to Rs. 5.86 Cr by adding back an income of Rs. 1.67 Cr. Against the order so passed, the assessee filed appeal to the ld. CIT(A) challenging the assumption of jurisdiction by the AO u/s 147 (of Income Tax Act, 1961) and also raising grounds on the merits of the case. The ld. CIT(A) dismissed the legal ground raised by the assessee while he partly allowed the ground raised on merits.

3. Aggrieved by the same, the assessee has come in appeal before us raising both legal ground and also on merits. We shall first be dealing with the legal ground raised by the assessee since it challenges the validity of the assessment order itself. The said ground relates to ground No. 1 raised by the assessee and reads as under :

“1. That the ld. CIT(A) has erred in dismissing the ground of proceedings of re-opening the case u/s 148 (of Income Tax Act, 1961).

4. The primary argument of the assessee challenging the assumption of jurisdiction by the AO u/s 147 (of Income Tax Act, 1961) is on the premise that the reasons recorded by the AO for assuming jurisdiction to reopen the case were bad in law, being based on incorrect facts which showed no application of mind by the AO on the information in his possession and also that the satisfaction for escapement of income was not his own but borrowed. Our attention was drawn to the reasons recorded, copy of which was placed before us on Paper Book page No. 35 to 37, as under : REASONS FOR ISSUE OF NOTICE U/S 148 (of Income Tax Act, 1961) IN THE CASE OF M/S FORTUNE METALIKS LTP.FOR THE.A.Y.2011-12.

The assessee is a limited company and engaged in business of rolling mills. The assessee has filed return of income through e-filling 30.09.2011 for A.Y.2011-12 declaring income of Rs. Nil (Rs. 38,43,004/- u/s 115JB (of Income Tax Act, 1961))/-. Further return of income assessed u/s 115JB (of Income Tax Act, 1961) at Rs. 38,43,004/- ort 20.03.2014.

2. This office is in the possession of the information received from ADIT(Inv.), Unit-I, Central Revenue Building, Civil Lines, Riapur (C.G) on 12.03.2018 in the case of M/s Fortune Metaliks Ltd.

3. In his report ADIT(Inv.), Unit-I, Riapur, has made following observations:-

The Commercial Tax Department, Chhattisgarh has detected and identified the concerns in whose name bogus sale bills have been isssued. Such bogus sale bills were detected with the help of specialized software of the Commercial Tax Department. After detection of such bogus bills, they were confirmed through enquiry and spot verification by the Commercial Tax Department. The findings on such bogus billing have been shared to the various intelligence and investigation agencies in the meeting of RE1C, Raipur on various dates. As per these findings, the beneficiaries have been taken bogus purchase bills from bogus dealers. Thus, the beneficiaries have suppressed their total income by way of debiting bogus purchases. Accordingly, action u/s 14 (of Income Tax Act, 1961)? of the Income Tax Act, 1961 has to be taken in case of such beneficiaries for F.Y. 2010-11 which is going to be time barred by limitation on 31s ' March, 201S. Details of such beneficiaries and corresponding bogus dealers, amount of bogus bills etc. pertaining to F.Y. 2010-11 are being forwarded for taking action ' u/s 147 (of Income Tax Act, 1961) of the I. T. Act 1961 as the PAN and jurisdiction lies with you.

4. This office has checked the entire details of the assessee on 360 degree profile on ITBA portal like Bank details, Address of assessee, ITR's details, Processing details, Tax details etc.

5. From the above information it was seen that assessee is involved in taking bogus purchase bill from bogus dealers namely as M/s Shital Trading Company for Rs. 1,31,78,094and from M/s Raj Dealers for Rs. 35,96,520/- in the A.Y 2011-12 and thus the assessee has suppressed its profit by way of debiting bogus purchases in the Trading and Profit & Loss account.

6. In view of above facts of the case, I have reason to believe that the income chargeable to tax, as discussed in para no. 05 above i.e. .Rs. 1,67,74,614/-, has escaped assessment (and also any other income chargeable to tax which has escaped assessment and which comes to notice subsequently in the course of the proceedings u/s 147 (of Income Tax Act, 1961).

7. In this case a return of income was filed for the year under consideration and regular assessment u/s 143(3) (of Income Tax Act, 1961)/147 was made 20.03.2014. Since, 4 years from the end of the relevant year has expired in this case, the requirement to initiate proceeding u/s 147 (of Income Tax Act, 1961) are reason to believe that income for the year under consideration has escaped assessment because of failure .on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment year under consideration. It is pertinent to mention here that reasons to believe that income has escaped assessment for the year under consideration have been recorded above. I have carefully considered the assessment records containing the submission made by the assessee in response to various notices issued during the assessment /reassessment proceedings and have noted that the assessee has not fully and truly disclosed the following material facts necessary for his assessment for the year under consideration:

• Unexlpained expenditure.

It is evident from the above facts that the assessee had not truly and fully disclosed material facts necessary for his assessment for the year under consideration thereby necessitating reopening u/s 147 (of Income Tax Act, 1961). It is true that the assessee has filed a copy of annual report and audited P& L a/c and balance sheet along with return of income where various information/ material were disclosed. However, the requisite full and true disclosure of all material facts necessary for assessment has not been made as noted above. It is pertinent to mention here that even though the assessee has produced books of account, annual report, audited P& L a/c and balance' sheet or other evidence as mentioned above, the requisite material facts as noted above in the reasons for reopening were embedded in such a manner that material evidence could not be discovered by the AO and could have been discovered with due diligence, accordingly attracting provisions of explanation 1 of section 147 (of Income Tax Act, 1961).

It is evident from the above discussion that in this case, the issues under consideration were never examined by the AO during the coure of regular assessment /reassessment. This fact is corroborated from the contents of notices issued by the AO u/s 143(2) (of Income Tax Act, 1961)/142(1) and order sheet recorded during the 143(3)/147 proceedings. It is important to highlighted here that material facts relevant for the assessment on the issue(s) under consideration were not filed during the course of assessment proceedings and the same may be embeded in annual report, audited P&L a/c, balance sheet and books of account in such a manner that it would require due diligence by the AO to extract these information. For aforesaid reasons, it is not a case of change of opinion by the AO.

In this case, more than four hears have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s 148 (of Income Tax Act, 1961) has been obtained separately from Principal Commissioner of Income Tax as per the provisions of Section 151 (of Income Tax Act, 1961).”

5. Referring to the above, ld. counsel for the assessee pointed out that the AO had recorded satisfaction of escapement of income on the basis of information which had come to his possession from the Commercial Tax Department, Chhatisgarh, that bogus purchase bills had been taken by the assessee from two parties. Drawing our attention to para 5 of the reasons recorded, ld. counsel for the assessee contended that while noting the figures of bogus purchases, the AO had recorded wrong figures. That the actual purchases from one such alleged party M/s Sheetal Trading Company, noted by the AO at Rs. 1,31,78,094/- in para 5, was Rs 67,18,244/-while that of the another M/s Raj Dealers, recorded at Rs35,96,520/- was Rs73,62,946/-.Further the name of one of the parties had also been noted wrongly as M/s Raj Dealers in place of its actual name Raj Traders.He further contended that the AO had noted that the assessee had debited these amounts to Profit & Loss Account which again was an incorrect fact since these bills related to purchase of fixed assets and had not been debited to the Profit & Loss Account. The ld. counsel for the assessee contended, that the satisfaction being based on incorrect facts it could not form the basis for re-opening the case. In this regard, he placed reliance on the following decisions of the ITAT holding that satisfaction of the AO of escapement of income based on incorrect facts would not empower the AO to reopen the case :

The ld. counsel for the assessee contended that it is evident that the AO had not cared to apply his mind at all to the information before him and the satisfaction of the AO ofescapement of income was without application of mind and was infact borrowed satisfaction. He drew our attention to the following case laws purportedly holding that non-application of mind by the AO while recording reasons would render the re- assessment proceedings invalid.

1.Holy Faith International Pvt. Ltd. V/s DCIT ITA No.181/ASR/2017 CHD-TRIB

2. Hari Steels and General Industries Limited V/s DCIT 104 taxmann.com 293 DEL-TRIB

3. MaganBehari Lai V/s Deputy Commissioner of Income Tax 75 ITR (Trib) 322 DEL-TRIB

6. The ld. DR on the other hand drew our attention to the findings of the ld. CIT(A) in this regard at page 60 of the order as under :

“.The Assessing Officer, therefore, had a cause to show that income of the appellant had escaped assessment and the AO had a bonafide reason to believe, formed on the basis of tangible material/information on record that income of the appellant had escaped assessment within the meaning of Section 147 (of Income Tax Act, 1961). Credible information was received by me AO relating to the case and the AO was duty bound to act on the same. The AO could not have slept on the information without taking any action. The credible information received could not be kept in the file without taking cognizance and the AO was rather duty bound to act on the same. Considering the facts in this case, it is found to be a fit case where the AO has rightly initiated action under Section 147 (of Income Tax Act, 1961) on the basis of information received from Directorate of Income Tax (Investigation). The issue is covered by the decision of the Hon'ble ITAT, Mumbai (ITA No. 995/mum/2012) in the case of Ratnakar M. Pujari, Mumbai Vs. ITO Ward-25(3)(3), Mumbai, where, the Hon'ble ITAT has elaborately discussed the issues of re-opening u/s 147 (of Income Tax Act, 1961) and consequential addition.

The Hon'ble ITAT has held that the reopening u/s 147 (of Income Tax Act, 1961) is justified, as the information received from the Investigation wing is fresh and tangible material which has live link and nexus with the formation of belief that the income of the assessee has escaped assessment. In view of these facts and in the circumstances of the case, the arguments of the AR are found devoid of merits and the issue of notice by the AO u/s 148 (of Income Tax Act, 1961), after recording reasons for re-opening u/s 147 (of Income Tax Act, 1961), based upon information received, is found to be as per law.........”

7. We have heard both the parties. We find merit in the contention of the ld. counsel for the assessee that the re- assessment proceedings undertaken by the AO in the present case were invalid since the reasons recording his satisfaction of escapement of income were based on incorrect facts and there was no application of mind at all by the AO. The fallacies in the facts pointed out by the ld. counsel for the assessee, regarding the quantum of bogus purchases noted by the AO in his reasons as also name of one of the parties, has not been disputed or controverted by the Revenue. Further, even the fact recorded by the AO in the reasons that the bogus bills had been debited to the Profit & Loss Account was incorrect which is evident from the fact that the ld. CIT(A) in his order passed on merits has found these bills to be relating to purchase of fixed assets and has accordingly, made the disallowance of only depreciation relating to the same, which has not been challenged by the Revenue before us. It is clearly evident that on receiving information from the Commercial Tax Department, the ld. AO did not even care to verify the same from his records from where all these factual inaccuracies would have been brought out. There was clearly total non application of mind by the AO and the belief of escapement of income is definitely not his own but borrowed from that of the commercial tax officer who had forwarded the information.

The basic requirement of law for reopening an assessment is application of mind by the AO to the material or information in his possession to conclude and arrive at a satisfaction therefrom that income has escaped assessment. Both application of mind and satisfaction/belief of the AO are lacking in the present case . The reassessment therefore we hold is invalid. The case laws relied upon by the Ld. Counsel for the assessee support the case of the assessee, The order passed by the AO is, therefore, set aside.

8. The ground of appeal No. 1 is, therefore, allowed.

9. Since we have set aside the order passed by the AO, we do not consider it necessary to adjudicate the grounds raised on merits, since it would be a mere academic exercise.

10. In the result, the appeal of the assessee is allowed in above terms.

Order pronounced on 12.01.2021.