AO Fails To Demonstrate Live Link Between Tangible Material & Reason To Believe Escaped Income: Delhi ITAT Quashes Reopening

The ITAT pointed that there is no independent application of mind by the AO to tangible materials and reasons and the AO failed to demonstrate live link between tangible material and formation of reason to believe that income had escaped assessment.

The Bench of the ITAT comprising of G.S. Pannu (Vice President) and Challa Nagendra Prasad (Judicial Member) observed that, “In the reasons recorded the AO has not given any details as to how the income more than 15 crores has escaped assessment. Nothing in the reasons specified as to how the escapement of income has been arrived at more than 15 crores. There is no live link between the reasons recorded and the materials on record when the reasons were recorded. The only basis on which the reasons recorded by the AO was based on the DDIT(Inv.) report and the AO has not even given the details of report which is the basis for reopening of assessment to believe that there is escapement of income of more than 15 crores.” (Para 9)

As per the brief facts of the case, the assessment was proposed to reopen on the ground that no return of income has been filed by the assessee for the year under consideration when in fact the assessee had filed return of income. The assessment was reopened based on an information received from DDIT wherein it has been stated that assessee has invested more than 15 crores in construction of house.

The Bench noted that the statement in the reasons that assessee had not filed return of income is factually incorrect, as the assessee filed return of income by declaring taxable income.

The Bench observed while referring the decision of Delhi High Court in the case of Pr. CIT vs. RMG Polyvinyl (I) Ltd., (2017) 396 ITR 5 (Del.) that the information received from the Investigation Wing cannot be said to be tangible material per se without a further enquiry being undertaken by the AO and the AO deprived himself of that opportunity by proceeding on the erroneous premise that assessee had not filed a return when in fact it had.

The Bench reiterated while referring the decision of Gujarat High Court in the case of Vijay Harishchandra Patel vs. ITO (2018) 4 (Guj.) (HC) that, “In the reasons recorded, the Assessing Officer had based his belief on the fact that the assessee had not filed any return due to which there was an escapement of income on account of sale of an immovable property. The Assessing Officer, instead of dropping the assessment proceedings, by an order rejecting the objections filed by the assessee, had sought to proceed with the reassessment proceedings on afresh ground which was not found in the recorded. When the original ground for reopening the assessment did not survive, the Assessing Officer had sought to proceed further with the assessment on totally different grounds, which was impermissible.”

The Bench observed that the AO is not disputing that the assessee filed return of income. If this is the fact, there is certainly a factual inconsistency in reopening the assessment that the assessee has not filed any return of income. Secondly, in the reasons stated the AO believed that the income escaped assessment only based on the report of the DDIT(Inv.) that the income had escaped more than 15 crores.

The Bench further observed that what is the basis for 15 crores is not specified in the reasons. This is only a bad statement that the income of the assessee has escaped assessment for more than 15 crores without spelling out any details which is said to have been given in the DDIT report. Therefore, the reasons recorded in the present case at best can be treated to be a reason to suspect which is not sufficient for reopening the assessment u/s 148.

Therefore, on finding that the AO has failed to demonstrate live link between tangible material and formation of reason to believe that income had escaped assessment, ITAT dismissed the revenue's appeal.

Counsel for Appellant/Department: Anuj Garg

Counsel for Respondent/Taxpayer: Rano Jain

Case Title: ITO verses Surender Dalal

Case Number: I.T.A No.7714/Del/2019

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