ITAT Rules Reassessment Invalid Where AO Relied on Erroneous Facts

The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of Kedia Carbon Pvt. Ltd. for Assessment Year 2009-10, holding that the Income Tax Department had wrongly reopened the company’s assessment based on incorrect facts.

The company had filed its income tax return in September 2009, declaring an income of Rs 95,36,905. Assessment was completed under section 143(3) in November 2011. In the case of Kedia Group, the AO conducted a search and in October, 2015, issued a notice under Section 148 and reopened the assessment under Section 147.

The AO alleged that the company had raised Rs 5,11,35,000 as share capital and share premium by issuing shares of face value Rs 10 at a premium of Rs 90 per share. On the basis of this allegation, the AO treated the amount as unexplained cash credit and brought it to the income of the company.

Before the Tribunal, the company challenged the validity of the reopening. It argued that the AO had relied on incorrect facts without verifying the company’s records. According to the audited financial statements, the company had issued shares only at their face value of Rs 10 and had not received any share premium during the year. The actual amount received through share capital was only Rs 1,59,00,000.

The assessee also pointed out that some companies mentioned in the reasons recorded by the AO had never subscribed to its shares. It argued that the reopening was based on assumptions and borrowed information from the Investigation Wing, without any independent application of mind by the AO.

The ITAT after going through the records found various factual errors in the reasons recorded by the AO. The Tribunal noted that the figures relating to share capital and share premium as mentioned by the AO were not correct and did not tally with the audited accounts of the company. It also said that the names of some alleged investor companies were wrongly mentioned as they had never invested in theassessee.

The Tribunal held that reopening of assessment is not permissible under the provisions of the Income Tax Act on the basis of wrong facts and borrowed satisfaction. It had supported judicial precedents, including the Bombay High Court’s decision in Tata Sons Ltd. that reassessment cannot be considered valid if the reasons are based on wrong facts or demonstrate non-application of mind.

The ITAT held that reopening cannot be made merely on the statement of the directors of the assessee company. Referring to CBDT Instructions issued in 2003 and 2014, the Tribunal reiterated that addition or reassessment cannot be made on the basis of confessional statement alone unless, it is supported by credible evidence.

In light of the above, the Tribunal quashed the reassessment proceedings as well as the assessment order passed by the AO. Since the reassessment itself was declared invalid, the Tribunal did not examine the remaining grounds raised by the assessee.

Accordingly, the appeal filed by Kedia Carbon Pvt. Ltd. was allowed.