The main legal point established in the judgment is the requirement of tangible material forming the basis for the belief that income had escaped assessment under Section 147/148 of the Income Tax Act, 1961, and the need for the AO's independent application of mind.

S. Muralidhar, J.

1. This appeal under Section 260A of the Income Tax Act, 196 (‘Act’) by the Revenue is directed against the impugned order dated 22nd March, 2016 passed by the Income Tax Appellate Tribunal (‘ITAT) in ITA No. 3148/Del2013 for the Assessment Year (‘AY’) 2004-05.

2. Admit.

3. The following question of law is framed for consideration:

Whether the ITAT erred in law and on facts in quashing the assessment proceedings under Section 147/148 of the Act?

4. The facts in brief are that the Assessee, Meenakshi Overseas Private Limited, filed its return of income on 30th October, 2004 for the AY 2004-05 declaring its income as Rs. 2,050. The return was processed under Section 143(1) of the Act on 25th November, 2004.

5. It is stated that information was received from the Director of Income Tax (Investigation), New Delhi [‘DIT(I)’] that during the year under consideration, the Assessee had received accommodation entries. Notice under Section 148 of the Act was issued after taking approval from the Additional Commissioner of Income Tax (‘ACIT’) under Section 151(1) of the Act. Notice under Section 148 of the Act was thus issued on 23rd/24th March, 2011 after recording the reasons for re-opening of the assessment.

6. The said reasons as recorded by the Assessing Officer („AO’) read as under:

“Reasons for the belief that income has escaped assessment:

In this case, information has been received from the Director of Income Tax, (Investigation) New Delhi that the Assessee has received amount of Rs. 5,00,000/- as follows:

Beneficiary’s Name Meenakshi Overseas P. Ltd.

Beneficiary Bank Name State Bank of Hyderabad

Beneficiary Bank Branch Karol Bagh

Value of entre taken 500,000

Instrument no. by which entry taken 8628

Date on which entry taken 31.03.2004

Name of A/c Holder of entry giving account Shubham Electronic & Electric

Bank from which entry given SBH

Branch of entry given bank KB

A/c No. Entry giving account 50038

Information so received has been gone through. The above said instruments are in the nature of accommodation entry, which the Assessee has taken after paying unaccounted cash to the accommodation entry given, who is a known entry operator as per the report of the Investigation Wing. In view of these facts, the alleged transaction is not the bonafide one. Therefore, I have reason to believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004-05 due to failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment so far as this amount is concerned. Therefore, this case is fit for issuing notice under Section 148 of the Income Tax Act, 1961 . In this case the assessment was made under Section 143 (1) not under Section 143 (3) of the IT Act, 1961.

I am therefore, satisfied that the said income, on account of accommodation entry worth Rs. 5,00,000 received by the Assessee has escaped assessment and accordingly after recording the above said reasons as laid down under the provisions of Section 148 (2) of the Income Tax Act, 1961 under Section 148 is being issued.”

7. In response to the said notice served on it, the Assessee wrote a letter dated 25th April, 2011 stating that the original return of income under Section 139 of the Act be treated as return filed in compliance with the notice under Section 148 of the Act.

8. An assessment order was passed by the AO on 30th November 2011 under Section 143 (3) read with Section 147 of the Act treating the credit received from Shubham Electronics & Electricals Pvt Ltd. as unexplained income under Section 68 of the Act. Besides from the statement of the Assessee's bank account it was found that there were other credit entries that “remained unverified, unsubstantiated and unexplained.” As a result, "an amount of Rs. 74,50,000 after including Rs. 5,00,000 in respect of Subham Electricals Pvt. Ltd." was treated as unexplained credits under Section 68 of the Act and added to the total income of the Assessee as income from undisclos