Beneficial judgement for taxpayers : Reassessment merely on the basis of Information emanated from investigation wing without application of mind is void
Overview:
Reopening of assessment merely based on report of Investigation Wing without independent application of mind on AO’s part was set aside.
AO received information from investigation wing as to assessee having received bogus share application money from certain entry operators. Accordingly, AO reopened assessment and made addition under section 68.
It is held that as apparent, AO merely referred to report of investigation wing in the reasons recorded for reopening of assessment. Even name of so-called entry operator had not been mentioned. Accordingly, there was clear non-application of mind on AO’s part and reopening of assessment was, therefore, set aside.
Decision: In assessee’s favour.
Followed: Pr. Crr v. G and G Pharma India Ltd. (2016) 384 ITR 147 (Delhi) : 2015 TaxPub(DT) 4054 (Del-HC), Pr. CIT v. RMG Polyvinyl (I.) Ltd. (2017) 396 ITR 5 (Delhi) : 2017 TaxPub(DT) 2034 (Del-HC) and MRY Auto Components Ltd. v. ITO [ITA No. 2418/Delhi/2014, dt. 15-9-2017].
Referred: Aaspas Multimedia Ltd. v. Dy. CIT (2018) 405 ITR 512 (Guj) : 2017 TaxPub(DT) 1665 (Guj-HC), AGR Investment Ltd. v. Addl. CIT (2011) 333 ITR 146 (Del) : 2011 TaxPub(DT) 0812 (Del-HC), Amit Polyprints (P) Ltd. v. Dy. CIT (2018) 94 Taxmann.comm 393 (Guj), Agya Ram v. CIT (2016) 386 ITR 545 (Del) : 2016 TaxPub(DT) 3841 (Del-HC), CIT v. Atul Jain (2008) 299 ITR 383 (Del) : 2008 TaxPub(DT) 0697 (Del-HC), CIT (Pr.) v. G and G Pharma India Ltd. (2016) 384 ITR 147 (Del) : 2015 TaxPub(DT) 4054 (Del-HC), CIT v. Highgain Finvest (P) Ltd. (2008) 304 ITR 325 (Del) : 2008 TaxPub(DT) 0695 (Del-HC), CIT v. Independent Media (P) Ltd. (I.T.A. No. 108 of 2013, dt. 19-11-2015), CIT (Pr.) v. Meenakshi Overseas (P) Ltd. (2017) 395 ITR 677 (Delhi) : 2017 TaxPub(DT) 1791 (Del-HC), CIT (Pr.) v. Paramount Communication (P) Ltd. (2017) 392 ITR 444 (Delhi) : 2017 TaxPub(DT) 0794 (Del-HC), CIT (Pr.) v. RMG Polyvinyl (I.) Ltd. (2017) 396 ITR 5 (Delhi) : 2017 TaxPub(DT) 2034 (Del-HC), General Electoral Trust v. ITO (2016) 289 CTR 284 (Bom) : 2016 TaxPub(DT) 3822 (Bom-HC), Indu Lata Rangwala v. Dy. CIT (2016) 384 ITR 337 (Delhi) : 2016 TaxPub(DT) 2519 (Del-HC), MRY Auto Components Ltd. v. ITO (I.T.A. No. 2418/Delhi/2014, dt. 15-9-2017), Oriental Insurance Co. v. CIT (2015) 378 ITR 421 (Delhi) : 2015 TaxPub(DT) 3662 (Del-HC), Paramount Communication (P) Ltd. v. Pr. CIT (2017) 396 ITR (St.) 75 (SC), Rajiv Agarwal v. Asst. CIT (2017) 395 ITR 255 (Delhi) : 2017 TaxPub(DT) 1855 (Del-HC), Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (SC) : 1999 TaxPub(DT) 0348 (SC), Rustagi Engineering Udyog (P) Ltd. v. Dy. CIT (2016) 382 ITR 443 (Delhi) : 2016 TaxPub(DT) 1719 (Del-HC), Sab Infrastructure Ltd. v. Asstt. CIT (2017) 398 ITR 198 (Del) : 2017 TaxPub(DT) 4248 (Del-HC), Shiv Sai Infrastructure (P) Ltd. v. Dy. CIT (W.P.(C) 2158/2016 & W.P.(C) 2383/2016, dt. 23-7-2018) : 2018 TaxPub(DT) 4951 (Del-HC), Signature Hotels (P) Ltd. v. ITO (2011) 338 ITR 51 (Del) : 2011 TaxPub(DT) 1992 (Del-HC) and Sonia Choudhary (Mrs.) v. ITO [ITA Nos. 2036 and 2037/Del/ 2010, dt. 7-10-2016].
(2019) 70 ITR (Trib) 211 (Delhi)
IN THE ITAT, DELHI ‘A’ BENCH
BHAVNESH SAINI, J.M. & L. P. SAHU, A.M.
KEY Components (P) Ltd. v. ITO
I.T.A. No. 366/Delhi/2016
A.Y. 2005-06
12 February, 2019
Assessee by: Ratio Jain, Advocate, and Pranshu Singhal, Chartered Accountant
Department by: Amit Katoch, Senior Departmental Representative
ORDER
Bhavnesh Saesti, J.M.
This appeal by the assessee has been directed against the order of the learned Commissioner (Appeals)-17, New Delhi, dated 2-12-2015 for the assessment year 2005-06.
2. Briefly the facts of the case are that information has been received from the Investigation Wing that the assessee-company has indulged in accommodation entries. The Investigation Wing reported that a report of inquiries made by the Director of Income Tax (Investigation), New Delhi, into the accommodation entries given by entry operators has been received. The said report of the Investigation Wing of the Department with information of entry operators and beneficiaries contained in the CD was forwarded by the then Director of Income Tax (Investigation)-1, New Delhi, and the said report along with the relevant information was forwarded to the office of the assessing officer through proper channel. As per the information the assessee-company in the assessment year under appeal has taken accommodation entries to the value of Rs. 5,00,545 from M/s. V. R. Traders (P) Ltd., on three occasions. The assessing officer also noted that it has been revealed that many persons were using service of accommodation entries operators to channelize their own unaccounted money in their regular books of account by routing the same through the accounts of accommodation entry providers. The modus operandi of the entry providers have been highlighted in the reassessment order. The assessing officer after getting approval of the Additional Commissioner issued notice under section 148 on 28-3-2012. The assessee filed letter stating that the return filed originally may be treated as having been filed in response to the notice under section 148 of the Income Tax Act. The assessing officer after examining the records before him rejected the objection of the assessee regarding reopening of the assessment and noted that in the assessment year under appeal the assessee has raised share capital of Rs. 1.90 crores from 32 parties including M/s. V. R. Traders (P) Ltd. (Rs. 5 lakhs). The assessing officer issued letters under section 133(6) to the parties but the same were returned unserved but the parties have confirmed the transactions. The assessing officer after considering the material on record, made the addition of Rs. 1.90 crores on account of undisclosed income of the assessee under section 68 of the Income Tax Act, 1961.
3. The assessee challenged the reopening of the assessment as well as addition on the merits before the learned Commissioner (Appeals). It was submitted that the assessing officer recorded reasons for reopening of the assessment without independent application of mind. The assessing officer did not verify or examine the report or material produced before him. The assessing officer merely adopted vague information provided by the Investigation Wing. Therefore, the reasons are invalid and bad in law. Several decisions in support of the contention was relied upon. The assessee also submitted that the assessee received genuine share capital which is supported by share application forms, confirmations, bank statements and copy of the board resolutions. The burden upon the assessee has been thus to prove the genuine credits of the matter, was discharged. The learned Commissioner (Appeals), however, dismissed the appeal of the assessee on both the grounds.
4. The assessee in the present appeal has challenged the reopening of the assessment under section 147/148 of the Income Tax Act, 1961 and addition of Rs. 1.90 crores under section 68 of the Income Tax Act, 1961. The learned counsel for the assessee reiterated the submissions made before the authorities below and filed a copy of the reasons recorded under section 148 of the Income Tax Act for reopening of the assessment at pages 16 and 17 of the paper book. The same reads as under :–
“M/s. Key Components (P) Ltd., assessment year 2005-06 A report on enquiries made by the Directorate of Income Tax (Investigation), New Delhi into accommodation entries given by the entry operators has been received. The said report of the Investigation Wing of the Department with the information on entry operators and beneficiaries contained in the C. D. was forwarded by the then Director of Income Tax (Investigation)-1 and the said report along with relevant information was forwarded to this office through proper channel.
As per the information received from the Director of Income Tax (Investigation), New Delhi revealed that during the financial year 2004-05 relevant to the assessment year 2005-06, M/s. Key Components (P) Ltd. has taken the following accommodation entries. It has been revealed that many persons were using services of accommodation entry operators to channelise their own unaccounted money in their regular books of account by routing the same through the accounts of accommodation entry providers.
2. The modus operandi of these entry providers and beneficiaries of their services, was detected to be as under :–
2.1. Entries were being broadly taken for two purposes :–
1. To plough back unaccounted black money for the purpose of business for personal needs such as purchase of assets etc., in the form of gifts, share application money, loans etc.
2. To inflate expenses in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes.
2.2. The assessee who had unaccounted money (called as entry takers or beneficiaries) and wanted to introduce the same in the books of account without paying tax, approached another person (called as entry operator) and handed over the cash (plus commission) and had taken cheques/DDs/Pos. The cash was being deposited by the entry operator in a bank account either in his own name or in the name or relative/friends or other person hired by him, for the purpose of opening bank account. In most of these bank accounts the introducer was the main entry operator and the cash deposit slips and other instruments were filled by him. The other persons in whose name the account is opened) only used to sign the blank cheque book and hand over the same to the main entry operator. The entry operator then used to issue cheques/DDs/Pos in the name of the beneficiary from the same account (in which the cash is deposited) or another account in which funds were transferred through clearing in two or more stages. The beneficiary in turn deposited these instruments in his bank accounts and the money came to his regular books of account in the form of gift, share application money, loan etc through banking channels.
2.3. The operators gave the account holders amounts ranging from Rs. 1.000 to 2,000 per month. These account holders were masons, plumbers, electricians, peons, drivers, etc., whose earnings are not sufficient for a living. They earned normally Rs. 3 to 5 thousands per month in their normal work and by working for the entry operators blank gift deeds, cheque books, share application money, etc. In fact these persons signed all types of papers they were asked to sign. They were made directors of companies, partners of firms and proprietor of different concerns solely for operation of these accounts. Actually, many of them were not even aware of the tax implications, etc. Their only concern was with the thousand rupees given to them by the entry operators.
3. Summing up, the report as a result of these extensive enquiries carried out by the Director of Income Tax (Investigation), New Delhi has established the non-genuineness of transactions, whether shown by beneficiaries as inflow of share capital or receipt of gifts or consideration for sale-purchase. The creditworthiness of the persons/ persons controlling the concerns who have given these credit entries/ share capital/gifts/sale consideration has also not been established.
4. In the instant case of the assessee, M/s. Key Components (P) Ltd. has taken the accommodation entries noted below :–
| Beneficiary’s name | Beneficiary’s hank name and branch | Value of entry | Inst. No. | Date of entry | Name of accountholder of entry giving | Bank from which entry given | Branch | A/c. No. |
| Key Components (P) Ltd. | State Bank of Bikaner and Jaipur, New Delhi | 2,50,265 | Transfer Chq. 00761057 | 22-5-04 | V. R. Traders (P) Ltd. | SBJJ | NRR | 24781 |
| Key Components (P) Ltd. | State Bank of Bikaner and Jaipur, New Delhi | 1,00,115 | Transfer Chq. 0152064 | 14-6-04 | V. R. Traders (P) Ltd. | SBJJ | NRR | 24781 |
| Key Components (P) Ltd. | State Bank of Bikaner and Jaipur, New Delhi | 1,50,165 | Transfer Chq.
00152091 |
28-6-04 | V. R. Traders (P,) Ltd. | SBJJ | NRR | 24781 |
| Total | 5,00,545 |
5. As per the findings of the report of the Investigating Wing-the creditworthiness of the lenders has not been established and these transactions seem to be not genuine. I, therefore have reasons to believe that this amount of Rs. 5,00,545 represents income of the assessee chargeable to tax which has escaped assessment for assessment year 2005-06.
Sd/- Dharam Veer
Income Tax Officer, Ward-5(2), New Delhi.”
4.1. The learned counsel for the assessee submitted that the reasons are based on the information and findings of the Investigation Wing. The assessing officer did not apply his mind to the same. The assessing officer merely concluded without verifying the facts that it is a case of reopening of the assessment. No details have been provided as to who has provided the accommodation entry and the observation of the assessing officer is merely based on “transactions seems to be not genuine”. The assessing officer did not verify the transaction and did not specify the nature of the alleged accommodation entries. No name of the accommodation entry provider have been mentioned in the reasons. The contents of the reasons recorded by the assessing officer for reopening of the assessment is merely an introduction about the investigations conducted by the Investigation Wing, modus operandi of the entry provider, summing up of enquiry of the Investigation Wing, information received from the Investigation Wing and the facts stated by the assessing officer that the assessee has taken accommodation entry. The assessing officer without verifying anything concluded that the assessee has taken accommodation entry. The assessing officer has not brought any material on record on the basis of which any nexus could have been established between the material and the escapement of income. The reasons do not show any application of mind nor the same show any belief independently arrived at by the assessing officer which is the basic pre-requisite for issue of notice under section 148 of the Income Tax Act. Learned counsel for the assessee, therefore, submitted that the reopening of the assessment is illegal and bad in law and liable to be quashed. She has relied upon the following decisions in support of her contention.
(i) Decision of the Hon’ble Delhi High Court in the case of Pr. CIT v. Meenakshi Overseas (P) Ltd. (2017) 395 ITR 677 (Delhi) : 2017 TaxPub(DT) 1791 (Del-HC).
(ii) Decision of the Hon’ble Delhi High Court in the case of Pr. CIT v. G and G Pharma India Ltd. (2016) 384 ITR 147 (Delhi) : 2015 TaxPub(DT) 4054 (Del-HC).
(iii) Decision of the Hon’ble Delhi High Court in the case of Pr. CIT v. RMG Polyvinyl (I.) Ltd. (2017) 396 ITR 5 (Delhi) : 2017 TaxPub(DT) 2034 (Del-HC).
(iv) Decision of the Hon’ble Delhi High Court in the case of Sab Infrastructure Ltd. v. Asst. CIT (2017) 398 ITR 198 (Del) : 2017 TaxPub(DT) 4248 (Del-HC) .
(v) Decision of the Hon’ble Delhi High Court in the case of CIT v. Atul Jain (2008) 299 ITR 383 (Delhi) : 2008 TaxPub(DT) 0697 (Del-HC).
(vi) Decision of the Hon’ble Delhi High Court in the case of Shiv Sai Infrastructure (P) Ltd. v. Dy. CIT in (W.P.(C) 2158/2016 & W.P.(C) 2383/2016, dt. 23-7-2018) : 2018 TaxPub(DT) 4951 (Del-HC).
(vii) Order of the Income Tax Appellate Tribunal Delhi Bench in the case of MRY Auto Components Ltd. v. ITO (I.T.A. No. 2418/ Delhi/2014, dt. 15-9-2017).
5. On the other hand, the learned Departmental Representative relied upon the orders of the authorities below and submitted that information was received by the assessing officer from the Director of Income Tax (Investigation) which is material for recording the reasons for reopening of the assessment. The learned Departmental Representative submitted that enquiries were conducted by the Investigation Wing, therefore, no fresh enquiry is to be conducted by the assessing officer The learned Departmental Representative relied upon the following decisions :–
(i) Paramount Communication (P) Ltd. v. Pr. CIT (2017) 396 ITR (St.) 75 (SC) ; 2017-TIOL-253-SC-IT.
(ii) Pr. CIT v. Paramount Communication (P) Ltd. (2017) 392 ITR 444 (Delhi) : 2017 TaxPub(DT) 0794 (Del-HC).
(iii) Amit Polyprints (P) Ltd. v. Dy. CIT (2018) 94 taxmann.com 393 (Guj).
(iv) Aaspas Multimedia Ltd. v. Dy. CIT (2017) 83 taxmann.com 82 (Guj) ; (2018) 405 ITR 512 (Guj) : 2017 TaxPub(DT) 1665 (Guj-HC).
(v) Decision of the Delhi High Court in the case of Indu Lata Rangwala v. Dy. CIT (2016) 384 ITR 337 (Delhi) : 2016 TaxPub(DT) 2519 (Del-HC).
5.1. The learned Departmental Representative submitted that at the time of commencement of reassessment proceedings, the assessing officer has to see whether there was prima facie some material on the basis of which the Department could reopen the case. Sufficiency or correctness of the material is not a thing to be considered at this stage–Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (SC) : 1999 TaxPub(DT) 0348 (SC).
6. We have considered the rival submissions and perused the material available on record. It is well-settled law that validity of the reopening of the assessment shall have to be determined with reference to the reasons recorded for reopening of the assessment. The learned counsel for the assessee has filed a copy of the reasons for reopening of the assessment which is reproduced above. The reasons contain the report of enquiries made by the Director of Income Tax (Investigation), New Delhi, about accommodation entries given by the entry operators. It is also informed by the Director of Income Tax (Investigation), New Delhi, that the assessee has received three accommodation entries totalling to Rs. 5,00,545 from M/s. V. R. Traders (P) Ltd. It is also reported that extensive enquiry have been carried out by the Director of Income Tax (Investigation) regarding non-genuine transactions. The assessing officer reproduced the same facts in the reasons and straightaway concluded that the findings of the report of the Investigation Wing shows the creditworthiness of the lender has not been established, therefore, these transactions seem to be non-genuine. The record reveals that vide Order, dt. May 16, 2018, the learned Departmental Representative was directed to produce a copy of the report of the Director of Income Tax (Investigation) referred to and recorded by the assessing officer in the reasons. However, till date, no such report has been produced on record for verification of the Tribunal. It may be noted that though in the reasons the assessing officer has mentioned that the value of the entry was of Rs. 5,00,545 but ultimately the assessing officer made addition of Rs. 5 lakhs in the case of M/s. V. R. Traders (P) Ltd. in which case accommodation entry is stated to have been received. There is, thus, a factual error in the reasons recorded for reopening of the assessment regarding the amount of the accommodation entry. In the present case, the assessing officer has merely reproduced the precise information which he has received from the Investigation Wing of the Revenue Department and reproduced the same in the reasons recorded under section 148 of the Income Tax Act, 1961, which was not produced for our perusal. It would show that the assessee has received the amount of three credits through banking channel by mentioning the names of the parties and cheque numbers, name of the bank with amount. The assessing officer has not gone through the details of these information and has not even applied his mind and merely concluded that the transactions seems not to be genuine, therefore, the assessing officer was not sure whether the transaction was genuine or not. Then, he has merely further concluded that he has reason to believe that the amount of Rs. 5,00,545 represents income of the assessee chargeable to tax which has escaped assessment. These reasons to believe are, therefore, not in fact reasons but only conclusion of the assessing officer. The expression “accommodation entry” is used to describe the information set out without explaining the basis for arriving at such conclusion. Even the assessing officer has not stated in the reason that he has gone through the reports of the Investigation Wing. The assessing officer merely repeated the report of the Investigation Wing in the reasons and formed his belief that income chargeable to tax has escaped assessment, without arriving at his satisfaction. The reasons to believe contain no reason but the conclusion of the assessing officer without any basis. Even no name of the entry provider has been mentioned who has provided accommodation entry. Thus, there is no independent application of mind by the assessing officer to the report of the Investigation Wing which formed the basis for reasons to believe that income chargeable to tax has escaped assessment. The conclusion of the assessing officer in the reasons are at the best reproduction of conclusion of the investigation report. It is merely followed which is not permissible in law. The assessing officer has not brought anything on record on the basis of which any nexus could have been established between the material and the escapement of income. The reasons fails to demonstrate the link between the alleged tangible material and formation of the reason to believe that income has escaped assessment. The Hon’ble Delhi High Court in the case of Pr. CITv. G and G Pharma India Ltd. (2016) 384 ITR 147 (Delhi) : 2015 TaxPub(DT) 4054 (Del-HC) held as under (headnote) :–
“The basic requirement of law for reopening an assessment is application of mind by the assessing officer, to the materials produced prior to reopening the assessment, to conclude that he has reason to believe that income has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not make an inherently defective reassessment order valid.
The assessee filed returns for the assessment year 2003-04 which was processed under section 143(3) of the Income Tax Act, 1961. Based on the information received from the Directorate of Investigation about four entries, stated to have been received by the assessee on a single date, i.e., 10-2-2003, from four entities which were termed as accommodation entries, the assessing officer issued notice to the assessee for reassessment for the assessment year 2003-04 on 19-3-2010 stating that it was evident that the assessee-company had introduced its own unaccounted money in its bank by way of accommodation entries. The assessee’s appeal was dismissed by the Commissioner (Appeals). The Tribunal concluded, from the reasons recorded, that the assessing officer issued notice only on the basis of information received from the Investigation Wing but without coming to an independent conclusion for reason to believe that income had escaped assessment and allowed the appeal of the assessee. On appeal :–
Held, dismissing the appeal, that once the date on which the so-called accommodation entries were provided was known, it would not have been difficult for the assessing officer, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the assessee, which must have been tendered along with the return, which was filed on 14-11-2004 and was processed under section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for him to have simply concluded that it was evident that the assessee-company as introduced its own unaccounted money in its bank by way of accommodation entries. The basic jurisdictional requirement was application of mind by the assessing officer to the material produced before issuing the notice for reassessment. Without analysing and forming a prima facie opinion on the basis of material produced, it was not possible for the assessing officer to conclude that he had reason to believe that income had escaped assessment. The order of the Tribunal was proper. No question of law arose.”
6.1. The Hon’ble Delhi High Court in the case of Pr. CIT v. RMG Polyvinyl (I.) Ltd. (2017) 396 ITR 5 (Delhi) : 2017 TaxPub(DT) 2034 (Del-HC) held as under (headnote) :–
“The assessee filed its return for the assessment year 2008-09 and assessment was made under section 143(1) of the Income Tax Act, 1961. The assessing officer issued a notice for reassessment based on information received from the Investigation Wing that the assessee was the beneficiary of certain accommodation entries, which were given in the garb of share application money or expenses or gifts or purchase of shares during the period relevant to the assessment year 2004-05. He recorded that the assessee had not filed a return for the assessment year 2004-05, as there was no return available in the database of the Department and that consequently he had not offered any income for taxation. On appeal :–
Held, dismissing the appeal, that no link between the tangible material and the formation of the reasons to believe that income had escaped assessment, could be discerned. The information received from the Investigation Wing was not tangible material per se without a further enquiry having been undertaken by the assessing officer, who had deprived himself of that opportunity by proceeding on the erroneous premise that the assessee had not filed a return for the assessment year 2004-05 when in fact it had. In his assessment order, the assessing officer had, instead of adding a sum of Rs. 78 lakhs, even going by the reasons for reopening of the assessment, added a sum of Rs.1.13 crores and the basis for such addition had not been explained. No error was committed by the Appellate Tribunal in holding that reopening of the assessment under section 147 was bad in law. No question of law arose.”
6.2. The Income Tax. Appellate Tribunal, Delhi E-Bench in the case of MRY Auto Components Ltd. v. ITO (supra), on identical facts, following the decision of the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra), set aside and quashed the reopening of the assessment. The findings of the Tribunal in paras. 2 to 7 are reproduced as under :–
“2. Briefly the facts of the case are that information was received from the Investigation Wing of the Department to the effect that the assessee was a beneficiary in accommodation entry racket being run by certain persons. It had reportedly received certain accommodation entries during the year under assessment. The assessee is registered in Delhi and as per the alphabetical jurisdiction in the case of corporate assessee, the jurisdiction over the assessee lies with the ward of the assessing officer The information was considered and notice under section 148 was issued on 26-3-2010 after duly recording the reasons as required by provisions of law. The details regarding address of the assessee-company and its directors were obtained from the official website of the Ministry of Corporate Affairs. The assessee filed letter dated 30-11-2010, filed a return declaring nil income in response to notice under section 148 of the Act along with copy of the balance-sheet. The reasons recorded on issuance of notice under section 148 were provided to the assessee vide letter dated 30-10-2010 which are reproduced in the assessment order as under :–
‘…The Investigation Wing of the Income Tax Department had unearthed a huge money laundering mechanism wherein it was established that bogus accommodation entities were being provided/ taken. These accommodation entries are received in lieu of payment of cash of equivalent amount plus commission thereon to the entry operator. For obvious reasons, these cash transactions are not routed through the books of account of the assessee. In this case, information has been received from Directorate of Income Tax, (Investigation), New Delhi that during the relevant assessment year, this assessee had received the following cheque amount(s) in nature of accommodation entry :–
| Value of entry taken | Instrument No. by which entry taken | Date on which entry taken | Name of account holder of entry giving account | Bank from which entry given | Branch of entry giving bank | A/c. No. entry giving account |
| 300375 | 13-3-03 | Rahul Fin-lease (P) Ltd. | SB Patiala | Darya Ganj | 50082 | |
| 300315 | 26-2-03 | Kuldeep Textiles (P) Ltd. | SBB | NRR | 24624 | |
| 400415 |
27-3-03 |
Division Trading (P) Ltd., | SBBJ | NRR | 24620 |
Therefore, I have reason to believe that an income of Rs. 10,01,105 plus commission at 2 per cent, thereon amounting to Rs. 20,022 totalling to Rs. 10,21,127 has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and the case is fit for issuing. Notice under section 148 of Income Tax Act, 1961.’
2.1. The assessing officer noted that assessee has not filed any objections to the validity of the notice issued under section 148 of the Act. The assessee informed the assessing officer that it has had no transaction with M/s. Kuldeep Textiles (P) Ltd., as noted in the reasons. The assessee filed details to show that addition to the amounts mentioned above from Rahul Finlease (P) Ltd. and Division Trading (P) Ltd., it had received money allegedly towards share capital from the three other companies as well. The total amount of money received from these entities towards share capital is noted at page-3 of the assessment order totalling to Rs. 27 lakhs from five parties. The assessing officer after discussion made addition of Rs. 27 lakhs to the income of the assessee-company under section 68 of the Income Tax Act and also disallowed Rs. 54,000 being commission paid for taking these accommodation entries. Income of the assessee was computed at Rs. 27,54,000. The assessee challenged the reopening of the assessment as well as addition on the merits before the learned Commissioner (Appeals). However, the learned Commissioner (Appeals), dismissed the appeal of assessee.
3. Learned counsel for the assessee submitted that the issue is covered in favour of the assessee by the recent judgment of the Hon’ble Delhi High Court in the case of Pr. CIT v. Meenakshi Overseas (P) Ltd. reported in (2017) 395 ITR 677 (Delhi) : 2017 TaxPub(DT) 1791 (Del-HC).. He has also relied upon the decision of the Hon’ble Bombay High Court in the case of General Electoral Trust v. ITO (2016) 289 CTR 284 (Bom) : 2016 TaxPub(DT) 3822 (Bom-HC) on the proposition that non-filing of the return of income does not ipso facto give jurisdiction to reopen the assessment. He has also relied upon the decision of the Income Tax Appellate Tribunal, Delhi ‘G’ Bench, in the case of Mrs. Sonia Choudharyv. ITO (I.T.A. Nos. 2036 and 2037/Delhi/2010, dt. 7-10-2016), in which on the identical reasons for reopening of the assessment, the reassessment proceedings have been quashed. Learned counsel for the assessee, therefore, submitted that reopening of the assessment may be quashed in this case.
4. The learned Departmental Representative on the other hand, relied upon the orders of the authorities below.
5. We have considered the rival submissions. The Hon’ble Delhi High Court in its recent decision in the case of Pr. CIT v. Meenakshi Overseas (P) Ltd.(supra), in paras. 19 to 38 held as under (page 684 of 395 ITR) :–
’19. A perusal of the reasons as recorded by the assessing officer reveals that there are three parts to it. In the first part, the assessing officer has reproduced the precise information he has received from the Investigation Wing of the Revenue. This information is in the form of details of the amount of credit received, the payer, the payee, their respective banks, and the cheque number. This information by itself cannot be said to be tangible material.
20. Coming to the second part, this tells us what the assessing officer did with the information so received. He says : “The information so received has been gone through”. One would have expected him to point out what he found when he went through the information. In other words, what in such information led him to form the belief that income escaped assessment. But this is absent. He straightaway records the conclusion that “the above said instruments are in the nature of accommodation entry which the assessee had taken after paying unaccounted cash to the accommodation entry given (sic giver)”. The assessing officer adds that the said accommodation was “a known entry operator” the source being “the report of the Investigation Wing”.
21. The third and last part contains the conclusion drawn by the assessing officer that in view of these facts, “the alleged transaction is not the bona fide one. Therefore, I have reason to be believe that an income of Rs. 5,00,000 has escaped assessment in the assessment year 2004-05 due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment…”.
22. As rightly pointed out by the Income Tax Officer, the “reasons to believe” are not in fact reasons but only conclusions, one after the other. The expression “accommodation entry” is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the assessee on his paying “unaccounted cash” is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the Director of Income Tax. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.
23. Thus, the crucial link between the information made available to the assessing officer and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.
24. The reopening of assessment under section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the assessing officer that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of section 147(1) of the Act.
25. At this stage it requires to be noted that since the original assessment was processed under section 143(1) of the Act and not section 143(3) of the Act, the proviso to section 147 will not apply. In other words, even though the reopening in the present case was after the expiry of four years from the end of the relevant assessment year it was not necessary for the assessing officer to show that there was any failure to disclose fully or truly all material facts necessary for the assessment.
26. The first part of section 147(1) of the Act requires the assessing officer to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The assessing officer being a quasi-judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre-condition to the assumption of jurisdiction under section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment.
27. Each case obviously turns on its own facts and no two cases are identical. However, there have been a large number of cases explaining the legal requirement that requires to be satisfied by the assessing officer for a valid assumption of jurisdiction under section 147 of the Act to reopen a past assessment.
28.1. In Signature Hotels (P) Ltd. v. ITO (2011) 338 ITR 51 (Delhi) : 2011 TaxPub(DT) 1992 (Del-HC), the reasons for reopening as recorded by the assessing officer in a proforma and placed before the Commissioner for approval read thus (page 56 of 338 ITR) :–
“11. Reasons for the belief that income has escaped assessment.–Information is received from the Director of Income Tax (Investigation- 1), New Delhi that the assessee has introduced money amounting to Rs. 5 lakhs during the financial year 2002-03 relating to the assessment year 2003-04. Details are contained in annexure. As per infonnation amount received is nothing but accommodation entry and the assessee is a beneficiary.”
28.2 The annexure to the said proforma gave the name of the beneficiary, the value of entry taken, the number of the instrument by which entry was taken, the date on which the entry was taken, name of the account holder of the bank from which the cheque was issued, the account number and so on.
28.3 Analysing the above reasons together with the annexure the court observed (page 59 of 338 ITR) :–
“14. The first sentence of the reasons states that information had been received from the Director of Income Tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lakhs during financial year 2002-03 as per the details given in annexure. The said annexure, reproduced above, relates to a cheque received by the petitioner on 9-10-2002 from Swetu Stone PV from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary.
15. The aforesaid reasons do not satisfy the requirements of section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except annexure, which has been quoted above. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the assessing officer did not apply his own mind to the information and examine the basis and material of the information. The assessing officer accepted the plea on the basis of vague information in a mechanical manner. The Commissioner also acted on the same basis by mechanically giving his approval. The reasons recorded reflect that the assessing officer did not independently apply his mind to the information received from the Director of Income Tax (Investigation) and arrive at a belief whether or not any income had escaped assessment.”
28.4. The court in Signature Hotels (P) Ltd. v. ITO (2011) 338 ITR 51 (Delhi) : 2011 TaxPub(DT) 1992 (Del-HC)quashed the proceedings under section 148 of the Act. The facts in the present case are more or less similar. The present case is therefore covered against the Revenue by the aforementioned decision.
29.1. The above decision can be contrasted with the decision in AGR Investment Ltd. v. Addl. CIT (2011) 333 ITR 146 (Delhi) : 2011 TaxPub(DT) 0812 (Del-HC), where the “reasons to believe” read as under (page 151 of 333 ITR) :–
“Certain investigations were carried out by the Directorate of Investigation, Jhandewalan, New Delhi in respect of the bogus/ accommodation entries provided by certain individuals/companies. The name of the assessee figures as one of the beneficiaries of these alleged bogus transactions given by the Directorate after making the necessary enquiries. In the said information, it has been inter alia reported as under :–
‘Entries are broadly taken for two purposes :–
1. To plough back unaccounted black money for the purpose of business or for personal needs such as purchase of assets etc., in the form of gifts, share application money, loans, etc.
2. To inflate expense in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes. It has been revealed that the following entries have been received by the assessee’ “
29.2. The details of six entries were then set out in the above “reasons”. These included name of the beneficiary, the beneficiary’s bank, value of the entry taken, instrument number, date, name of the account in which entry was taken and the account from where the entry was given the details of those banks. The reasons then recorded :–
“The transactions involving Rs. 27,00,000, mentioned in the manner above, constitutes fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income/income from other sources of the assessee-company, which has not been offered to tax by the assessee till its return filed.
On the basis of this new information, I have reason to believe that the income of Rs. 27,00,000 has escaped assessment as defined by section 147 of the Income Tax Act. Therefore, this is a fit case for the issuance of the notice under section 148.”
29.3. The court was not inclined to interfere in the above circumstances in exercise of its writ jurisdiction to quash the proceedings. A careful perusal of the above reasons reveals that the assessing officer does not merely reproduce the information but takes the effort of revealing what is contained in the investigation report specific to the assessee. Importantly he notes that the information obtained was “fresh” and had not been offered by the assessee till its return pursuant to the notice issued to it was filed. This is a crucial factor that went into the formation of the belief. In the present case, however, the assessing officer has made no effort to set out the portion of the investigation report which contains the information specific to the assessee. He does not also examine the return already filed to ascertain if the entry has been disclosed therein.
30.1. In CIT v. Highgain Finvest (P) Ltd. (2008) 304 ITR 325 (Delhi) : 2008 TaxPub(DT) 0695 (Del-HC) relied upon by Mr. Chaudhary, the reasons to believe read as under (page 327 of 304 ITR) :–
“It has been informed by the Additional Director of Income Tax (Investigation), Unit VII, New Delhi vide letter No. 138 dated 8-4-2003 that this company was involved in the giving and taking bogus entries/transactions during the financial year 1996-97, as per the deposition made before them by Shri Sanjay Rastogi, chartered accountant during a survey operation conducted at his office premises by the Investigation Wing. The particulars of some of the transaction of this nature are as under :–
Date particulars of cheque debit amount credit amount 18.11.96 305002 5,00,000 Through the bank account No. CA 4266 of M/s. Mehram Exports (P) Ltd. in the PNB, New Rohtak Road, New Delhi.
Note : It is noted that there might be more such entries apart from the above.
The return of income for the assessment year 1997-98 was filed by the assessee on March 4, 1998 which was accepted under section 143(1) at the declared income of Rs. 4,200. In view of these facts, I have reason to believe that the amount of such transactions particularly that of Rs. 5,00,000 (as mentioned above) has escaped the assessment within the meaning of the proviso to section 147 and clause (b) to Explanation 2 of this section.
Submitted to the Additional CIT, Range-2, New Delhi for approval to issue notice under section 148 for the assessment year 1997-98, if approved.”
30.2. The assessing officer was not merely reproducing the information received from the investigation but took the effort of referring to the deposition made during the survey by the chartered accountant that the assessee-company was involved in the giving and taking of bogus entries. The assessing officer thus indicated what the tangible material was which enabled him to form the reasons to believe that income has escaped assessment. It was in those circumstances that in the case, the court came to the conclusion that there was prima facie material for the assessing officer to come to the conclusion that the assessee had not made a full and true disclosure of all the material facts relevant for the assessment.
31. In CIT v. G and G Pharrna (supra) there was a similar instance of reopening of assessment by the assessing officer based on the information received from the Director of Income Tax (Investigation). There again the details of the entry provided were set out in the ‘reasons to believe’. However, the court found that the assessing officer had not made any effort to discuss the material on the basis of which he formed prima facie view that income had escaped assessment. The court held that the basic requirement of section 147 of the Act that the assessing officer should apply his mind in order to form reasons to believe that income had escaped assessment had not been fulfilled. Likewise in CIT v. Independent Media (P) Ltd. (I.T.A. No. 108 of 2013, dt. 19-11-2015) the court in similar circumstances invalidated the initiation of the proceedings to reopen the assessment under section 147 of the Act.
32. In Oriental Insurance Co. v. CIT (2015) 378 ITR 421 (Delhi) : 2015 TaxPub(DT) 3662 (Del-HC) it was held that “therefore, even if it is assumed that, in fact, the assessee’s income has escaped assessment, the assessing officer would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. In absence of the jurisdictional precondition being met to reopen the assessment, the question of assessing or reassessing income under section 147 of the Act would not arise”.
33. In Rustagi Engineering Udyog (P) Ltd. (2016) 382 ITR 443 (Delhi) : 2016 TaxPub(DT) 1719 (Del-HC) it was held that “… the impugned notices must also be set aside as the assessing officer had no reason to believe that the income of the assessee for the relevant assessment years had escaped assessment. Concededly, the assessing officer had no tangible material in regard to any of the transactions pertaining to the relevant assessment years. Although the assessing officer may have entertained a suspicion that the assessee’s income has escaped assessment, such suspicion could not form the basis of initiating proceedings under section 147 of the Act. A reason to believe–not reason to suspect–is the pre-condition for exercise of jurisdiction under section 147 of the Act”.
34. Recently in Agya Ram v. CIT (2016) 386 ITR 545 (Delhi) : 2016 TaxPub(DT) 3841 (Del-HC) it was emphasized that the reasons to believe “should have a link with an objective fact in the form of information or materials on record …” It was further emphasized that “mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments”.
35. In the decision of this court in Rajiv Agarwal v. Asst. CIT (2017) 395 ITR 255 (Delhi) : 2017 TaxPub(DT) 1855 (Del-HC) (W. P. (C) No. 9659 of 2015, dt. 16-3-2016), it was emphasized that “even in cases where the assessing officer comes across certain unverified information, it is necessary for him to take further steps, make inquiries and garner further material and if such material indicates that income of an assessee has escaped assessment, form a belief that income of the assessee has escaped assessment”.
36. In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the assessing officer one after the other. There is no independent application of mind by the assessing officer to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the assessing officer are at best a reproduction of the conclusion in the investigation report. Indeed it is a “borrowed satisfaction”. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.
37. For the aforementioned reasons, the court is satisfied that in the facts and circumstances of the case, no error has been committed by the Income Tax Appellate Tribunal in the impugned order in concluding that the initiation of the proceedings under section 147/148 of the Act to reopen the assessments for the assessment years in question does not satisfy the requirement of law.
38. The question framed is answered in the negative, i.e., in favour of the assessee and against the Revenue. The appeal is, accordingly, dismissed but with no orders as to costs.’
5.1. In this case, the reasons for reopening are also reproduced in the judgment of the Hon’ble Delhi High Court in which similarly information has been received from Director of Income Tax (Investigation), New Delhi that the assessee has received amount of Rs. 5 lakhs. The assessing officer on going through the information found that it is an accommodation entry and reopened the assessment. In the instant case under appeal, the assessing officer has reproduced the precise information he has received from Investigation Wing of the Revenue and reproduced the same in the reasons recorded under section 148 of the Income Tax Act. This information shows that assessee has received the amount of credit through banking channels by mentioning names of the parties and cheque nos. with amount. This information by itself cannot be said to be tangible material. The assessing officer has not gone through the details of these information and has not even applied his mind and merely concluded that he has reason to believe that income chargeable to tax has escaped assessment. The reason to believe are therefore, not in fact reasons but only conclusion of the assessing officer. The expression ‘accommodation entry’ is used to describe the information set-out without explaining the basis for arriving at such conclusion. In the case of Meenakshi Overseas (P) Ltd. (supra), the assessing officer in the reasons has even mentioned that he has gone through the information so received which is lacking in the instant case. The assessing officer being a quasi-judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. The assessing officer however, merely repeated the report of Investigation Wing in the reasons and formed his belief that income chargeable to tax has escaped assessment without arriving at his satisfaction. The reason to believe contain no reason but the conclusion of assessing officer without any basis. Thus, there is no independent application of mind by the assessing officer to the report of Investigation Wing which form the basis for reasons to believe that income has escaped assessment. The conclusion of the assessing officer in the reason are at best reproduction of conclusion of the investigation report. It is borrowed satisfaction not permissible in law. The reasons fail to demonstrate the link between the alleged tangible material and the formation of the reason to believe that income has escaped assessment. The issue is therefore, identical in the present appeal as has been considered and decided by the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra). The issue is therefore, covered in favour of the assessee by the judgment of the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra).
5.2. The Hon’ble Bombay High Court in the case of General Electoral Trust v. ITO(supra) held as under :–
‘Non-filing of return of income and/or not obtaining of permanent account number does not ipso facto give jurisdiction to reopen an assessment under section 147/148, prima facie jurisdiction even in case of non-filing of the return of income, to issue notice of reopening notice is a reasonable belief of the assessing officer that income chargeable to tax has escaped assessment.’
5.3 The learned counsel for the assessee also relied upon the order of the Income Tax Appellate Tribunal, Delhi ‘G’ Bench in the case of Mrs. Sonia Choudhary v. ITO (supra), in which on identical facts the reopening of the assessment have been quashed.
5.4 In view of the above, reopening of assessment in the facts and circumstances of the case are not justified and have to be quashed.
6. Considering the facts and circumstances of the case, in the light of above discussion and the decision of the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra), we set aside the orders of the authorities below and quash the reopening of the assessment under section 147/148 of the Income Tax Act. Resultantly, the entire additions of Rs. 27,54,000 are deleted. Since the reopening of the assessment is quashed, therefore, there is no need to decide the addition on the merits.
7. In the result, the appeal of the assessee is allowed.”
6.3. Considering the above discussion, it is clear that there is a total non-application of mind on the part of the assessing officer while recording the reasons for reopening of the assessment. He has recorded incorrect amount which escaped assessment. His conclusion was merely based on the observations and information received from the Director of Income Tax (Investigation), New Delhi, which is not brought on record and his conclusion is merely based on doubts because he was not sure whether transaction in question is genuine or not. Therefore, the decisions relied upon by the learned counsel for the assessee squarely apply to the facts and circumstances of the case. The decisions relied upon by the learned Departmental Representative would not support the case of the Revenue. Since there is a total lack of mind while recording the reasons for reopening of the assessment, therefore, assumption of jurisdiction under section 147/148 of the Income Tax Act, 1961, is bad and illegal. The assessing officer was not justified in assuming jurisdiction under section 147/148 of the Income Tax Act, 1961. We, therefore, hold that reopening of the assessment in the matter is bad in law and illegal, as such, the same cannot be sustained in law. We, accordingly, set aside the orders of the authorities below and quash the reopening of the assessment. Resultantly, all additions stand deleted.
7. In the result, the appeal of the assessee is allowed.
