Reassessment quashed as there was tangible material in possession of AO at the time of reopening and re-pening based merely on CIB Report alone

Short Overview Even though reopening of assessment was made after expiry of four years from the end of the relevant assessment, however, there was no original return of income filed by assessee and consequent assessment, hence, it was not necessary for AO to show that there was any failure to disclose fully or truly all material facts necessary for assessment in terms of proviso to section 147, however, AO had merely gone by the CIB Report and was not even in possession of sale deed and the exact specifics of transaction at the time of recording of reasons and, therefore, proceedings were vitiated for want of tangible material in possession of AO and lack of reason to believe which was more in the realm of suspicion, rather than formation of opinion that income had escaped assessment.

AO received information from CIB as to assessee having sold immovable property for a consideration of Rs. 7 lakhs which was valued at Rs. 7.17 lakhs for the purposes of charging stamp duty. Accordingly, AO reopened assessment after expiry of four years from the end of relevant assessment year. Assessee took plea of proviso to section 147. 

It is held that  Even though reopening was made after expiry of four years from the end of the relevant assessment, however, there was no original return of income filed by assessee and consequent assessment, hence it was not necessary for AO to show that there was any failure to disclose fully or truly all material facts necessary for assessment in terms of proviso to section 147, however, AO had merely gone by the CIB report and was not even in possession of sale deed and the exact specifics of transaction at the time of recording of reasons and, therefore, proceedings were vitiated for want of tangible material in possession of AO and lack of reason to believe which was more in the realm of suspicion, rather than formation of opinion that income had escaped assessment.

Decision: In assessee s favour.

Followed: Balaji Health Care (P) Ltd. v. ITO (2019) 14 ITR (Trib) 570 (JP) [ITA Nos. 566 and 567/JP/2018 vide Order dated 30-1-2019

 

IN THE ITAT, JAIPUR “A” BENCH

SANDEEP GOSAIN, J.M. & VIKRAM SINGH YADAV, A.M.

Shujaat Ali Khan v. ITO

ITA No. 170/JP/2019

A.Y. 2008-09

5 January, 2021

Assessee by: Vinod Kumar Gupta, Chartered Accountant

Department by: Monisha Chaudhory, Additional Commissioner

ORDER

Vikram Singh Yadav, A.M.

The assessee has filed the present appeal against the order of the learned Commissioner (Appeals)-II, Jaipur, dated 19-11-2018 pertaining to the assessment year 2008-09 wherein the assessee has taken the following grounds of appeal :–

“1. The impugned addition and disallowances made in the order under section 147/143(3) of the Income Tax Act, 1961, dated 2-2-2016 are bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence, the same kindly be deleted.

2. Rs. 7,17,286 : The learned Commissioner (Appeals) erred in law as well as on the facts of the case in confirming the addition of Rs. 7,17,286 made on account of short-term capital gains. The addition so made and confirmed by the learned Commissioner of Income Tax (Appeals), is contrary to the provisions of law and facts hence, kindly be deleted in full.

3. The learned assessing officer further erred in law as well as on the facts of the case in charging interest under sections 234A, 234B and 234C of the Act. The interest so charged, being contrary to the provisions of law and facts, kindly be deleted in full.”

2. Briefly the facts of the case are that the case of the assessee was reopened under section 147 of the Act and notice under section 148 was issued on 25-3-2015, in response to which return of income was filed on 16-6-2015 declaring total income of Rs. 1,04,500 as income from commission. The case was reopened on the ground of alleged sale of immovable property by the assessee for sale consideration of Rs. 7,00,000, the value of which was adopted at Rs. 7,17,826 by stamp valuing authority. The assessment under section 143(3) read with section 147 was completed after making addition of Rs. 7,71,826 being alleged undisclosed short-term capital gain on alleged sale of immovable property after invoking section 50C of the Act. The assessee preferred an appeal before the learned Commissioner (Appeals), which was decided by the learned Commissioner (Appeals) vide Order, dated 19-11-2018 sustaining the findings of the assessing officer and addition made under section 148 of the Act. Against the said order of the learned Commissioner (Appeals), the assessee is in appeal before us.

3. During the course of hearing, the learned Authorised Representative submitted that the assessee is an individual drawing income from commission. During the year, total income of Rs. 1,04,500 was earned which was below the maximum amount not chargeable to tax, therefore no return of income was filed by the assessee. During the year under consideration, the assessee got a power of attorney in his favour on 27-10-2007 from one Shri Nishikant Khopkar for sale of a property being Flat No. 2/304, Jawahar Nagar, Jaipur. The property was owned and possessed by Shri Nishikant Khopkar. The aforesaid property was sold to Shri Amit Ahuja on 29-12-2007 by Shri Nishikant Khopkar for sale consideration of Rs. 7,00,000 through registered sale deed, dated 29-12-2007. As the assessee was a power of attorney holder of the seller Shri Nishikant Khopkar, therefore, the registry documents were presented by the assessee for registration as power of attorney holder. The assessing officer got certain CIB information that the assessee has sold a property for sale consideration of Rs. 7,00,000 whose value taken for the purpose of stamp duty valuation has been taken at Rs. 7,17,286 and on this basis, the assessing officer entertained a reason to believe that income to the extent of Rs. 7,17,286 has escaped the assessment and the case of assessee was reopened under section 148 after recording of reasons, dated 25-3-2015.

4. It was submitted by the learned Authorised Representative that after recording the abovementioned reasons, the assessing officer obtained copy of registered sale deed from the office of Sub-registrar-2, Jaipur, by issuing notice under section 133(6), dated 3-8-2015. The addition of Rs. 7,17,286 was made by the assessing officer on the ground of alleged undisclosed capital gain earned by the assessee on sale of property for Rs. 7,00,000, whose value for the purpose of stamp duty valuation has been taken at Rs. 7,17,286 holding the assessee to be the owner of the property and invoking section 50C of the Act.

5. It was submitted by the learned Authorised Representative that a perusal of the reasons recorded reveals that the assessing officer was of belief that the assessee has sold the property for Rs. 7,00,000 and on this ground, the action of initiation under section 148 of the Act was taken, whereas in fact, the assessee never sold any property as he was the mere power of attorney holder acting on behalf of seller and owner of property was Shri Nishikant Khopkar. Therefore, the ground so taken by the assessing officer to form belief of escapement is factually incorrect. To sell something in someone’s own right, firstly, the person must own the same and there is no such evidence that the assessee was having ownership of said property. Once, it is an established fact that the assessee was not the owner of the property, how can he sell the same. Therefore, the reasons so recorded were on wrong presumption and without looking into the correct facts of the case. In support of our contention we rely upon the decision of the Hon’ble co-ordinate Bench in the case of Shailesh Kumar Chaturvedi v. ITO (2020) 20 ITR (Trib)-OL 101 (Jaipur) (I. T. A. No. 1026/JP/2019 Order, dated 7-7-2020).

6. It was further submitted that in the instant case, the reasons were recorded by the assessing officer on 25-3-2015 on the basis of CIB information available that a property has been sold by the assessee for sale consideration of Rs. 7,00,000 and on the basis of the said information and non-filing of return, it was concluded that the income has escaped the assessment. After recording the reasons, a notice under section 133(6), dated 3-8-2015 was issued to Sub-registrar-2 to obtain the copy of registered sale deed of the transaction. In view of these facts, it emerges that the assessing officer was having information from two sources, viz., information received in the form of CIB report and information (registered sale deed) obtained from the sub-registrar by way of notice under section 133(6). It is important to note that the registered sale deed was obtained by the assessing officer after recording the reasons, thus, at the time of recording the reasons, there was no tangible material in the hands of the assessing officer to have any reason to believe that income to the extent of Rs. 7,17,286 has escaped the assessment and the assessing officer was having the CIB Information only.

7. It was further submitted that the report of the CIB was only sufficient to make a prima facie reason to suspect that the same property has been sold by Shri Shujaat Ali Khan but it was not sufficient enough to draw a conclusion that the income has escaped the assessment. To convert reason to suspect into reason to believe some tangible material was needed. Therefore, to reach to such a decisive finding the assessing officer was expected to obtain the said registered sale deed, before recording the reasons, from Sub-registrar or from the assessee, but nothing of this sort was done. This shows that the assessing officer merely gone by the report of CIB. In this regard reliance is placed on the 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) wherein the Hon’ble High Court held as under (page 685) :–

“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.”

8. It was further submitted the non-availability of any tangible information at the time of recording of reasons is further supported by the fact that in the reasons, the assessee was termed as seller, whereas in the registered sale deed, the name of assessee is clearly mentioned as GPA holder of Nishikant Khopkar. Thus, the information in the possession of the assessing officer and obtained under section 133(6) were contradictory to each other. As mentioned above, after recording the reasons, the assessing officer has subsequently written a letter under section 133(6) to Sub-registrar-2 to obtain the copy of sale deed. Given that, on the basis of this transaction, the assessing officer formed a reason of escapement in the hands of the assessee, therefore, it was essential on his part to at least examine the correct facts of the transaction beforehand. There is no dispute that the assessing officer can rely upon the information received but at the same time, where he is assuming jurisdiction under section 147, he is required to carry out further examination to make an established formation of belief that income has escaped, whereas, nothing of this sort was done. In support of his contentions, he has relied upon the decision of Jaipur Bench in the case of Balaji Health Care (P) Ltd. v. ITO (2019) 14 ITR (Trib)-OL 570 (Jaipur) (I. T. A. Nos. 566 and 567/JP/2018 vide Order, dated 30-1-2019).

9. It was accordingly submitted that in view of these facts and circumstances, once the assessing officer reached to a decisive finding that the assessee has sold the property and the sale consideration of Rs. 7,00,000 whose value adopted for stamp duty valuation purpose of Rs. 7,17,286 has escaped the assessment, he was to make some inquiry to bring some tangible material rather than completely relying upon a one line information and then was to examine the correct facts to establish the nexus between the material and formation of belief that income has escaped. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons but as there was no such tangible material with the assessing officer and only conclusions have been drawn. Therefore, in the absence of these preconditions, the assumption of jurisdiction under section 147 has no legal basis and resultantly the assessment made under section 148 deserves to be quashed.

10. Per contra, the learned Departmental representative submitted that the assessing officer was in receipt of CIB information that the assessee has sold an immovable property and thus had received sale consideration for transfer of property which was not disclosed to the Department in absence of any return of income and therefore, it is a clear case of escapement of income and the assessing officer was justified in initiating the proceedings under section 148 which have been rightly upheld by the learned Commissioner (Appeals). He accordingly supported the order passed by the lower authorities and has relied upon the findings of the learned Commissioner (Appeals) wherein at para 2.3, it was held as under :–

“2.3 I have perused the facts of the case, the assessment order and the submissions of the appellant. The assessee challenged the reopening proceedings. The assessing officer has information that the assessee received sale consideration for transfer of property and the same was not disclosed in the return of income. Therefore, I upheld the action of the assessing officer in reopening the case. This ground of appeal is dismissed.”

11. We have heard the rival contentions and perused the material available on record. It is a settled legal proposition that the satisfaction of the assessing officer for assumption of jurisdiction under section 147 of the Act should be discernible from the reasons so recorded and the reasons alone should be considered for determining whether the assessing officer is in possession of the material/information basis which he has formed the reasonable belief that the income of the assessee has escaped assessment for the impugned assessment year. For assumption of jurisdiction under section 147, the assessing officer must form a prima facie view on the basis of tangible material in his possession that there is an escapement of income, the opinion so formed may be subjective but the reasons recorded or the information available on record must show that the opinion is not a mere suspicion, the reasons recorded and/or the documents available on record must show a link/nexus and relevancy to the opinion formed by the assessing officer regarding escapement of income and the reasons are required to be read as they were recorded by the assessing officer. It is for the Assessing officer to disclose and open his mind through the reasons recorded by him and he has to speak through the reasons that the income chargeable to tax has escaped assessment. In the present case, the reasons recorded by the assessing officer before issuance of notice under section 148 read as under :–

“As per the information available on record, during the period under consideration, the assessee has sold immovable property for consideration of Rs. 7,00,000 which has been valued at Rs. 7,17,286 for the purpose of charging stamp duty. On verification of record, it has been found that the assessee has not filed the return of income. Thus the assessee has failed to disclose fully and truly all material facts necessary for his assessment. Therefore, I have the reason to believe that the above income of Rs. 7,17,286, which is chargeable to tax has escaped assessment.”

12. On perusal of the reasons so recorded, we find that the assessing officer had received certain information that the assessee had sold an immovable property for a consideration of Rs. 7 lakhs and which has been valued at Rs 7.17 lakhs for the purposes of charging stamp duty. The nature and source of such information is not discernible from the reasons so recorded nor the specific of the immovable property in terms of location, size, purchaser, etc., has been stated, therefore, the question that has been raised before us is about the tangible nature of such information and material in possession of the assessing officer and the nexus thereof with formation of belief that the income has escaped assessment. It has been contended by the learned Authorised Representative that the information so referred in the reasons recorded is only the CIB report received by the assessing officer, a fact which is corroborated by the assessing officer where he had subsequently issued a notice under section 133(6) to Sub-registrar-2 to obtain copy of the sale deed. It is an admitted fact that the said notice under section 133(6) was issued on 3-8-2015 subsequent to recording of reasons by the assessing officer on 25-3-2015. Therefore, we find that as on the date of recording of reasons by the assessing officer, only piece of information in possession of the assessing officer was the CIB report that the assessee has sold certain immovable property and the assessing officer was not even having a copy of the sale deed or the specifics of the immovable property, which to our mind, raises a question mark on the tangible nature of such information in terms of whether it is real or actual rather than imaginary and whether it actually relates to the assessee or not. Where the assessing officer still wishes to rely on the report of CIB, given that such report is more of a generic report and not containing exact specifics of immovable property and other particulars of the transaction, it is expected that the assessing officer on receipt of such report should carry out further examination before arriving at the prima facie view that income has escaped assessment and the matter is fit for issuance of notice under section 148 of the Act. Such examination is required to be carried out before issuance of notice under section 148 as the same is required for the assessing officer to form his own independent opinion that the income has escaped assessment. In the instant case, there is no such examination and investigation carried out by the assessing officer and in fact, only after recording of the reasons, he has sought copy of the sale deed from the Sub-registrar where the assessee has been shown as power of attorney holder of the owner of the immovable property which again raises a question mark on the tangible nature of the CIB report. We, therefore, find that the assessing officer has merely gone by the CIB report and was not even in possession of the sale deed and the exact specifics of the transaction at the time of recording of reasons and therefore, it is a case where the proceedings are vitiated for want of tangible material in possession of the assessing officer and lack of reason to believe which is more in the realm of suspicion rather than formation of opinion that income has escaped assessment. The reasons thus recorded and/or the documents available on record, therefore, do not show a link/nexus and relevancy to the opinion formed by the assessing officer regarding escapement of income. Further, even though the reopening in the present case was after the expiry of four years from the end of the relevant assessment year 2008-09, given that there was no original return of income filed by the assessee and consequent assessment, 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 in terms of proviso to section 147 of the Act which is not applicable in the instant case. Similar view has been taken by the co-ordinate Bench in the case of Balaji Health Care (P) Ltd. (supra) wherein the relevant findings read as under (page 589 of 14 ITR-OL) :–

“. . . Further, it is noted that after recording of the reasons, the assessing officer has subsequently written a letter on 30-8-2013 to Assistant Commissioner, New Delhi requesting for copy of statements of Surendra Kumar Jain, Virendra Kumar Jain at whose premises the search was conducted and P. C. Agarwal, so-called mediator in these transactions. Given that search proceedings in respect of these two persons have formed the basis for the present reassessment proceedings in the hands of the assessee, it was essential to at least examine the statements of these three persons and seized material if any found during the course of search which in any ways indicate that these two persons have carried out certain trans actions with the assessee and prima facie these transactions are suspected to be accommodation entries and not actual transactions. However, there is nothing in the reasons so recorded that the assessing officer has gone through the statements so recorded during the course of search and the seized material to show prima facie linkage of the assessee’s undisclosed income being routed back in form of share capital. This shows that the assessing officer has merely gone by the report of the Director of Income Tax, Investigation Wing and the said report even did not have the statements of these persons which either find mention in the report or as enclosures when the same was forwarded to the assessing officer. Therefore, it transpires that there is no further examination which has been carried out by the assessing officer. The fact that the assessee has filed its return of income under section 139(1) was very much in the knowledge of the assessing officer and the latter could have verified the transactions with the reported transactions in the financial statements and could have asked for more information to establish the necessary nexus, however nothing of that sort has been done by the assessing officer and he has merely gone by the report of Director of Income Tax, Investigation Wing. It is true that the assessing officer can rely on the report of Director of Income Tax, Investigation Wing but at the same time, where he is assuming jurisdiction under section 147, he is required to carry out further examination and analysis in order to establish the nexus between the material and formation of belief that income has escaped assessment and in the absence thereof, the assumption of jurisdiction under section 147 has no legal basis and resultant reassessment proceedings deserve to be set aside. Our view is fortified by the decision of the Hon’ble Delhi High Court in the case of Meenakshi Overseas (P) Ltd. (supra) wherein it was held as under (page 684 of 395 ITR) :–

‘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.

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 abovesaid 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”.

The third and the 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 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…”

As rightly pointed out by the Income Tax Appellate Tribunal, 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.

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.

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.

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.

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 precondition 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. . . .

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.

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.’

Subsequently, 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) has held as under (page 9) :–

‘Recently, in its decision, dated 26-5-2017 in I. T. A. No. 692 of 2016 Pr. CIT v. Meenakshi Overseas (supra) this court discussed the legal position regarding reopening of assessments where the return filed at the initial stage was processed under section 143(1) of the Act and not under section 143(3) of the Act. The reasons for the reopening of the assessment in that case were more or less similar to the reasons in the present case, viz., information was received from the Investigation Wing regarding accommodation entries provided by a “known” accommodation entry provider. There, on facts, the court came to the conclusion that the reasons were, in fact, in the form of conclusions “one after the other” and that the satisfaction arrived at by the assessing officer was a “borrowed satisfaction” and at best a reproduction of the conclusion in the investigation report.

As in the above case, even in the present case, the court is unable to discern the link between the tangible material and the formation of the reasons to believe that income had escaped assessment. In the present case too, the information received from the Investigation Wing cannot be said to be tangible material per se without a further inquiry being undertaken by the assessing officer. In the present case the assessing officer deprived himself of that opportunity by proceeding on the erroneous premise that the assessee had not filed a return when in fact it had.’

In the light of the above discussions and in the entirety of facts and circumstances of the case, the assumption of jurisdiction and initiation of the proceedings under section 147 of the Act to reopen the assessment proceedings does not satisfy the requirement of law and is hereby set aside. In the result, ground No. 1 of the assessee’s appeal is allowed.”

13. In the light of the above discussions and in the entirety of facts and circumstances of the case and following the decisions referred supra, the assumption of jurisdiction and initiation of the proceedings under section 147 of the Act to reopen the assessment proceedings are vitiated and does not satisfy the requirement of law and such action on the part of the assessing officer cannot be accepted and the notice under section 148 and consequent proceedings are thus set aside. In the result, ground No. 1 of the assessee’s appeal is allowed.

14. In view of the above discussions where the reassessment proceedings have been quashed and set aside, the other grounds of appeal taken by the assessee have become academic and are thus dismissed as infructuous.

15. In the result, the appeal of the assessee is allowed.