ITO, WARD- 21(4), NEW DELHI vs. RUKMINI IRON PVT. LTD., DELHI

That on the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate both in law and on facts that there was no material having live nexus with the foundation of belief, therefore, initiation of re-assessment proceeding is bad in law and may please be annulled.

That the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate the fact that order dt. 28/12/2016 for disposing the objection for re-opening of assessment was not in accordance with law and has not dealt with all the objections raised by the assessee. Therefore, impugned assessment order is bad in law and may please be annulled.

That on the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals) has failed to appreciate both in law and on facts that the notice u/s 143(2) was not served within the stipulated period prescribed u/s 143(2) of I.T. Act, hence the impugned assessment order is invalid and bad in law and may please be annulled.”

The ld. Assessee’s Representative (ld. AR), by way of Cross Objections, has raised objections to the validity of assumption of jurisdiction for initiation of reassessment proceedings u/s 147 of the Income-tax Act, 1961 (for short, ‘the Act’) and issuance of notice u/s 148 of the Act on various grounds, which could be summarized as follows:- (i) Non-compliance by the AO of first proviso to section 147 of the Act as the assessment for AY 2009-10 has been reopened by way of recording reasons on 17.03.2016, i.e., beyond four years from the end of relevant assessment year; (ii) Passing of reassessment order within four weeks or before expiry of four weeks’ time from the date of disposal of objections of the assessee challenging the validity of reassessment proceedings and notice u/s 148 of the Act. (iii) The jurisdiction u/s 147 of the Act was assumed by the AO on the basis of the material seized during the search and seizure operation on Shri S.K. Jain and his brothers and on the exactly identical facts and circumstances where re-assessment proceedings were initiated based on the material seized in the search operation on Shri S.K. Jain and his brothers, were quashed in view of specific powers available to the AO to take action u/s 153C of the Act; CO No.66/Del/2018 (iv) No valid notice u/s 148 was issued and served on the assessee; (v) Non-application of independent mind by the AO while assuming jurisdiction to proceed with reassessment before supply of reasons which were based on mistakes of facts; (vi) The AO has initiated action u/s 147 of the Act based on the information forwarded by the Investigation Wing on 14.03.2013 related to search operation in the case of Shri S.K. Jain group on 14.09.2010 and the material found in search indicated involvement of the group in the activities of providing accommodation entries through bogus/benami entities, but, the AO did not apply his mind to the material and did not discuss how prima facie belief of accommodation entry is reached when no evidence/material regarding the payment of cash in lieu of cheques to searched group is discussed which clearly shows non-application of mind by the AO and in absence of any specific discussion of material on the basis of which independent prima facie belief is reached that income has escaped assessment, mere reproduction of information is not sufficient to meet the requirement of section 147 of the Act. The ld. AR has relied on the judgement of the Hon’ble High Court of Delhi in the case of CIT vs. Meenakshi Overseas, 395 ITR 677 (Del) and other judgements.

Further, regarding passing the order within four weeks from the disposal of objections on validity of reassessment proceedings, the ld. Sr. DR submitted that there is no requirement of law that the AO has to wait for four weeks after disposal of objections of the assessee to the initiation of reassessment proceedings. Therefore, this legal contention of the assessee being without any support from the law or any provisions of the Act, should be dismissed. On the validity of action u/s 147 in defiance of provisions of section 153C of the Act, the ld. Sr. DR submitted that both the courses are simultaneously available to the AO and, in a case where there is a new tangible material in the hands of the assessee received in the form of information from the Investigation Wing that the assessee has taken accommodation entries from Shri S.K. Jain and his brothers, then, the action of the AO of initiating reassessment proceedings u/s 147 of the Act and issuing notice u/s 148 has to be held as valid and permissible CO No.66/Del/2018 in the law. He also submitted that the AO cannot be debarred from initiating the proceedings u/s 147 of the Act merely because the material so gathered was outcome of a search and seizure operation.

On careful consideration of the above rival submissions, first of all, we find it just, proper and necessary to reproduce the relevant part of the reasons recorded by the AO wherein in paras 14-16, the AO has titled the same as ‘Reason to believe.’ This operative portion is as follows:- “4. Reason To Believe: After considering the return of income of the assessee, information received from Investigation Wing, copies of incriminating documents seized from custody and control of Jain Brothers, copies of assessment order and appeal order as discussed along with evidences related to the assessee and taking them into accounts have reached the following conclusion: a. That S.K.. Jain Group was engaged in the business of providing accommodation entries to beneficiaries in lieu by entities controlled by them in cash. This has been held by the CIT(Appeal) in his case recently and the same has been discussed as above. b. During the course of search operation, on S,K. Jain Group cases, various incriminating documents were been seized which showed that all the companies entities controlled by the group do not have any known business activities, and lack of independent existence as separate entity and were a part of group of companies engaged in providing accommodation entries. The above conclusion was corroborated with the following evidences found and seized during the course of search from their custody and control of S.K. Jain Group:  Seizure of passbooks and/or cheque books in the name of approx. 200 Persons/firms/companies i.e. entry provider companies.  Computer hard disks containing confidential details namely user name, password, id of various companies etc. 7 CO No.66/Del/2018  Documents containing the details of funds transferred through cheque/ RTGS pay order to various entities/persons through these entries provider.  Seizure of daily cash books wherein details of cash received from beneficiary companies/ persons through various middlemen agents by Jain Brothers in lieu of accommodation entries provided to beneficiary on different dates. • That entry provider companies were running their activities from the residential and the other premises of Sh. Surendra Kumar Jain and Sh. Virendra Kumar Jain through entry provider companies. • That third party correspondence with entry provider companies were seized from the. Custody of Sh. Surendra Kumar Jain and Sh. Virendra Kumar Jain. • That S.K. Jain / Virendra Jain and there close associates were directors of these entry provider companies during relevant but different time period. • Seizure of documents had revealed that commission- income was earned by Jain Brothers and mediator. d. It was further proved that evidence relating to all the steps involved in providing accommodation entries by entry provider companies in lieu of cash payment to Jain Brothers on charging commission were seized from custody and control of Jain Brothers. e. A perusal of documents as seized from the premises of Shri S.K. Jain Group has revealed that accommodation entry amounting to Rs. 2,40,00,000/-, (copy enclosed) was taken by the assessee Co., i.e. M/s Rukmini Iron Pvt. Ltd from S.K. .lain Group Companies. The particulars of which are as under:-

A careful examination of information received from the Investigation Wing and subsequent analysis of report of invesugatron wing, copies of seized document and verification of assessment and appeal order in case of Jain Brothers lead to an irresistible conclusion that the assessee had received share capital/loan of Rs. 2,40,00,000 from companies/entities engaged in business of providing accommodation entries by charging commission in lieu of cash payment by beneficiary assessee, accordingly, an amount of Rs.2,40,00,000 represents unexplained credit u s 68 of the Act in books of A/c of the assessee. 15.1 In view of the facts narrated above, it is clear that the assessee has not disclosed fully & truly all material facts necessary for its assessment for the assessment year 2009-10. I have therefore, reasons to believe that entry found in seized cash/ Cheque book of Jain brothers is nothing but an accommodation entry & assessee Company is beneficiary thereof. I have reason to believe that income of Rs. 2,40,00,000/- has escaped assessment in the A.Y. 2009-10, which includes commission @ 2%.

Since, the assessment/re-assessment proceedings in this case for A.Y. 2009-10 pertain to a period beyond four years but before the expiry of six years from the date of issue of notice, necessary sanction has to be obtained from Pr. Commissioner of Income Tax. in view of the amended provision of section 151 w.e.f 01.06.2015. The necessary sanction in this regard is being obtained separately from Pr. Commissioner of Income Tax-07. Delhi, before the issue of notice u/s. 148.”

On careful consideration of the above submissions, in the judgement of the jurisdictional High Court of Delhi in the case of BPTP Ltd. vs. PCIT (supra), in operative paras 22-25, it has been held that the recorded reasons except of CO No.66/Del/2018 using the expression ‘failure on the part of the assessee to disclose fully and truly all material facts’ do not specify as to what is the nature of default or failure on the part of the assessee. The relevant paras read as follows:- “22. Reading of the proviso to Section 147 and the decisions of this Court discussed above makes it amply clear that after a period of four years from the end of the Assessment Year, for the AO to assume jurisdiction, it becomes necessary that income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the Assessee to make a return, or to disclose all material facts necessary for that assessment year. 23. We find force in the submissions advanced by Mr. Kaushik that in the present case, the test for reopening the assessment as per proviso to Section 147 has not been met. The questionnaire raised by the AO during the course of assessment proceedings categorically adverted to the question of withholding tax. The details of the TDS paid and EDC charges were available with the AO. Revenue has sought to contend that even if the AO could have, with due diligence, discovered material from the tax audit report, it does not necessarily mean that the petitioner had made a full and true disclosure of material facts. The mere production of evidence before AO is not enough and there may be a failure to make full and true disclosure, if some material for the assessment lies embedded in that evidence which the AO could uncover, but did not do so. The aforesaid submissions may be correct proposition in law; however, each case has to turn on its own facts. In the present case, the details of the TDS and EDC charges paid to HUDA were brought to the notice of the AO. On this question, it would be sufficient to refer to the decision of this Court in Donaldson India Filters Systems Pvt. Ltd. vs. DCIT, (2015) 371 ITR 87 (Del. In the said case, the Court held that the explanation clarifies the general refrain by the words “not necessarily”. Burden is equally placed on the AO to exercise due diligence in examining the record (account books or evidence) produced before him in light of the declarations made in the return or responses to the notices or questionnaires. This is necessary as the AO has to gather “tangible” material which is a pre-requisite for reopening the matter under Section 147 of the Act. In CIT v. Central Warehousing Corporation, (2015) 371 ITR 81 (Del.), the Court held that the expression “reason to believe” on which a re- assessment under Section 147 of the Act can be validly ordered should CO No.66/Del/2018 necessarily be based on “tangible material” which an AO comes by after original assessment.

It would also be profitable to refer to the decision of Central Warehousing Corporation (supra) and CIT vs Kelvinator of India Ltd., (2002) 256 ITR 1and CIT vs. Usha International Ltd., 348 ITR 485 (Del.) and several other decisions wherein it has been repeatedly held that reopening initiated without any failure on the part of the Assessee in fully and truly disclosing all material facts without any fresh tangible material deserves to be quashed. In view of the aforesaid test laid down by this Court for re-opening of the assessment in cases where proviso to Section 147 of the Act is attracted, we find that in the present case, the test is not met. It is well settled proposition under the Income Tax Act that merely a change of opinion would not give the AO the jurisdiction to reopen the assessment under Section 147/148, as the same would amount to reviewing the earlier decision. There has to be some relevant tangible material for the AO to come to the conclusion that there is escapement of income from assessment, and there must be a live link with such material for the formation of the belief. The reasons should also disclose due application of mind as reopening of the assessment proceeding is not an empty formality. On a perusal of the recorded reasons, we are not able to discern as to how the AO has come to a conclusion that there is a failure on the part of the Assessee in fully and truly disclosing all material facts for the purpose of the assessment. Though, the recorded reasons allude to an ostensible failure on the part of the Assessee to disclose fully and truly all material facts, however, the recorded reasons except for using the expression “failure on the part of the Assessee to disclose fully and truly all material facts”, do not specify as to what is the nature of default or failure on the part of the Assessee. The reasons also do not explain or specify as to what is the rationale connection between the reasons to believe and the material on record. The Supreme Court in Income Tax Officer v. Techspan Pvt. Ltd And Ors. (2018) 6 SCC 685 has held that “The use of the words “reason to believe” in Section 147 has to be interpreted schematically as the liberal interpretation of the word would have the consequence of conferring arbitrary powers on the assessing officer who may even initiate such re-assessment proceedings merely on his change of opinion on the basis of some facts and circumstances which has already been considered by him during the original assessment proceedings. Such could not be the intention of the legislature.” The said judgment further held that “Section 147 of the IT Act does not allow the reassessment of an 15 CO No.66/Del/2018 income merely because of the fact that the assessing officer has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the assessing officer the power of review and Section 147 confers the power to reassess and not the power to review.”

It becomes evident on perusal of the Scrutiny questionnaires issued by the AO and the information furnished in response thereto by the Assessee that there has been no failure on the part of the Assessee in furnishing the information. On the other hand, there appears to be non application of mind on such material on the part of the AO to make an appropriate determination in accordance with law. Thus, the AO cannot now review its decision, having failed to perform its statutory duty and therefore the impugned action of reopening is nothing but a change of opinion.”

In the present case also, undisputedly, rather admittedly, the AO, in the reasons at para 16, noted that since the re-assessment in this case for AY 2009- 10 pertained to a period beyond for years, but before the expiry of six years from the date of issue of notice, therefore, the proviso to section 147 is applicable to the facts of the present case and from the reasons recorded by the AO as reproduced above, we are unable to see any allegation or assertion by the AO as to which fact or the material was not disclosed by the assessee leading to its income escaping assessment pertaining to the impugned amount of alleged accommodation entries. It is not the case of the AO that the assessee did not disclose the impugned amount in its books of account or did not provide the details to the AO on being asked during the assessment proceedings. In the similar facts and circumstances, the Hon’ble Bombay High Court in the case of Anand Developers vs PCIT (supra) held that mere bald observation by the AO CO No.66/Del/2018 that the assessee did not disclose fully and truly all the material facts is not sufficient, the AO has to give the details as to which fact or the material fact was not disclosed by the assessee leading to its income escaping assessment. Otherwise, reopening is not valid. From the facts and circumstances emerged from the reasons recorded, it is clearly discernible that except a bald allegation in para 15.1 that the assessee has not disclosed fully and truly all material facts necessary for its assessment, there is no indication by the AO as to how the assessee has failed to fully and truly disclose all the material facts with regard to the impugned amount of alleged accommodation entry. Per contra, the ld.CIT (A), in para 2.4.1 has noted that the appellant furnished the details which included the complete details of impugned share subscription money. These findings have not been challenged by the Revenue as clearly discernible in the grounds raised by the assessee in Form No.36.

In view of the foregoing, we summarise our findings that in the cases when the AO intends to initiate reassessment proceedings beyond a period of four years, but, before expiry of six years from the date of issuance of notice, then, the proviso to section 147 of the Act comes into play and the AO is bound to follow the same as per the mandate of the provision. The escapement of income from assessment must also be occasioned by the failure on the part of the assessee to disclose the material facts fully and truly. This is a necessary condition for overcoming the rider set up by the proviso to section 147 of the CO No.66/Del/2018 Act. If this condition precedent is not satisfied, the bar would operate and no action u/s 147 of the Act can be initiated against the assessee for reassessment proceedings. At the cost of repetition, we may point out that the reasons supplied to the Petitioners, operative part of which has been reproduced hereinabove, does not contain any such allegation. Consequently, one of the conditions precedent for removing the rider against taking action u/s 147 of the Act after a lapse of four years remains unfulfilled and unsatisfied and in absence of any allegation in the reasons recorded that the escapement of income had occurred by the reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for the relevant assessment year, any action taken by the AO u/s 147 of the Act beyond the period of four years would be without assumption of valid jurisdiction. Therefore, respectfully following the proposition rendered by the Hon’ble Delhi High Court in the case of BPTP Ltd. (supra); in the case of Haryana Acrylic Manufacturing Company Ltd. vs. CIT, 308 ITR 38 (Del), order dated 1st July, 2020 (supra); and judgement of the Hon’ble Bombay High Court in the case of Anand Developers (supra), we hold that the notice dated 28.03.2016 u/s 148 of the Act based on the reasons recorded on 17.03.2016 and the consequent reassessment order dated 30.12.2016 are without jurisdiction as no action u/s 147 of the Act could be taken beyond the period four years in absence of compliance of proviso to section 147 of the Act. We hold so.

Since, in the earlier part of this order, we have allowed Cross Objection of the assessee and have quashed initiation of reassessment proceedings u/s 147 of the Act, notice u/s 148 of the Act and reassessment order dated 30.12.2016 passed u/s 143(3)/147 of the Act, therefore, the grounds of the Revenue do not stand for adjudication and we dismiss the same as having become infructuous.