M/S SAFE INFRA PROJECTS PVT. LTD.,JAIPUR vs. INCOME TAX OFFICER, WARD-5-4, JAIPUR

Briefly stated, the facts of the case are that the assessee filed its return of income declaring loss of Rs 8,12,510 on 26.09.2009 which was processed U/s 143(1) of the Act. Subsequently, the AO issued notice U/s 148 of the Act dated 09.01.2015 which was duly served on the assessee and the assessment was completed wherein an addition of Rs. 1.10 crores was made U/s 68 of the IT Act on account of unexplained share capital. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) who has sustained the addition and now the assessee is in appeal before us.

In ground no. 1, the assessee has challenged the legality of the order passed by the Assessing Officer U/s 147 of the Act. In this regard, the ld. AR drawn our reference to the reasons recorded by the 3 M/s Safe Infra Projects Pvt. Ltd. vs. ITO Assessing Officer before issuance of notice U/s 148 and the reasons reads as under:- “As per information available on record, it is gathered that during F.Y. 2008-09, the assessee has filed the return of income for the AY 2009-10 declaring total income of Rs.8,12,510/- which stands process u/s 143(1). On verification of record, it was found that the assessee has taken accommodation entries of Rs.75,00,000/- in the nature of loan/advance/purchase bill from Alka Diamond Ind. Ltd. of Rs.15,00,000/-, Casper Enterprises P. Ltd (Ostwal Trading(I) P. Ltd) of Rs.5,00,000/-, Olive Overseas P Ltd (Realgold Trading Co. P.) of Rs.10,00,000/-, Triangular Infocom Ltd. (Lexus Infotech Ltd.) of Rs.30,00,000/- and Vanguard Jewels Ltd of Rs.15,00,000/- all the concerns indulged in providing accommodation entries in lieu of cash obtained from the beneficiaries and not doing any genuine business activity as divulged during the course of search and seizure proceedings in the case of Praveen Jain Group, Mumbai. The assesse company is a beneficiary who has taken accommodation entry in the nature of loans and advances which is not genuine as the lender was not carrying on any genuine business activity and was providing accommodation entries in lieu of cash obtained from the beneficiaries. On the basis of information available on record, therefore the assessee has failed fully and truly all material facts necessary for this assessment. I have reason to believe that income of Rs.75,00,000/- chargeable to tax has escaped assessment within the meaning of section 147 of the income tax Act 1961.”

The ld. AR submitted that from the reasons so recorded, it can be noted that AO has reopened the assessment on the basis of information available on record that in search of Praveen Jain Group, Mumbai, it is 4 M/s Safe Infra Projects Pvt. Ltd. vs. ITO divulged that assessee has taken accommodation entries of Rs. 75,00,000/- in the nature of loan/advance/purchase bill from five companies which is not genuine. It was clear from above that in the reasons recorded, the AO has not specified from whom he has received the information, how such information related to the assessee and whether in search of Praveen Jain Group, any material/ evidence was found that assessee has taken alleged accommodation entries. It was further submitted that the reasons recorded is not specific as to whether assessee has taken loan or advance or made purchases from these five companies whereas the fact is that assessee has neither taken any loan or advance or made any purchases from the above parties. The AO in the assessment order has also not made any addition on account of alleged loan/ advances/purchases rather he made addition on account of the share capital. This shows that AO has not examined the information alleged to be on record to verify the nature of receipt from these parties. This apart in the reasons there is nothing whatsoever to show as to which is the record which shows that there were bogus loan/advance/purchase to the extent stated therein. Neither any paper or any document or statement of any person has been referred in the reasons to have a reason to belief that loan/advance/purchase taken from five companies is bogus. Hence the reopening of assessment is illegal & bad in law.

In support, reliance was placed on the Co-ordinate Bench decision in case of M/s Merta Oil Mills Company Pvt. Ltd. Vs. ITO (ITA No.516/JP/16 order dt.11.05.2018). In that case, the AO has recorded the reasons stating that assessee has obtained entries of 5 M/s Safe Infra Projects Pvt. Ltd. vs. ITO bogus purchases from certain companies managed by Praveen Jain whereas no such bogus purchase was made rather the share capital was received from these companies. The Jaipur Bench of the Tribunal on these facts quashed the reopening by giving following findings:

Further reliance was placed on the Coordinate Bench decision in case of Meta Plast Engineering Pvt. Ltd. Vs. ITO (ITA No.5780/Del/2014 order dt.06.04.2018). In that case, the reasons recorded by the AO do not suggest whether the assessee has received or provided the accommodation entries in as much as the reasons read that “bogus accommodation entries were provided/taken”, it means there is no application of mind by the AO while recording reasons and thus the reopening of assessment was held bad in law.

Further reliance was placed on the Coordinate Bench decision in case of M/s Balaji Health Care Pvt. Ltd. Vs. The ITO(E) (ITA No.566 & 567/JP/2018 order dated 30.01.2019) wherein it was held that: “Material and information on the basis of which reasons have been recorded that income in the hands of the assessee has escaped assessment relates to search and seizure operation in case of Surendra Kumar Jain and Virendra Kumar Jain and the report of the Director of Income tax (Inv)-II, New Delhi. Based on 7 M/s Safe Infra Projects Pvt. Ltd. vs. ITO the report of the DIT, AO has formed not merely a prima facie belief but has reached a conclusion that the assessee has routed back his undisclosed income in the form of share capital. However, for reaching such a decisive finding, there is nothing which has been stated in the reasons so recorded. Therefore, without establishing the nexus, the AO has not just formed a prima facie view but has concluded that the amount invested is undisclosed income which has escaped assessment cannot be accepted. Further, there is nothing in the reasons so recorded that the AO has gone through the statements of Surendra Kumar Jain, Virendra Kumar Jain recorded during the course of search and the seized material to show prima facie linkage of assessee’s undisclosed income being routed back in the form of share capital. The fact that the assessee has filed its return of income u/s 139(1) was very much in the knowledge of the AO 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 AO and he has merely gone by the report of DIT, Investigation Wing. Hence, the assumption of jurisdiction u/s 147 has no legal basis and resultant reassessment proceedings deserve to be set-aside.”

Further reliance was placed on the decision of Hon’ble Gujarat High Court in case of Varshaben Sanatbhai Patel Vs. ITO (2016) 129 DTR 261 (Guj.) wherein it was held as under: 8 M/s Safe Infra Projects Pvt. Ltd. vs. ITO “A perusal of the reasons recorded reveals that the AO on verification of the details available on record has noticed that there were bogus purchases. However, from the reasons there is nothing whatsoever to show as to which is the record which shows that there were bogus purchases to the extent stated therein. No details have been mentioned by the AO as to what is the basis on which he says the purchases are bogus. AO for purpose of reopening assessment placed reliance upon material from external source that did not form part of record. It was settled legal position that substratum for formation of belief that income liable to tax has escaped assessment had to form part of reasons recorded. Apparently, substratum for formation of belief, as indicated in order rejecting objections as well as affidavit-in- reply, was information given by DGIT (Inv.), Mumbai that had no relation with reasons recorded. AO on basis of material on record could not have formed belief that there was any escapement of income chargeable to tax so as to validly assume jurisdiction u/s.

Reasons recorded for re-opening of assessment could not be supplemented in affidavit or by order rejecting objection. Material on basis of which belief that income chargeable to tax escaped assessment has been formed had to find place in reasons itself. Formation of belief that income has escaped assessment not being based upon record, substratum for reopening the assessment could not be said to be laid in reasons recorded. Thus, basic requirement for assumption of jurisdiction u/s 147 for reopening assessment was not satisfied. Impugned notice u/s 148 could not be sustained.” 9 M/s Safe Infra Projects Pvt. Ltd. vs. ITO In view of above, it was submitted that the reopening of the assessment u/s 147 is illegal and bad in law and the same be quashed.

Per contra, the ld DR is heard who has relied on the findings of the Assessing officer and submitted that the Assessing Officer was having credible information to hold the belief the assessee has obtained accommodation entries to the tune of Rs. 75 lacs and therefore, there is a clear nexus between the tangible material and formation of belief that the income of the assessee has escaped taxation. It was further submitted that the return of income was originally processed U/s 143(1) of the Act, there is thus no question of change of opinion by the Assessing Officer. Further, she relied on the findings of the ld. CIT(A) which reads as under:-

We have heard the rival contentions and purused the material available on record. It is a settled legal proposition that the reasons are required to be read as they were recorded by the Assessing officer. No substitution or addition is permissible. 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. The material on basis of which belief has been formed that income chargeable to tax has escaped assessment had to find place in reasons itself and there has to be a nexus between the material and formation of belief that income has escaped assessment. In the instant case, in the reasons so recorded, the Assessing officer stated that on verification of record, it is found that assessee has taken accommodation entries in the nature of loan/advance/purchase bills from five entities. It has been stated therein that the assessee company is a beneficiary who has taken accommodation entry in the nature of loans and advances which is not genuine as the lender was not carrying on any genuine business activity and was providing accommodation entries in lieu of cash obtained from the beneficiaries. Firstly, what is relevant to determine is the material that is available on record on the basis of which the belief has been formed that income has escaped assessment. We find that the same has not been specified by the Assessing officer in the reasons so recorded, therefore what is the material in possession of the Assessing 11 M/s Safe Infra Projects Pvt. Ltd. vs. ITO officer basis which the belief has been formed is not discernable from the reasons so recorded. The ld DR has submitted that there is credible information which has been received by the Assessing officer, however, as we have stated above, the said material has to be reflected in the reasons so recorded and the reasons cannot be supplemented as held by the Hon’ble Gujarat High Court in case of Varshaben Sanatbhai Patel Vs. ITO (supra) wherein under similar fact pattern, it has been held as under:- “15. Adverting to the facts of the present case, the returns filed by the assessee has been processed under section 143(1) of the Act. The Assessing Officer in the reasons recorded for the purpose of reopening the assessment has placed reliance upon the record of the case. As noted hereinabove, there is no assertion as regards on what basis the Assessing Officer has stated that the assessee had made claim in respect of bogus purchases in the trading and the Profit and Loss Account as expenditure. The Assessing Officer has stated that on verification of the details available on record, it has been noticed that the assessee has made bogus purchases; however, no specific averments are made as regards which details available on record reflected such bogus purchases. It is evident that the Assessing Officer for the purpose of reopening the assessment has placed reliance upon the material from an external source which does not form part of the record. However, the said aspect is not reflected in the reasons recorded. On behalf of the Assessing Officer, the learned counsel is not in a position to point out any material on the record on the basis of which the Assessing Officer 12 M/s Safe Infra Projects Pvt. Ltd. vs. ITO could have formed such belief. What is now sought to be stated by way of the order rejecting the objections as well as the affidavit-in-reply filed in response to the averments made in the petitions is that the formation of belief is based upon the information which is received from the DGIT (Inv.), Mumbai. It is settled legal position as held by a catena of decisions that the substratum for formation of belief that income liable to tax has escaped assessment has to form part of the reasons recorded. In the present case, the substratum for formation of belief, as indicated in the order rejecting the objections as well as the affidavit-in-reply, is the information given by the DGIT (Inv.), Mumbai, which got no relation with the reasons recorded, which are stated to be based upon the material available on record. Under the circumstances, the Assessing Officer, on the basis of the material on record, could not have formed belief that there was any escapement of income chargeable to tax so as to validly assume jurisdiction under section 147 of the Act. As held by the Supreme Court in a catena of decisions, the reasons recorded cannot be supplemented in the affidavit or by the order rejecting the objections. The material, on the basis of which, the belief that income chargeable to tax has escaped assessment has been formed, has to find place in the reasons itself.”

Further, we find that the transactions with the four entities which have been listed in the reasons so recorded are the transactions where these four entities have subscribed to the share capital of the assessee company and has thus contributed the money towards the share capital, a fact which is apparent from the assessment order wherein the 13 M/s Safe Infra Projects Pvt. Ltd. vs. ITO addition has been made towards the unexplained share capital. However, in the reasons so recorded by the Assessing officer, it has been stated that the assessee has taken accommodation entries in the nature of loan/advance/purchase bill. The same thus reflects non- application of mind by the Assessing officer and lack of even basic verification before recording the reasons more so where the return of income is already on record and thus a case of borrowed satisfaction and not that of the Assessing officer. In case of PCIT-5, Mumbai v/s M/s. Shodiman Investments P Ltd. (ITA No. 1297 of 2015 – Mumbai HC vide order dated 16.04.2018), the Hon’ble Bombay High Court has held as under:-

Further, for assumption of jurisdiction, in the reasons so recorded by the Assessing officer, he has stated that assessee has failed to fully and truly disclose all material facts necessary for the assessment. Apparently, the Assessing officer has drawn reference to the proviso to section 147 of the Act which in our mind is not applicable in the instant case as the original return so filed by the assessee was processed u/s 143(1) and not under section 143(3) and thus, the proviso to section 147 and the condition so specified therein cannot be invoked to invoke assumption of jurisdiction u/s 147 of the Act.

In light of above discussions and in the entirety of facts and circumstances of the case, we are of the considered view that basic requirement for assumption of jurisdiction u/s 147 is not satisfied in the instant case and consequent reassessment proceedings deserve to be set-aside. The grounds on merits thus become academic and are dismissed as infructious.