DCIT, NEW DELHI vs. M/S. SHUBHAM CHEMICALS & SOVENTS LTD., NEW DELHI

PER PRADIP KUMAR KEDIA, A.M.: The captioned appeal has been filed at the instance of the Revenue against the order of the Commissioner of Income Tax (Appeals)-VIII, New Delhi [‘CIT(A)’ in short], dated 12.06.2015 arising from the assessment order dated 31.07.2014 passed by the Assessing Officer, under Section 143(3) r.w Section 147 of the Income Tax Act, 1961 (the Act) concerning AY 2007-08.

3. The assessee challenged the reassessment before the CIT(A) on both counts, namely, validity of jurisdiction assumed under Section 148 of the Act as well as merits of additions so made in the reassessment proceedings. The CIT(A) found merit in the plea of the assessee on jurisdictional defect alleged by the assessee as well as merits of the addition. The CIT(A) consequently allowed the appeal of the assessee on both counts.

4. Aggrieved by the aforesaid order of the CIT(A), the Revenue has filed appeal before the Tribunal. The grounds of appeal raised by the Revenue read as under:

“1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in holding that the Assessing Officer has wrongly assumed the jurisdiction over the assessee under Section 148 of the Act.

2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs.3,54,99,691/- made by the Assessing Officer under Section 68 of the IT Act.”

assessment proceeding, Ld. Assessing Officer enquired the correctness of GP declared by the appellant. To verify the correctness of GP, the purchases and sales were examined. From the records it appears that details of the parties with whom the purchases above Rs.2 lacs and the parties to whom sales above Rs,50 lacs made were furnished and examined. After examination, Ld, Assessing Officer has given the finding that there is no fall in the GP and the trading results are accepted, on page 2 of the original assessment order. Later on Ld. AO received the information from the DDI (Inv.)-I, Faridabad that M/s SSB Sales Corporation, M/s RK Trading Co. (Prop Ram Kishan), M/s Global Trading Corporation and M/s Nat West Trade Links (prop. Take Chand Sharma) claimed to have been doing business. However, no such business is found existing at their addresses. These concerns are operating 12 bank accounts and it appears that they are issuing bogus billing of steel.; On the basis of this information, DDIT (Inv.) has advised as under;

"The AO is advised to check the copy of account of assessee with all these firms and examine them from this angle that these are in the nature of accommodation entries and take necessary action as per provisions of I.T. Act, 1961. Copies of bank account, statement of assesses are hereby enclosed.”

From this information it is very clear that there was no definite information about the issuance of bogus entries to the appellant. The information was only a suspicion and Ld. Assessing Officer was advised to make proper enquiries. Without making any enquiries, Ld. Assessing Officer treated this information as a reason for reopening the case u/s 147 of the IT Act, The relevant letter of the DDIT (Inv.)-I, Faridabad was reproduced on page 2 of the assessment order. I agree with the arguments of the Ld. AR of the appellant that there was no material on record to show that appellant has not disclosed fully and truly all material facts in the return filed by it or during the original assessment proceedings. Before reopening the case, Ld. AO has not enquired the facts which was communicated by the DDIT (Inv.), Faridabad. From the records it is also clear that Ld. Assessing Officer has not scrutinized the original records before recording the reasons. From the records it is clear that DDIT (Inv.) has given information for transactions worth of Rs.1,02,50,000/- which is appearing in the HDFC Bank Account. However, the total transaction with the Nat West Trade Links was to the tune of Rs.3,64,99,691/-. On this amount of sales, appellant has not received the amount of Rs.10 lacs which was outstanding on the last day of the financial year of this assessment year. This information clearly indicates that Ld. Assessing Officer has proceeded on the basis of letter received from the DDIT (Inv.)-I, Faridabad. Since the sales and purchases were already investigated during the original assessment proceedings, on the basis of same information, the assessment cannot be reopened again. Respectfully following the decision of the Hon'ble Supreme Court in the case of ITO v. Laxmi Mewal Dass reported in 103 ITR 437, I hold that the information available with the assessing officer was a mere suspicion. On the basis of that information, no belief can be formed. Since the original assessment was completed u/s 143(3) and reopening was made after 4 years, it was necessary on the part of the Ld. Assessing Officer to show that tax has escaped by reasons of failure on the part of the assessee to make a return u/s 139 or to disclose fully and truly all material facts necessary for the assessment, for that assessment year In this case, there was no failure on the part of the appellant. In view of these facts, I find that Ld. Assessing Officer has wrongly assumed the jurisdiction u/s 147 of the IT Act. In view of these facts, the grounds of appeal No,2,3 & 4 are allowed.

(ii) Regarding the merits, I have considered the issue. The sales and purchases were verified at the time of original assessment proceedings and trading results were accepted. The exact turnover shown against M/s Nat West Trade Links is Rs.3,64,99,691/- which is declared in the return. Again Ld. Assessing Officer has treated that this sales is bogus and further added Rs.3,54,99,691/- as an amount of cheque received from that party u/s 68 of the IT Act. The Ld. Assessing Officer has made the double addition. One time he has accepted the turnover in the trading results and again added part of the turnover excluding only Rs.10 lacs which was not received by the appellant and was reflected as outstanding from M/s Nat West Trade Links. After considering this issue, I find that the amount cannot be added u/s 68 of the I.T. Act. If the sales is bogus, then the goods will reflect in the closing stock. Ld. Assessing Officer was not able to point out any discrepancy in the purchases. If the purchases are accepted as correct, how Ld. Assessing Officer can presume that there was no sales. In view of these facts, I find that Ld. Assessing Officer has not appreciated the full facts and wrongly made the addition of Rs.3,54,99,690/-. In view of the discussion, the addition made by the Ld. Assessing Officer is deleted. Ground No.5 is allowed.

The Ld. counsel essentially relied upon its arguments made before the CIT(A) as recorded in the first appellate order and the process of reasoning adopted by the CIT(A) while dislodging the assumption of jurisdiction under Section 147 of the Act. We shall deal with the arguments of the assessee at appropriate place in the succeeding paragraphs.

9.1 The reasons recorded under Section 148(2) towards escapement of income giving the cause for issuance of notice under Section 148(1) is the foundation for determination of the jurisdiction issue. Accordingly, the reasons so recorded by the Assessing Officer reproduced hereunder:

Reasons for reopening the assessment proceedings in the case of M/s Shubham Chemicals & Solvents Ltd, for A.Y. 2007-08 u/s 148 of the Income Tax Act, 1961.

D.D.I.T (Inv.)-I Faridabad vide letter dated 07/03/2014 issued though F.No. DDIT/(Inv.)-I/FBD/2013-14/4235 has informed as under;

“An information was received from FIU in the STR No. 1000014477 dated 20.07.2010 in the case of Global Trade Corporation having PAN No. ASCLPS3593J having two A/c 10250500817 and 630305500180. In the account funds are received by cash deposits, RTGS and clearing and debit arc mostly by cash withdrawal during EDD. Customer reported to be trader of steel plant and lubricants. Although business of steel products involves rare cash usage the value of non-cash deposition and nature of transactions incurred appear to be unusual in relation to what would be expected from normal activity of the customer.

Similar information was received on 20.04.2011 in the STR No. 1000030164 dated 20.04.2011. In this STR also the following firms appeared . Their details are as under:-

Sr. Name o f the Address A/c No. No. Company 1 Global Trade IC/70, Back side of Bata 10250500817 Corporation Petrol Pump, NIT, 630305500180 Faridabad R. K. Trading IC/70, Back side of Bata 630305011259 2. Petrol Pump, NIT Faridabad 3. SSB Sales IC/70, side of Bata Petrol 630305011253 Corporation Pump, NIT, Faridabad

As per STR reporting SSB sales Corporation is proprietorship concern and Sh. Ram Kishan is its proprietor. Another firm linked to Sh. Ram Kishan is M/s R.K.Trading Co.

On enquiry it has been found that address of I-C/70, NH-1, is located behind Bata Petrol pump in the street adjoining Indian Overseas Bank, main market pfNM-1 (Back side) and the premise is being used by Sh. Barender Manoeha for his business of screen printing in the name and style M/s Inter India i.e. these concerns are not doing any business at the given address. As per F1U-IND reporting received vide above STR the firm M/s SSB Sales Corporation, M/s R.K. Trading Co., (Prop. Ram Kishan) and M/s Global Trade Corporation, M/s Natwest Tarde Links (Prop. Tek Chand Sharma) claimed to have been doing business. However, no such business is found existing at this address. These concerns are operating 12 banks accounts in different banks of Faridabad and Delhi. It appears to be case of bogus billing of Steel.

The assessee was asked to furnish the requisite information, but no response was received from the assessee at the above addresses as these are merely paper companies. Letters were issued to the branch manager of various banks. Bank statements were received and placed on record. In his business of providing accommodation entries, M/s. Global Trade Corporation has benefited many companies/entities and thus helped in evasion of taxes in many cases.

On going through the bank statement it is found that one of the beneficiary of accommodation entries given by the above mentioned concerns i.e. Shubham Chemicals and Solvents and Silver Tulip Buildwell Pvt. Ltd. lie in your jurisdiction. Copy of band statement is being enclosed for your perusal. It is clear that your assessee has taken accommodation entries and evaded tax. The estimated amount is Rs. 1.07 crores in both the cases for F.Y. 2006-07.

So, the AO is advised to check the copy of account of assesses with all these firms and examine them from this angle that these are in the nature of accommodation entries and take necessary action as per provisions of Income Tax Act, 1961. Copies of bank account statement of assessee are herby enclosed.

As per the enclosed copy bank statement, though which entries have been taken by M/s Shubham Chemicals and Solvents Pvt. Ltd. reflected in the bank statement of Netwest Trade Links Account No.04832320000088 of HDFC Bank Ltd. during the F.Y. 2006-07 relevant to A.Y. 2007-08 is as under,

Dated Particulars Cheque Accepted 05.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 17.01.2007 Shubham Chemcials and Solvents Ltd. 400,000.00 17.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 18.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00

19.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 22.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 23.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 24.01.2007 Shubham Chemcials and Solvents Ltd. 300,000.00 25.01.2007 Shubham Chemcials and Solvents Ltd. 350,000.00 25.01.2007 Shubham Chemcials and Solvents Ltd. 650,000.00 27.01.2007 Shubham Chemcials and Solvents Ltd. 450,000.00 31.01.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 05.02.2007 Shubham Chemcials and Solvents Ltd. 400,000.00 05.02.2007 Shubham Chemcials and Solvents Ltd. 400,000.00 06.02.2007 Shubham Chemcials and Solvents Ltd. 400,000.00 07.02.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 08.02.2007 Shubham Chemcials and Solvents Ltd. 400,000.00 09.02.2007 Shubham Chemcials and Solvents Ltd. 600,000.00 12.02.2007 Shubham Chemcials and Solvents Ltd. 500,000.00 26.03.2007 Shubham Chemcials and Solvents Ltd. 600,000.00 26.03.2007 Shubham Chemcials and Solvents Ltd. 800,000.00 Total 1,02,50,000.00

Looking to the Frequency and pattern of transfers from the above account, I have reason to believe that a sum aggregate of Rs. 1,02,50,000 has been accepted by M/s Shubham chemicals and Solvents Ltd., as accommodation entries. It is seen that scrutiny assessment u/s 143(3) was completed in this case for AY 2007-08 on 29.12.2009. Although the assessee had furnished the details relating to introduction of share capital, share premium, share application money or/and unsecured loans but the details furnished by the assessee in this regard were not complete & sufficient enough to conclude that these receipts were taken by way of accommodation entries. The true nature of transactions in this regard has been revealed only after the findings of the documents comprising the new information which points to escapement of income in the relevant assessment year.

In view of the above discussed facts and the specific information as mentioned above, 1 have reasons to believe that income of Rs. 1,02,50,000/- which should have been chargeable to tax has escaped assessment for AY 2007-08. Issue Notice u/s. 148 of the Income Tax Act, 1961. Notice u/s. 148 is being issued after requisite approval of Commissioner of Income Tax/Addl. Commissioner of Income Tax as per the provisions of Section 151 of IT Act.

9.2 Before we look into reasons so recorded, it will be pertinent to notice that the instant case pertains to Assessment Year 2007-08 where the assessment order was earlier framed under Section 143(3) vide order dated 29th December, 2009. Hence, the embargo placed by the first proviso to erstwhile provisions of Section 147 is also applicable in addition to main provision of Section 147 of the Act. On a bare reading of the reasons recorded and the information received by the Assessing Officer as reproduced in the assessment order, it is ostensible that the information so provided by the DDIT (Inv.) goes to show that certain transactions through banking channel has been carried out by the assessee with Global Trade Corporation, R.K. Trading, SSB Sales Corporation and Natwest Trading Links. Noticeably, the information supplied by the DDIT is merely advisory in nature whereby the Assessing Officer was advised to check the copy of account of the assessee with all these firms and examine them from an angle as to whether the entries are in the nature of accommodation entries with such parties and check necessary action as a consequence thereof. In a sense, the Assessing Officer was advised to make proper inquiries into such hugely suspicious entries. However, the Assessing Officer in response to such information dated 07.03.2014 issued notice under Section 148 on 28.03.2014 without any intermittent inquiry to ascertain the propriety of facts emerging from such information and to make prima facie opinion of escapement of chargeable income on such purportedly suspicious transactions.

9.3 In this backdrop, where an inquiry was warranted as per the information received from the other wing, the Assessing Officer could not have ipso facto hold the ‘reasons to believe’ contemplated under Section 147 of the Act without coming to some definite prima facie finding towards escapement independently. The information from the DDIT (Inv.) to the Assessing Officer which is fulcrum from holding ‘reason to believe’, lacked conviction and is in the realm of suspicion alone and thus could not have been automatically acted upon for drastic action under Section 147 without ascertaining the facts. The Assessing Officer apparently has proceeded on dotted lines based on uncorroborated inquiry from the DDIT (Inv.). Such action of the Assessing Officer does not comply the jurisdictional parameter, i.e., reason to believe contemplated in the main provision of Section 147 of the Act. The Assessing Officer has proceeded to record reasons on hypothesis visualized by the DDIT (Inv.) towards existence of accommodation entries without making any effort to discuss any material except for reproduction of the investigation report at the stage of invoking jurisdiction under Section 147. Paradoxically, the information disseminated to Assessing Officer is correct or otherwise is not known to even supplier of the information with certainty and an inquiry on the facts available, were suggested to the user of information.

9.4 Needless to say, the expression ‘reason to believe’ is fundamental and pre-eminent premise of jurisdiction and thus cannot be bypassed. The information provided by the DDIT does invoke reason to suspect and disquiet. Nevertheless, where the information is plagued by doubt and suspicion, it was incumbent upon Assessing Officer to conduct some minimum inquiry post the receipt of information to come to any assertive belief adverse to Assessee. The Assessing Officer, instructed in law, could not have formed the ‘reason to believe’ of escapement in the absence of credible information. The “belief” in the instant case is merely a shadow in the absence of such elementary inquiry. The formation of belief based on unvouched information thus cannot be deemed to be legit under the circumstances and consequently, the assumption of jurisdiction cannot be regarded as a well considered exercise of powers in terms of main provision of Section 147 of the Act. The abstract belief of Assessing Officer, in our view, has been rightly struck down by the CIT(A). Hence, we decline to interfere with the action of the CIT(A) in holding such notice under Section 148 to be nonest on the contours of Section 147 of the Act.

Delineating further, we now advert to the requirement of 1st 9.5 proviso to Section 147 of the Act. The instant case has been reopened after four years from the end of the relevant assessment year where the assessment was earlier framed under Section 143(3) of the Act. Consequently, the reasons so recorded must pass the examply burden placed upon Assessing Officer by the 1st proviso to Section 147 of the Act in addition to the condition stipulated in main provisions of Section 147 of the Act. The instant case being covered by 1st proviso to Section 147 could be reopened only when twin conditions co-exist namely, (i) the Assessing Officer holds reasons to believe about the escapement of chargeable income (which is not found to be satisfied as deliberated in the preceding paragraph); (ii) the escapement is due to failure on the part of the assessee to disclose fully and truly all material facts. As a logical corollary, the burden is on the Assessing Officer to form a prima facie opinion that the conditions embedded in first proviso is also found scrupulously satisfied when the same is challenged. The allegation of the Assessing Officer on the failure of assessee is therefore a first step to enable to the Assessing Officer to invoke proviso. Noticiably, the reason recorded by the Assessing Officer does not even allege any such failure in express terms. It is not known what fact giving perception of accommodation entries has not been fully disclosed. It is further not known as to which fact has not been truly disclosed which the Assessee was found privy to. The Assessing Officer appears to have drawn adverse inference which is not intelligible in the absence of any basic inquiry on the information in the peculiar facts of the present case. The stringent conditions of 1st proviso to Section 147 is thus not satisfied. Hence seen from any angle, we do not see any error per se in the process of reasoning adopted by the CIT(A) to uphold the plea of the assessee towards lack of jurisdiction.