TRISTAR SECURITIES PVT. LTD.,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-8(1),, AHMEDABAD

Per Pramod Kumar, Vice President:

“2.1 The Ld. CIT(A) has grievously erred in law and on facts in upholding the validity of reopening of assessment u/s 147. The Ld. CIT(A) has failed to appreciate that the reasons recorded by AO stated that there was no creditworthiness of the depositor – Shri S M Shah so that there cannot be any reason to believe that the income of the appellant company had escaped assessment.

2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) ought not to have upheld the validity of reopening u/s 147.”

ITA No. 976/Ahd/2015 Tristar Securities Pvt. Ltd. Vs. ITO Assessment year: 2006-07 Page 2 of 5 3. To adjudicate on this grievance, only a few material facts are required to be taken note of. The assessee before us is a company engaged in the business of trading in Govt. Securities and Bonds. The return of income was originally filed on 28.12.2006 and it was processed under section 143(1) on 07.06.2007. Thereafter the case was reopened by issuance of notice under section 148 on 14.05.2010. The background in which the case was reopened is evident from the following observations made by the Assessing Officer in the assessment order:-

“The return of income was originally e-filed on 28.12.2006 declaring total income loss of Rs.12,100/-. The return of income was processed u/s. 143(1) of the IT Act’61 on 7.6.2007. Thereafter, it was come to the notice that during the year under consideration, the assessee company had accepted funds more than Rs.1,00,000/- from Shri Switoo M. Shah. The said fund has been transferred from the Bank Account No.00481050011374 of HDFC Bank maintained in the name of Shri Switoo M. Shah in the FY 2005-06. The said bank account had not been disclosed by Shri Switoo M. Shah in his return of income. From perusal of the bank statement of the said bank account of Shri Switoo M. Shah, it is noticed that substantial cash had been deposited in the bank before or on the day of transfer of funds to the assessee company. Shri Switoo M. Shah's declared income was not at par with the substantial amounts deposited in the bank account meaning thereby that there is no credit worthiness of the depositor. Therefore, there was reason to believe that the amount received by the assessee from Shri Switoo M. Shah through HDFC Bank Account No. 00481050011374 is unexplained cash credits of the assessee company and the income chargeable to tax had escaped assessment.”

“2. With reference to ground A, it is seen that assessing officer had reopened the case by recording reasons as per due process of law. It was noted by the assessing officer that bank account from which money was transferred by Shri Switoo M Shah was not disclosed to the income tax department and further the declared income of Mr Shah was not at par with the substantial amount deposited in the bank account meaning thereby that there was no creditworthiness of the depositor. Based on this is specific information and the conclusion drawn the case was reopened by issuing notice under section 147. The appellant has challenged the reopening and reasons are stated in the grounds of appeal. It is seen that return of income was filed on 28/12/2006 declaring total loss of Rs.12,100. The return of income was processed under section 143 (1). Thereafter the case was reopened by issuing notice under section 148 on 14/05/2010. It is seen that case has been reopened after recording reasons. The case was earlier processed under section 143(1) which shows that no opinion was found in respect of the transactions of loan received from Mr. Switoo M Shah. Reliance is placed on ACIT vs Rajesh Jhaveri Stock Brokers P Ltd 291 ITR 500 (SC). It is seen that in the present case the assessing officer had sufficient reasons to issue notice under section 148 and so the ground number (A) taken by the appellant is dismissed.”

ITA No. 976/Ahd/2015 Tristar Securities Pvt. Ltd. Vs. ITO Assessment year: 2006-07 Page 3 of 5

“7. It is well settled in law that reasons, as recorded for reopening the reassessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor anything can be deleted from the reasons so recorded. Hon'ble Bombay High Court, in the case of Hindustan Lever Ltd. v. R.B. Wadkar [2004] 268 ITR 332/137 Taxmann 479 , has, inter alia, observed that "……….It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons." Their Lordships added that "The reasons recorded should be self-

ITA No. 976/Ahd/2015 Tristar Securities Pvt. Ltd. Vs. ITO Assessment year: 2006-07 Page 4 of 5 explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence….". Therefore, the reasons are to be examined only on the basis of the reasons as recorded. The next important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly, at the stage of recording the reasons for reopening the assessment, all that is necessary is the formation of prima facie belief that an income has escaped the assessment and it is not necessary that the fact of income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations have not been carried out, which, if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. While dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das [1976] 103 ITR 437,

"the reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."”

ITA No. 976/Ahd/2015 Tristar Securities Pvt. Ltd. Vs. ITO Assessment year: 2006-07 Page 5 of 5 linkage sought to be established by the Revenue authorities is too far fetched and devoid of any legally sustainable basis. In these circumstances, and in the light of the discussions above, in our considered view the Assessing Officer was not justified in reopening the assessment on the basis of the reasons so recorded by him. We, therefore, set aside the reassessment proceedings.