AMAR PIYUSH SHAH,MUMBAI vs. ITO WARD 20(1)(1), MUMBAI

Subsequently, the AO received information from the Deputy Director of Income Tax (Investigation), Unit-7(4), Mumbai, vide communication dated 27.09.2016. As recorded in the reasons for reopening, a search and seizure action had been conducted on 05.02.2016 in the case of Shri Vipul Vidur Bhatt and his related entities. According to the information received by the AO, Shri Vipul Vidur Bhatt was engaged in providing accommodation entries in the nature of bogus sales and unsecured loans. On examination of the ledger accounts of the entities stated to be managed, controlled and operated by Shri Vipul Vidur Bhatt, the assessee was alleged to have received accommodation entries aggregating to Rs.10,00,000/- during the financial year 2009-10.

On the basis of the aforesaid information, the AO recorded reasons for reopening the assessment and issued notice under section 148 of the Act on 30.03.2017. In response thereto, the assessee, vide letter dated 10.04.2017 filed on 17.04.2017, requested that the return originally filed on 16.08.2010 be treated as the return filed in response to the notice issued under section 148 of the Act. The assessee also sought a copy of the reasons recorded for reopening. The reasons were furnished to the assessee along with a notice under section 142(1) dated 17.07.2017.

In the notice dated 28.09.2017, the AO called upon the assessee to furnish, inter alia, purchase bills, particulars of the parties, transportation receipts, vouchers, payment details, quantitative particulars, tax identification numbers, stock register and other information relating to the alleged purchases. The assessee’s case before the lower authorities was that he was deriving income from professional fees and had not undertaken any purchase of goods from the aforesaid parties. According to the assessee, the transactions were loans and the enquiries made in the notice under section 142(1) proceeded on an erroneous factual assumption that he had made bogus purchases.

During the reassessment proceedings, the assessee explained that he had received loans of Rs.5,00,000/- each from Shri Akshay M. Joshi and Smt. Vijaya B. Bhatt. The assessee furnished loan confirmations and other supporting documents in respect of the said parties. The documents stated to have been furnished included their bank statements, acknowledgements of returns of income, computations of income, ledger accounts and affidavits confirming the advancement and subsequent repayment of the loans.

The AO issued a show-cause notice dated 11.12.2017 proposing to treat the two loans of Rs.5,00,000/- each as unexplained cash credits under section 68 of the Act. The assessee filed his reply dated 15.12.2017 objecting to the proposed addition and relied upon the supporting documents furnished during the reassessment proceedings.

The AO, however, was not satisfied with the explanation and evidence furnished by the assessee. The AO treated both the loans, aggregating to Rs.10,00,000/-, as unexplained cash credits under section 68 of the Act. Consequently, the reassessment was completed under section 143(3) read with section 147 of the Act vide order dated 21.12.2017, determining the total income of the assessee at Rs.11,72,910/- as against the returned income of Rs.1,72,910/-.

Aggrieved by the reassessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee challenged the validity of the reopening as well as the addition of Rs.10,00,000/- made under section 68 of the Act. The

In relation to the validity of reopening, the assessee contended before the learned CIT(A) that the proceedings had been initiated after the expiry of four years from the end of the relevant assessment year without identifying any failure on the part of the assessee to disclose fully and truly all material facts. It was further contended that the reasons recorded were founded upon borrowed satisfaction and factually incorrect information. The assessee submitted that the reasons and the notice under section 142(1) proceeded on the basis that the assessee had made bogus purchases, whereas the addition was ultimately made in respect of unsecured loans. According to the assessee, there was no live link between the reasons recorded for reopening and the addition ultimately made in the reassessment order.

The assessee also questioned the sanction granted under section 151 of the Act and contended that the sanction had been granted mechanically on the basis of erroneous facts. Another contention raised by the assessee was that the procedure prescribed by the Hon’ble Supreme Court in GKN Driveshafts (India) Ltd. had not been followed inasmuch as the objections against reopening had not been disposed of by a separate speaking order.

On the merits of the addition under section 68 of the Act, the assessee contended that the identity and creditworthiness of the lenders and the genuineness of the transactions stood established by the confirmations, bank statements, acknowledgements of

The assessee also contended that the AO had relied upon information received from the Investigation Wing and statements or material concerning third parties without furnishing copies thereof to the assessee. The assessee asserted that, notwithstanding repeated requests, the parties whose statements were relied upon were not produced for cross-examination. On this basis, the assessee alleged violation of the principles of natural justice.

The learned CIT(A) rejected the challenge to the validity of the reassessment. The learned CIT(A) observed that the reopening had been initiated on the basis of specific and tangible information received from the Investigation Wing pursuant to the search and seizure action in the case of Shri Vipul Vidur Bhatt and related entities. According to the learned CIT(A), the information identified the assessee as a beneficiary of accommodation entries aggregating to Rs.10,00,000/- and, therefore, there was a direct nexus between the information available with the AO and the formation of the belief that income chargeable to tax had escaped assessment.

The learned CIT(A) further held that, at the stage of issuance of notice under section 148 of the Act, the AO was only required to form a prima facie belief regarding escapement of income and was not required to conclusively establish such escapement. For this proposition, the learned CIT(A) placed reliance upon the decision of the Hon’ble Supreme Court in Raymond Woollen Mills Ltd. v. ITO (236 ITR 34). The learned CIT(A) rejected the contention that the

The learned CIT(A) further recorded that approval under section 151 had been obtained from the competent authority and that the assessee had not produced any tangible material to establish that such approval was granted mechanically or without application of mind. The learned CIT(A), accordingly, upheld the reopening under sections 147 and 148 of the Act and dismissed Ground No. 1 raised before him.

In respect of the addition under section 68 of the Act, the learned CIT(A) observed that the investigation had allegedly unearthed an organised arrangement for providing accommodation entries through entities controlled by Shri Vipul Vidur Bhatt. According to the learned CIT(A), the two lenders named by the assessee formed part of the said network. The learned CIT(A) further observed that the financial statements and income declared by the lenders were not commensurate with the loans advanced by them and, therefore, their creditworthiness remained doubtful.

As regards the alleged violation of the principles of natural justice, the learned CIT(A) held that the reassessment was based upon the inference drawn from documentary evidence and information gathered during the investigation. The learned CIT(A) observed that the AO was not required to produce third parties for cross-examination when independent material was available on record. It was further observed that adequate opportunity had been afforded to the assessee to explain the transactions and furnish evidence, and that the assessee had failed to demonstrate any prejudice caused by the procedure adopted by the AO. The learned CIT(A), accordingly, rejected the allegation of violation of the principles of natural justice and dismissed Ground No. 3.

The assessee has raised the following grounds of appeal: 1. a) The learned CIT(A) erred in confirming the action of the AO in re-opening of the assessment though on facts and in law the provisions of S.148, S.149 and S.151 have not been fully complied with and are not applicable to the facts of the case. b) On fact and circumstances of the case and in law, the AO had wrongly re-opened the assessment though there was no live link between the reasons for re-opening of the assessment and the final assessment made. c) The assessment was wrongly re-opened on the basis of factual errors. Similarly, the sanctioning authority has given permission mechanically on the basis of wrong facts. Therefore, permission given is bad in law. d) The learned CIT(A) erred in not considering the full facts and though the assessment was re-opened after period 4 years from the end of the assessment year without showing any tangible material and or establishing that the appellant has failed to disclose all material facts. e) The learned CIT(A) erred in not considering the fact that the procedure laid down by Supreme Court in the case of GKN Driveshaft (India) Limited have not been followed and hence the assessment is bad in law. 2. a) On the facts and circumstances of the case and in law, the learned CIT(A) not considering that reasons recorded were not correct. b) The Ld. CIT(A) erred in law and on facts by confirming Rs.10,00,000 loans as unexplained cash credits u/s 68 of the act and further erred in ignoring the evidences produced by the appellant before the authority in support of the genuineness of the transactions. c) The Ld. CIT(A) erred in not considering the fact that the AO erred in not furnishing the copies of the information relied upon and in not producing the witnesses for examination in spite of repeated requests to do so. d) Your appellant submits that loans were received from identified persons with explained sources of income and that the

During the course of hearing, the learned AR invited our attention to page 17 of the impugned order, wherein the notice issued under section 142(1) of the Act has been reproduced. Referring specifically to clause 9 of the said notice, the learned AR pointed out that the AO had stated as under: “As per the re-opening of assessment reasons, you had taken accommodation entry in form of bogus purchase from the following parties:”

The learned AR submitted that the reassessment proceedings were thus pursued on the premise that the assessee had obtained accommodation entries in the form of bogus purchases. However, the addition ultimately made by the AO was in respect of loans aggregating to Rs.10,00,000/-, which were treated as unexplained cash credits under section 68 of the Act. It was, therefore, contended that there was no live link or rational nexus between the reasons for reopening the assessment and the addition ultimately made in the reassessment order. On this basis, the learned AR submitted that the AO had wrongly assumed jurisdiction to reopen the assessment and that the consequential reassessment order was liable to be quashed.

Per contra, the learned Departmental Representative (DR) relied upon the orders passed by the AO and the learned CIT(A). The learned DR invited our attention to paragraph 3 of the assessment order, wherein the AO referred to the information received from the Investigation Wing concerning alleged bogus accommodation entries. On the strength of the said information,

In rebuttal, the learned AR submitted that the credit of Rs.5,00,000/- appearing in the lender’s bank account immediately before the advancement of the loan to the assessee had been specifically explained by the lender, Shri Akshay M. Joshi, in his affidavit dated 23.03.2021 placed on record. Referring to the affidavit, the learned AR submitted that Shri Akshay M. Joshi had affirmed that he was regularly assessed to tax under PAN AHFPJ4035N and had filed his return of income for the assessment year 2010-11. The learned AR further pointed out that the lender had affirmed that, on 15.12.2009, he had received Rs.5,00,000/- from M/s Bhavisha Projects Pvt. Ltd., PAN AADCB1975B, through account-payee cheque No. 142719. Out of the said amount, the lender advanced Rs.5,00,000/- to the assessee on the same date through cheque No. 173742 drawn on Bank of Baroda. Thus, according to the learned AR, the immediate preceding credit relied upon by the learned DR was not unexplained, and its source had been expressly disclosed and affirmed by the lender. The learned AR also referred to the lender’s affirmation that the loan advanced

We have considered the rival submissions and perused the material placed on record. The principal controversy raised in Ground No. 1 concerns the validity of the assumption of jurisdiction under sections 147 and 148 of the Act. The precise question is whether the material available with the AO bore a rational and live nexus with the belief formed by him and the income which was ultimately brought to tax in the reassessment order.

The reasons recorded by the AO referred to information received from the Investigation Wing pursuant to a search and seizure action in the case of Shri Vipul Vidur Bhatt and related entities. The information stated that the said person was engaged in providing accommodation entries in the nature of bogus sales and unsecured loans. The reasons then alleged that the assessee had received two accommodation entries of Rs.5,00,000/- each. However, the reasons did not clearly identify whether the two transactions attributed to the assessee represented purchases, sales or unsecured loans. Nor did the reasons disclose any

The manner in which the AO understood and acted upon the information is evident from the notice issued under section 142(1) of the Act, reproduced at page 17 of the impugned order. In clause 9 thereof, the AO specifically stated: “As per the re-opening of assessment reasons, you had taken accommodation entry in form of bogus purchase from the following parties:” 31. Proceeding on that premise, the AO called upon the assessee to furnish purchase bills, transportation receipts, quantitative details, stock register, tax identification numbers and other particulars ordinarily relevant to verification of purchases of goods. However, no addition on account of bogus purchases was ultimately made. Instead, the transactions were treated as loans and added as unexplained cash credits under section 68 of the Act.

In our considered view, the distinction between an alleged bogus purchase and an unexplained loan cannot be regarded as a mere difference in nomenclature. A purchase transaction involves an alleged expenditure or trading transaction and requires examination of invoices, movement of goods, stock records and corresponding sales. A loan appearing as a credit in the books is examined under section 68 with reference to the identity and creditworthiness of the creditor and the genuineness of the transaction. The factual enquiry, the statutory foundation and the evidentiary requirements applicable to the two transactions are materially different.

In this regard, the decision of the jurisdictional High Court in Principal Commissioner of Income Tax v. Shodiman Investments Pvt. Ltd., (2020) 422 ITR 337 (Bom.), is directly relevant. The Hon’ble Bombay High Court held that mere receipt of information from the Investigation Wing does not, by itself, constitute reason to believe. The AO must apply his own mind and the reasons must demonstrate a linkage between the material received and the conclusion regarding escapement of income. The relevant extract reads: 12. The re-opening of an Assessment is an exercise of extra-ordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before re-opening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of re-opening Assessment and its reasons which would evidence the linkage/nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as observed by the Supreme Court in S. Narayanappa v. CIT [1967] 63ITR 219, that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in ITO v. Lakhmani Merwal Das [1976] 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing

In the present case, the information undoubtedly named the assessee and quantified the aggregate amount at Rs.10,00,000/-. However, mere identification of the assessee and quantification of an amount does not, by itself, establish the necessary rational connection. The AO was also required to identify the nature of the transactions and apply the information to the facts appearing from the assessee’s return and record. The reasons referred generally to two distinct types of accommodation entries, while the subsequent statutory notice unequivocally proceeded on the premise of bogus purchases. The reassessment order, on the other hand, abandoned that premise and treated the very same amounts as unsecured loans liable to be added under section 68 of the Act.

The notice under section 142(1) is significant not for supplementing or altering the recorded reasons, which is impermissible, but because it contemporaneously demonstrates the manner in which the AO himself understood the reasons recorded by him. The purchase-specific enquiries made therein show that the AO proceeded on the assumption that the assessee had entered into purchase transactions. The AO did not, at the stage of recording the reasons, examine whether the impugned credits represented loans or whether the ingredients of section 68 were prima facie attracted.

The decision in Raymond Woollen Mills Ltd. v. ITO, (1999) 236 ITR 34 (SC), relied upon by the learned CIT(A), does not advance the case of the Revenue. The assessee is not inviting us to adjudicate upon the sufficiency or final correctness of the information at the stage of reopening. The challenge is to the absence of application of mind to the nature of the transactions and the lack of a live link between the belief actually acted upon and the addition ultimately made.

We also note that the original return was processed under section 143(1) of the Act. Therefore, this is not a case of change of opinion. Further, since no assessment had earlier been completed under section 143(3) or section 147 of the Act, the assessee’s contention based upon the first proviso to section 147 and the alleged absence of failure to disclose fully and truly all material facts does not, by itself, invalidate the reopening. Nevertheless, as held by the jurisdictional High Court in Shodiman Investments Pvt. Ltd. (supra), even where the return was processed under section 143(1), the AO must possess a valid reason to believe founded upon

The learned DR’s reliance upon paragraph 3 of the assessment order and the general information received from the Investigation Wing does not cure this jurisdictional defect. The validity of reopening must be tested exclusively on the reasons recorded before issuance of the notice under section 148. The AO’s subsequent conclusion or the observations made by the learned CIT(A) cannot supply the application of mind absent from the recorded reasons.

In view of the foregoing discussion, we hold that the reasons recorded did not disclose the requisite live link between the information received and the belief that income chargeable to tax had escaped assessment in the form ultimately assessed. The assumption of jurisdiction under sections 147 and 148 of the Act was, therefore, unsustainable. The consequential reassessment order dated 21.12.2017 is quashed. Ground No. 1, to the extent it challenges the reopening for want of a live link, correct factual foundation and independent application of mind, is allowed. In view of this conclusion, separate adjudication of the remaining objections concerning sanction under section 151 and disposal of objections to reopening is rendered academic.

Although the reassessment has been quashed on the jurisdictional issue, for completeness we may briefly advert to the merits of the addition under section 68 of the Act. The assessee had furnished confirmations, bank statements, acknowledgements of returns of income, computations of income, ledger accounts and

The learned DR relied upon page 11 of the paper book to point out that an amount of Rs.5,00,000/- was credited to the bank account of Shri Akshay M. Joshi shortly before the advancement of an equivalent amount to the assessee. However, the lender, in his affidavit dated 23.03.2021, specifically explained that the preceding credit represented Rs.5,00,000/- received through an account- payee cheque from M/s Bhavisha Projects Pvt. Ltd., PAN AADCB1975B. He affirmed that the same amount was thereafter advanced to the assessee through cheque No. 173742 dated 15.12.2009 drawn on Bank of Baroda. He also confirmed repayment of the loan by the assessee through banking channels on 20.07.2010.

The existence of an equivalent credit immediately before the advancement of a loan may justify further verification. It cannot, without examination of the disclosed source and supporting banking trail, conclusively establish that the transaction was an accommodation entry. The explanation contained in the affidavit was not shown to have been disproved by making enquiries from M/s Bhavisha Projects Pvt. Ltd. or from the concerned banks. The lender had also responded to the notice under section 133(6) and furnished his loan confirmation, bank passbook, computation of income and return of income.

Further, the lender specifically denied having provided an accommodation entry or having made any statement declaring the transaction with the assessee to be bogus. No transaction-specific

On the material available, the assessee had discharged the initial burden of establishing the identity of the lenders, the movement of funds through banking channels and the disclosed source of the material bank credit. The documentary evidence was not displaced by any transaction-specific enquiry or cogent rebuttal. Accordingly, even on the merits, the addition of Rs.10,00,000/- under section 68 of the Act cannot be sustained. Ground Nos. 2 and 3 are, therefore, allowed.

In view of the quashing of the reassessment and deletion of the addition, Ground No. 4 relating to computation of tax and levy of interest under section 234B is consequential and does not survive for separate adjudication. Ground No. 5 is general in nature and requires no adjudication.

In the result, the appeal filed by the assessee is allowed.