ITO-5(2)(1), MUMBAI, MUMBAI vs. NAKODA SPINNING MILL S PRIVATE LIMITED, MUMBAI

The brief facts of the case are that the assessee filed the return by declaring total income nil. Subsequently, the notice was issued u/s. 148 on dated 09.03.2015. In response to the notice u/s. 148, the assessee had stated that the original return filed u/s. 139(1) shall be treated as return filed in response to notice u/s. 147 of the Act. The assessee also asked the reasons recorded for reopening of assessment u/s. 148 of the Act vide letter dated 13.05.2015. The Ld.AO vide letter dated 07.08.2015, furnished the reasons for reopening. The information had been received from Office of DIT (Investigation)-II, Mumbai, that the assessee has obtained the accommodation entry in the form of unsecured loan from the following concerns and statements has been recorded by the Investigation Wing, Mumbai in search case of Mr. Bhanwarlal Jain Group, in which it was admitted that Mr. Bhanwarlal Jain had provided the accommodation entries. The Ld. AO found that the assessee had received the loan amount of Rs. 25 lakhs from M/s Meridian Jewellery. The assessee filed an objection in relation to the recorded reasons & stated that the assessee has no transaction with party, M/s Meridian Jewellery. Finally, the objection was duly disposed of by the Ld. AO. After completion of the re-assessment proceeding, the Ld. AO had considered the loan transaction of Rs. 25 lakhs as bogus transaction and added back with the total income of the assessee. The aggrieved assessee filed an appeal before the Ld. CIT(A) on the ground that the assessee had taken loan from Meridian Jewellery Private Limited through banking channel only. The assessee had not transacted any cash against the said loan and Ld. AO was unable to provided any corroborative evidence to prove otherwise. Further, the Ld. CIT(A) after considering the submission of the assessee deleted the addition. Being aggrieved, the revenue filed an appeal before us.

The Ld. DR argued and contended that the Ld. CIT(A) had erred for deleting the addition without considering the fact that the assessee is beneficiary of the accommodation entry. The entire addition was made by the Ld. AO on basis of the statements recorded from Mr. Bhanwarlal Jain. On basis of the recorded statement of Mr. Bhanwarlal Jain the Ld. AO considered the assessee as beneficiary. So, the loan taken by the assessee is nothing but a bogus transaction. The Ld. DR prayed for upholding the impugned assessment order.

The Ld. AR argued and contended that in the recorded reasons the Ld. AO had noted the name of the loan creditor as M/s Meridian Jewellery, whereas the assessee had received the loan from M/s Meridian Jewellery Private Limited. The Ld. AO was not able to bring any corroborative evidence that the assessee had received the cash or the cash was withdrawn in the bank of the assessee for transaction with the loan creditor. The genuineness, identity and creditworthiness of the loan creditor was duly submitted both before the Ld. AO and the Ld. CIT(A). But considering the recorded reason, there is no such any specific name duly mentioned related to transactions of the assessee. The Ld. AO had not initiated any separate verification apart from relying on the report of investigation wing. The said issue was duly considered by the Ld. CIT(A) in impugned order. The Ld. AR respectfully relying on the order of Ld. CIT(A) in para number 5.5.6, which is reproduced as below: “5.5.6 I have carefully perused the reasons recorded by the Assessing Officer. It is observed that in the second paragraph of the reasons, the Assessing Officer has stated that information was received from the DIT (Inv.)-II, Mumbai, alleging that the appellant had obtained accommodation entries in the nature of bogus unsecured loans amounting to Rs.25,00,000/- from Maridian Jewellery. It has further been noted that the Investigation Wing recorded statements in the case of the Bhanwarlal Jain Group, wherein it was admitted that accommodation entries were provided to various beneficiaries for the purpose of reducing tax liability. Based on the said information, the Assessing Officer concluded that the appellant company had obtained accommodation entries from Meridian Jewellery amounting to Rs.25,00,000/-. In the concluding part of the reasons recorded, the Assessing Officer stated that he had reason to believe that income of Rs.25,00,000/- had escaped assessment due to the failure on the part of the appellant to fully and truly disclose all material facts necessary for assessment. On perusal of the reasons recorded, it is evident that the Assessing Officer has relied solely upon the information received from the Investigation Wing and the statement of a third party to arrive at the conclusion that income had escaped assessment, without demonstrating any independent application of mind. It is further observed that no tangible material evidence has been brought on record in the reasons recorded to substantiate the formation of such belief, nor has any live link been established between the information received and the facts of the appellant's case. It is also noted that the Assessing Officer has not referred to or reproduced any specific statement recorded from the concerned parties to demonstrate that the name of the appellant was mentioned therein. The Assessing Officer has merely referred to the entity "Meridian Jewellery" without establishing its connection with the appellant. The appellant, on the other hand, has categorically denied having any transaction with Meridian Jewellery and has stated that it had entered into genuine transactions of unsecured loan with M/s. Meridian Jewellery Pvt. Ltd. In this regard, it is observed that the Assessing Officer has failed to establish any live nexus between the said concern and the appellant. Consequently, the reasons recorded appear to be based on incorrect or unverified facts. Further, the reasons recorded do not clearly indicate the basis on which the Investigation Wing concluded that the appellant had received accommodation entries, nor do they establish how the concerned parties were engaged in providing such entries. It is thus evident that the Assessing Officer has failed to establish any direct and proximate nexus between the material available on record and the formation of belief regarding escapement of income. In the absence of such nexus, and in the absence of any specific incriminating material against the appellant, the validity of the reopening itself is rendered unsustainable in law. Hence the Ground No 1 and 2 are ALLOWED.”

The Ld. AR further contended that the issue was duly considered by the Ld. CIT(A) that the assessee had not taken any loan from the bogus entity as mentioned by the Ld. AO. Even the assessee was not allowed to cross-examine the parties, M/s Meridian Jewellery Private Limited, from whom the assessee had taken the unsecured loan. On that basis the Ld.CIT(A) had noted his observations in para number 5.6.1, which is reproduced as below: “5.6.1 I have considered the facts of the case, the assessment order, and the submissions of the appellant. However, it is observed that Ground Nos. 1 and 2 relating to the validity of reassessment proceedings have already been adjudicated in favour of the appellant, wherein the reassessment has been held to be invalid in law. In view of the above, since the very initiation of reassessment proceedings has been held to be bad in law, the addition made in the assessment order does not survive. Accordingly, Ground Nos. 3 to 6, being on merits of the addition, are rendered academic in nature and do not require separate adjudication.”

We have heard the rival submissions and perused the material available on record. The reassessment proceedings were initiated under section 147 of the Act on the basis of information received from the Investigation Wing alleging that the assessee had obtained an accommodation entry in the form of an unsecured loan of Rs.25,00,000/- from M/s Meridian Jewellery. The Ld. CIT(A), after examining the reasons recorded, observed that the Ld. AO had relied upon the information received from the Investigation Wing and the statement of a third party without demonstrating any independent application of mind or establishing a live nexus between such information and the assessee. Before us, the Ld. AR has relied upon the judgment of the Hon'ble Bombay High Court in PCIT-5 vs. M/s Shodiman Investments Pvt. Ltd., ITA No.1297 of 2015, order dated 16.04.2018, and particularly paragraphs 13 to 15 thereof. The relevant observations of the Hon'ble Bombay High Court are reproduced below: “13. In this case, the reasons as made available to the Respondent-Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent-Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even do not indicate the amount which according to the Assessing Officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment.

Further, the reasons clearly show that the Assessing Officer has not applied his mind to the information received by him from the DDIT (Inv.). The Assessing Officer has merely issued a re-opening notice on the basis of intimation regarding re-opening notice from the DDIT (Inv.) This is clearly in breach of the settled position in law that re-opening notice has to be issued by the Assessing Office on his own satisfaction and not on borrowed satisfaction.

Therefore, in the above facts, the view taken by the impugned order of the Tribunal cannot be found fault with. This view of the Tribunal is in accordance with the settled position in law.”

In the present case also, the material referred to in the recorded reasons emanates from the Investigation Wing, whereas no independent material or enquiry establishing a direct and proximate nexus between the assessee and the alleged accommodation entry has been brought on record. The Ld. CIT(A) has specifically recorded that no tangible material was referred to in the reasons and no specific statement identifying the assessee was reproduced or referred to by the Ld. AO. In view of the ratio laid down by the Hon'ble Bombay High Court in Shodiman Investments Pvt. Ltd. (supra), we find no reason to interfere with the finding of the Ld. CIT(A) holding the reassessment proceedings to be invalid. The Ld. DR has not brought before us any contrary material or judicial precedent warranting interference with the impugned order. Accordingly, we find no infirmity in the order of the Ld. CIT(A). All the grounds raised by the revenue are dismissed.