ITO-42(1)(4), MUMBAI, MUMBAI vs. RAKHI VIPUL JOGI, MUMBAI

The revenue has taken the following grounds: “1. "On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in quashing the re-assessment order u/s 147 as bad in law without deciding matter on merit 2. "On the facts and circumstances of the case and in law, the Ld.CIT(A) is erred in considering that the reopening was based on borrowed satisfaction, or mechanical reliance on the observations, without appreciating the material available on record" 3. "On the facts and circumstances of the case and in law, the Ld.CIT(A) has failed to consider that the reasons recorded by the assessing officer clearly demonstrate nexus between the material available and the formation of belief of escapement of income, and therefore the reopening cannot be termed as erroneous" 4. "On the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in not considering that during the course of assessment proceedings it was established by assessing officer that the transaction entered by the assessee with M/s Star Commodity is nothing but an accommodation entity" 5. "On the facts and circumstances of the case and in law, the Ld.CIT(A) failed to appreciate that the assessee has failed to disclose fully and truly all material facts necessary for assessment in the light of information received from the Investigation wing? 6. "On the facts and in the circumstances of the case, the Hon'ble ITAT is requested to entertain this appeal, though, the tax effect is below the monetary limit prescribed for filing of appeal before ITAT as per the CBDT Circular No.9/2024 Dt. 17.09.2024but the case falls within the exceptions laid down in clause (h) of Para 3.1 of the Board's Circular No. 5/2024 Dt. 15.03.2024.” 7. "The appellant craves leave to amend or alter or add a new ground which may be necessary."”

The brief facts of the case are that the assessee filed her return of income, declaring total income of Rs.7,36,940/-, which was processed under section 143(1) of the Act. Subsequently, on the basis of information received from the Investigation Wing, Kolkata regarding alleged misuse of the National Multi Commodity Exchange (NMCE) platform for providing accommodation entries through contrived transactions, the Ld. AO reopened the assessment under section 147 of the Act and issued notice under section 148 dated 29.03.2019. The information referred to transactions of the assessee involving purchases of Rs.2,77,12,725/- and sales of Rs.2,78,29,475/-. During the reassessment proceedings, the Ld. AO observed that the assessee had undertaken F&O/commodity transactions through M/s Star Commodities and had earned profit of Rs.8,07,420/-. Treating the said transactions as accommodation entries, the Ld. AO made an addition of Rs.8,07,420/- under section 68 of the Act and further made an addition of Rs.24,225/- under section 69C, being 3% of the alleged accommodation entry towards estimated commission. The Ld. AO also noticed purchase of an immovable property for Rs.50,00,000/- and, for want of satisfactory explanation regarding its source, treated the same as unexplained investment under section 69 of the Act. Consequently, the assessment was completed under section 143(3) r.w.s. 147 on 16.12.2019 at total income of Rs.66,68,584/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), challenging both the validity of the reassessment proceedings and the additions on merits. The Ld. CIT(A) observed that neither the assessee nor her broker, M/s Star Commodities, figured in the lists/annexures referred to in the assessment order and that the Ld. AO had not demonstrated the nexus between the Investigation Wing information and the assessee's alleged accommodation entry. The Ld. CIT(A), relying inter alia upon the decisions of the Hon'ble Bombay High Court in PCIT v. Shodiman Investments (P.) Ltd. and Sociedade de Fomento Industrial (P.) Ltd. v. ACIT, held that the reopening was based on borrowed satisfaction/mechanical reliance on the Investigation Wing report and consequently quashed the reassessment as bad in law. Being aggrieved by the said appellate order, the revenue is in appeal before the Tribunal.

The Ld. DR argued and contended that the Ld. CIT(A) erred while considering the legal grounds and dismissed the impugned assessment order. The Ld. DR submitted a written note in relation to his argument, which is placed on record. The relevant para of the DR’s submission is reproduced as below: “2. It is respectfully submitted that the reopening was made on the basis of specific information relating to the assessee's transactions. The reasons recorded by the Assessing Officer clearly mention that during F.Y. 2011-12 the assessee had purchase transactions of 22,77,12,725/- and sale transactions of ₹2,78,29,475/- through NMCE, resulting in profit. The AO also recorded that the entities involved were found to be shell/dummy entities and that the transactions were being used for booking artificial profits/losses. On this basis, the AO formed a belief that income of more than 1 lakh had escaped assessment. 3. Therefore, it is not correct to say that the AO simply acted on the Investigation Wing report without applying his mind. The AO considered the information received and also referred to the actual transactions of the assessee and their value before recording his reasons. 4. The learned CIT(A) has mainly relied upon the fact that the name of the assessee or "Star Commodities" was not appearing in the lists/annexures referred to in the assessment order. However, the reasons recorded by the AO have to be read as a whole. The reasons specifically refer to the transactions of the assessee, including the quantum of purchases and sales made during the relevant year, and record the AO's belief that the said transactions involved contrived profits through shell/dummy entities. Therefore, merely because the name of the assessee or "Star Commodities" does not appear in the particular lists/annexures reproduced in the assessment order, it cannot by itself lead to the conclusion that there was no material before the AO or that the AO had not applied his mind. 5. It is also important that the original return was processed only u/s 143(1) and there was no scrutiny assessment u/s 143(3). Therefore, there was no earlier opinion of the AO on these transactions and the question of change of opinion does not arise. The Hon'ble Supreme Court in ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd., 291 ITR 500 (SC) has held that where a return is only processed u/s 143(1), the AO can reopen the assessment if the conditions of section 147 are satisfied. 6. At the stage of reopening, the AO is only required to have material giving him a reasonable basis to believe that income has escaped assessment; the sufficiency or final correctness of such material is a matter to be examined during the assessment proceedings, as held by the Hon'ble Supreme Court in Raymond Woollen Mills Ltd. v. ITO, 236 ITR 34 (SC). 7. In the present case, after reopening, the AO made further enquiries. The assessee was asked to furnish details of the transactions carried out through Star Commodities, including supporting documents. The assessee furnished bills, but the AO, after considering the Investigation Wing material and the statement of Jignesh Shah, came to the conclusion that the transactions were accommodation entries. The AO accordingly made an addition of Rs. 8,07,420/- u/s 68. 8. Therefore, the present case is also different from the situation considered in CIT v. Jet Airways (I) Ltd., 331 ITR 236 (Bom.). The assessee may rely upon Jet Airways to say that an addition on an issue not mentioned in the reasons cannot be made. However, in the present case, the issue on the basis of which the reopening was made was actually examined and an addition of 28,07,420/- was made. Therefore, this is not a case where the AO failed to make any addition on the issue which formed the basis of reopening and proceeded only with a completely different issue. 9. The assessment order further shows that during the reassessment proceedings the AO noticed the purchase of an immovable property for ₹50 lakhs and called upon the assessee to explain the source of the investment. During the reassessment proceedings, the AO specifically called upon the assessee to explain the source of the ₹50 lakh investment in the immovable property and to furnish supporting documentary evidence. However, the assessee failed to furnish the required explanation and supporting evidence. Accordingly, the AO treated the investment of ₹50 lakhs as unexplained investment under section 69. 10. Thus, the Department submits that merely because the property issue was not specifically mentioned in the original reasons, the entire reassessment cannot be treated as invalid. Once the reopening was validly initiated and the very issue which formed the basis of reopening was assessed, the AO could also examine other income which came to his notice during the reassessment proceedings. 11. It is further submitted that the various contentions raised by the assessee regarding the genuineness of the Star Commodities transactions, payment through banking channels, purchase of property and PPF investment are mainly matters relating to the merits of the additions. These issues were not decided by the learned CIT(A), as the reassessment itself was quashed. 12. In view of the above facts, it is respectfully submitted that the reopening u/s 147 was valid and the order of the learned CIT(A) quashing the reassessment may kindly be set aside. 13. Since the learned CIT(A) has not examined the remaining grounds on merits after quashing the reassessment, the matter may kindly be restored to the file of the learned CIT(A) for deciding the remaining grounds on merits, in accordance with law. 14. The above submissions are filed for the kind perusal of the Hon'ble Bench and the same may kindly be taken on record.”

The Ld. AR argued and filed a paper book comprising pages 1 to 41, which has been placed on record. The Ld. AR contended that the assessee had made the transaction F&O and the copies of the bills of Star Commodities, including ledger copies are filed before the bench which were duly submitted before the Ld. AO and the Ld. CIT(A). Related to purchase of immovable property, the copy of the agreement is duly enclosed in APB pages 27 to 39. The assessee had also submitted the relevant bank statement showing the payment to the party for purchasing the immovable property, enclosed in APB pages 40 to 41, and the Ld. AR had specifically mentioned the entire amount was paid through the banking channel. So, without considering the same, the Ld. AO had made the addition in arbitrary manner.

The Ld. AR further contended that the Ld. AO had duly noted the recorded reasons on the basis of the information from the Investigation Wing. No such separate investigation was carried out by the Ld. AO in the assessment proceeding. The relevant part of the recorded reasons is reproduced in the impugned appellate order at page number 2 to 3, which is reproduced as below: “"Reason for reopening of the assessment under section 147 of the Income Tax Act, 1961, 1. The assessee, an individual, has filed the return of income on 16/09/2012 for Assessment Year 2012-13 with the total income of Rs. 7,36,940/- as per the data available in the ITD system. The same has been processed under section 143(1) of the Income Tax Act, 1961 on 04/12/2012. 2. In this case, specific information is received from the Investigation Wing of the Department, the Asst. Director of Income Tax (Inv.) Unit 3(1), Kolkata that the National Multi Commodity Exchange Platform [NMCE] was misused for the purpose of tax evasion by use of Blank Client Codes, the creation of artificial members, rampant use of wash trades to inflate volume on NMCE platform in order to bring liquidity to illiquid contracts. The bogus clients made use of the NMCE platform to artificially increase the volumes and to book contrived losses through pre mediated synchronized trades. It has been found from the material available on record that the assessee has purchased shares amounting to Rs.2,77,12,725/- and also sold shares amounting to Rs.2,78,29,475/- during Financial Year 2011-12 relevant to Assessment Year 2012-13 thereby resulting into profit. It is also appeared from data available the said assessee took profit from entities/company who are found to be shell companies which are managed and controlled by various Kolkata based entry operators which are engaged in providing accommodation entries in various forms to the beneficiaries. It has also been found from the record that the said assessee has traded through NMCE in order to book contrived losses/profit through these aforesaid shell/dummy entities. Therefore, it is evident that the same is nothing but a sham transaction and unaccounted money of the assessee which is escaped from taxation. 3. After appraisal of the material on record and in the light of the above stated facts, I have reason to believe that the income to the extent of more than one lakh chargeable to tax in the hands of the assessee has escaped assessment for assessment 2012-13 within the meaning of section 147 of theIncome Tax Act, 1961 due to failure on the part of the assessee to disclose fully and truly all material facts. 4. in this case, though the return of income was filed for the year under consideration but no scrutiny assessment under section 143(3) of the Act was made. Accordingly, in this case, the only requirement to initiate proceedings under section 147 is reason to believe which has been recorded above. 5. It is pertinent to mention here that in this case the assessee has filed return of income for the year under consideration but no assessment as stipulated under section 2(40) of the Act was made and the return of income was only processed under section 143(1) of the Act. In view of the above, the provision of clause (b) of Explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment. 6 In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice under section 148 has been obtained separately from Principal Commissioner of Income Tax -32, Mumbai as per the provisions of section 151 of the Act.” During the course of assessment proceedings, on verification of details available with him and considering the submission made by the appellant, the AO made following addition/disallowances in the assessment order:”

The Ld. AR further contended that the addition made by the Ld. AO without considering any separate investigation and entire addition is made merely on the basis of report from Investigation Wing. The legal grounds are duly considered by the Ld. CIT(A) and adjudicated in favour of the assessee. The Ld. AR respectfully relied on the order of the Ld. CIT(A). The relevant paragraph no. 6 of the order of Ld. CIT(A) is reproduced as below: “6. DECISION: 6.1 In Ground No. VII, the appellant has challenged the validity of initiation of reassessment proceeding u/s. 147 of the Act and has stated that the information/ material based on which reopening was done, has no bearing to the appellant so as to form an opinion that income has escaped assessment. It further stated that the AO erred in deciding that the appellant was one of beneficiaries based on list compiled after enquiries for FY 2011-12, however the name of the appellant and his broker ‘Star Commodities’ was not included in any of such Annexures cited in the order. 6.2 The case of the appellant was re-opened, on the basis of information received by the AO from the Asst. Director of Income Tax (Inv.) Unit 3(1), Kolkata. From the said report, the AO found that the appellant had earned profit from entities/ company who were found to be shell companies, which were managed and controlled by various Kolkata based entry operators and which were engaged in providing accommodation entries in various forms to the beneficiaries. The AO also found that the appellant had traded through NMCE in order to book contrived losses/profit through these aforesaid shell/dummy entities. On perusal of assessment order, it is seen that in the assessment order, the assessing officer has mentioned the reason for initiation of reassessment asunder: “2. In this case, specific information is received from the Investigation Wing of the Department, the Asst. Director of Income Tax (Inv.) Unit 3(1), Kolkata that the National Multi Commodity Exchange Platform [NMCE] was misused for the purpose of tax evasion by use of Blank Client Codes, the creation of artificial members, rampant use of wash trades to inflate volume on NMCE platform in order to bring liquidity to illiquid contracts. The bogus cilents made use of the NMCE platform to artificially increase the volumes and to book contrived losses through pre mediated synchronized trades. It has been found from the material available on record that the assessee has purchased shares amounting to Rs.2.77, 12.725/-and also sold shares amounting to Rs.2,78,29,475/- during Financial Year 2011-12 relevant to Assessment Year 2012-13 thereby resulting into profit. It is also appeared from data available the said assessee took profit from entities/ company who are found to be shell companies which are managed and controlled by various Kolkata based entry operators which are engaged in providing accommodation entries in various forms to the beneficiaries. It has also been found from the record that the said assessee has traded through NMCE in order to book contrived losses/profit through these aforesaid shell/dummy entities. Therefore, it is evident that the same is nothing but a sham transaction and unaccounted money of the assessee which is escaped from taxation. 3. After appraisal of the material on record and in the light of the above stated facts, I have reason to believe that the income to the extent of more than one lakh chargeable to tax in the hands of the assessee has escaped assessment for assessment 2012-13 within the meaning of section 147 of the Income Tax Act, 1961 due to failure on the part of the assessee to disclose fully and truly all material facts.” From, the assessment order, it is evident that the assessing officer has relied solely on the report of Investigation Wing, while adjudicating in this case. Here, it is to be kept in mind that the report from Investigation Wing can be a valid “tangible material” to trigger reopening. However, if the AO reopens solely on the basis of the report without linking it to the appellant’s income, then the same shall not be acceptable. It is the duty of the assessing officer to establish the nexus between the appellant’s case and the report from the investigation wing, instead of borrowed satisfaction, or mechanical reliance on the observations of the Asst. Director of Income Tax (Inv.) Unit 3(1), Kolkata. 6.3 In the reason recorded for initiation of reassessment, the AO hasmentioned that the appellant had earned profit from entities/company who were found to be shell companies, which were managed and controlled by various Kolkata based entry operators and which were engaged in providing accommodation entries in various forms to the beneficiaries. However, the AO has not particularly mentioned as to from which shell company and how the appellant had taken accommodation entry. In para 5 of the assessment order, the AO has mentioned the list of entities providing accommodation entries and list of the entities/persons to whom accommodation entries were provided. However, in that list neither the name of the appellant nor the name of its broker ‘Star Commodities’ has been mentioned. Further, in para 6.1 of the assessment order, the AO has mentioned as under: ‘The beneficiary were further identified through banking enquiries. Based on such enquiries, the details of beneficiaries for FY 11-12 (AY12-13) were compiled. The assessee is one of the beneficiaries.’ However, in the assessment order the details of bank account through the appellant had received accommodation entry and its modus operandi has not been explained. The AO has simply relied on the report of the investigation wing and no analysis has been done as to how from that report it has been arrived by the AO that the appellant had received any accommodation entry. The Hon’ble High Court of Bombay in the case of Principal Commissioner of Income-tax-5 Vs. Shodiman Investments (P.) Ltd [2018] 93 taxmann.com 153 (Bombay)/ (2020) 422 ITR 337 (Bom.)(HC), has held as under: “Section 147 of the Income-tax Act, 1961 - Income-escaping assessment - Non-disclosure of primary facts (Information) - Assessment year 2003-04 - Whether where Assessing Officer has merely issued a reassessment notice on basis of intimation regarding re-opening notice from DDIT (Inv.), this is clearly in breach of settled position in law that re-opening notice has to be issued by Assessing Officer on his own satisfaction and not on borrowed satisfaction - Held, yes – Whether where reasons as made available to assessee for reopening assessment merely indicated information received from Director (Investigation) about a particular entity, entering into suspicious transactions and, that material was not further linked by any reason to come to conclusion that assessee had indulged in any activity which could give rise to reason to believe on part of Assessing Officer that income chargeable to tax had escaped assessment, reassessment was an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax had escaped assessment - Held, yes [Paras 13 and 14]” Further, reliance is placed on the judicial pronouncement of the Hon’ble High Court of Bombay in the case of Sociedade de Fomento Industrial (P.) Ltd. Vs. Assistant Commissioner of Income-tax [2024] 158 taxmann.com 576 (Bombay), wherein it has been held as under: “Section 148, read with section 147, of the Income-tax Act, 1961 - Income escaping assessment - Issue of notice (Scope of provision) - Reassessment was initiated in case of assessee-company on ground that there were illegal export particularly by means of under-invoicing on part of mining lessees and exporters on basis of Shah Committee report - In case of another assessee, reassessment was initiated on basis of DRI report that assessee had not paid custom duty to extent of reduction of sale consideration on account of commission directly paid to agents by buyers - Assessees filed writ petition on ground that no independent inquiry was conducted by assessing authorities before issuing reassessment notice and that reassessment was initiated on basis of Shah Commission Report and DRI report only - There was only a bare statement that office independently conducted inquiry but reasons demonstrated in notice were imported from Shah Commissions Report and DRI report - Assessing Officer except quoting few portions from said Reports failed to link such material to believe on his part that income chargeable to tax had escaped assessment - Further High Court had already concluded that observations in Shah Commission Report were merely their opinion - Whether reliance only on opinion in third Shah Commission Report without independently assessing or recording reasons by Assessing Officer was itself jurisdictional error on part of such officer -Held, yes - [Paras 63 , 64]” Thus, from the above discussion and judicial pronouncement relied upon, it is held that as the reopening was based on borrowed satisfaction, or mechanical reliance on the observations, the reopening is considered to be erroneous and bad in law. Therefore, the order u/s 147 is quashed as being bad in law. The Grounds of Appeal are allowed.”

We have heard the rival submissions and perused the material available on record. The solitary controversy requiring our consideration is whether the Ld. CIT(A) was justified in quashing the reassessment proceedings initiated under section 147 of the Act. On perusal of the reasons recorded by the Ld. AO, we find that the reassessment was initiated on the basis of information received from the Investigation Wing, Kolkata, alleging misuse of the NMCE platform for booking contrived profits/losses through shell/dummy entities. Though the reasons contain the quantum of purchases and sales allegedly undertaken by the assessee, the material brought on record does not identify the particular shell/dummy entity through which the assessee allegedly obtained the accommodation entry. Further, neither the name of the assessee nor that of her broker, M/s Star Commodities, was found in the lists of entities/persons referred to in the assessment order. The Ld. CIT(A) has specifically recorded that the Ld. AO did not explain the relevant bank account, the alleged modus operandi, or undertake an analysis demonstrating how the Investigation Wing material established that the assessee was a beneficiary of an accommodation entry.

It is well settled that information received from the Investigation Wing may constitute tangible material for initiating reassessment proceedings; however, the Assessing Officer is required to apply his own mind to such information and establish a live nexus between the material available and the formation of belief that income chargeable to tax has escaped assessment. In the present case, the Ld. CIT(A), after examining the reasons recorded and the assessment order, arrived at a finding that the Ld. AO had merely relied upon the Investigation Wing report without demonstrating the requisite nexus with the assessee's transactions. On the material placed before us, we do not find any cogent basis to interfere with the said factual finding of the Ld. CIT(A).

The Ld. DR has relied upon Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) and Raymond Woollen Mills Ltd. (supra) to contend that, since the original return was merely processed under section 143(1), there was no question of change of opinion and that sufficiency of the material could not be examined at the stage of reopening. However, the issue in the present case is not merely the sufficiency of the material or change of opinion. The finding of the Ld. CIT(A) is that the information relied upon was not appropriately linked with the assessee so as to demonstrate an independent formation of belief by the Ld. AO. The revenue has not brought before us any material sufficient to dislodge this finding.

In view of the above, we find no infirmity in the order of the Ld. CIT(A) in holding the reassessment proceedings to be invalid and quashing the assessment framed under section 143(3) r.w.s. 147 of the Act. Accordingly, the grounds raised by the revenue challenging the quashing of the reassessment are dismissed. Since the reassessment itself stands quashed, the issues relating to the additions on merits do not survive for adjudication and are rendered academic. The application filed by the assessee under Rule 27 also requires no separate adjudication.

In the result, the appeal of the revenue bearing ITA No.9396/Mum/2025 is dismissed. Order pronounced in the open court on 03rd day of September 2026.