C I T vs. M/S RIVERSIDE FARM

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 476 / 2009 COMMISSIONER OF INCOME TAX, JAIPUR-II ,JAIPUR ----Appellant Versus M/S RIVERSIDE FARMA (P) LTD., 4, ZILEDAR HOUSE, AMER ROAD, JAIPUR ----Respondent _____________________________________________________ For Appellant(s) : Mr. R.B. Mathur with Mr. K.D. Mathur For Respondent(s) : Mr. Sanjay Jhanwar _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 01/08/2017 1. By way of this appeal, the appellant has challenged the judgment and order passed by the tribunal whereby the tribunal has allowed the appeal preferred by the asessee modifying the order of CIT(A) whereby the CIT(A) has partly allowed the appeal of the assessee. 2. This court while admitting the appeal on 10.11.2010 has framed following substantial questions of law which reads as under:- (i) “Whether in the facts and circumstances of case the ITAT was justified in law in holding the share loss claimed by the assessee as genuine in spite of the fact that numerous discrepancies were pointed out by the AO and the broker itself admitted to have provided accommodation entries? (ii) Whether in the facts and circumstance of

(2 of 7) [ITA-476/2009] case the ITAT was justified in law in not upholding the sale of 33000 share as speculative transactions as the assessee itself admitted that no delivery was taken for the said transactions?”

(3 of 7) [ITA-476/2009] Rs. 30 lakhs are supposed to have been paid to them in cash by J. R. Pillani, Gwalior, and turned over by them in cash to the appellant. They produced no accounts for their dealings and the ankdas produced by them at a late stage were found to have been freshly written up. When Durgaprasad Mandalia, the manager of the appellant, was asked as to what securities he held as cover in respect of the huge transactions he entered into with men of such means, he answered that they were men of character. Sagarmal Dingliwala, the manager of J. R. Pillani, Gwalior, at the relevant period, was asked the same question, and he replied that "this business was of Jiyajeerao Cotton Mills, Ltd." The appellant had, in fact, genuine transactions with Cotton Agents Ltd., Gwalior, on a large scale, and when Durgaprasad Mandalia was asked why he did not put these transaction through them, he had to answer to give. And he was likewise unable to explain why he did not directly deal with J. R. Pillani, Gwalior. It was suggested by the learned Solicitor-General that if the object of the appellant in setting up contracts in Gwalior was to throw a veil over its contracts with Jwaladutt Kishanprasad, that could not effectively be achieved by putting them in the name of J. R. Pillani, Gwalior, which was a branch of the firm, as the veil would have been too thin to concern the true face of the contracts, and that is why the brokers were though of. We think there is considerable force in this. Then again, Durgaprasad Mandalia was asked why he did not place the orders directly with Cotton Agents Ltd., Bombay, or J. R. Pillani, Bombay, and he said that the policy of the appellant was not to do any business in British India. Mr. Kolah argues that there is nothing wrong in business being done in such a way as to escape taxation. No exception can be taken to that statement. Every person is entitled so to arrange his affairs as to avoid taxation but the arrangement must be real and genuine and not a sham or make- believe, and the question now under consideration is whether the contracts with the brokers were genuine. 12. Turning next to the accounts produced by the appellant, it is seen that the transactions of the three brokers were entered in Kherij Khata, which is said to have been maintained for parties for whom there are small dealings and whose accounts are cleared up in short time. But then, these transactions are not small transactions, nor were they close in a short time. Though the dealings went on for several months and there were several settlements, it was not until the 15th March, 1943, that payments are alleged to have been made to them. In the absence of regular ledgers in the names of these parties and having regards to

(4 of 7) [ITA-476/2009] the fact that the entries in the Kherij Khatas were journal entries, the Income-tax authorities were not prepared to attach any value to them. 13. Mr. Kolah argued that the contracts between the appellant and the three brokers expressly recite that they are as between principals and principals, that there were clauses therein providing for delivery and payment at Gwalior and that there was no reason for not accepting them as correct. But it is pointed out by the Income-tax authorities that the contracts provide for the business being done in accordance with the rules and bye-laws of the East India Cotton Association, Bombay, that according to bye-law No. 44-A of that Association "every contract made subject to these bye-laws shall take effect as contract wholly made in Bombay", and that further under the rules, the delivery of the goods must take place in Bombay. In view of this, the Income-tax Officer was of the opinion that the contracts in question had been got up for the purpose of supporting the present version of the appellant. 14. Mr. Kolah also contended that the evidence of Birlas would have been material in deciding whether they settled the contracts at Bombay as contended for by the Department and that though the order of remand stated that their evidence should be taken, that had not been done and that was a serious irregularity. The portion of the order of remand relevant for the present purpose is as follows : "The managing director of the assessee company or rather the person responsible for ordering these transactions on behalf of the assessee company should also be similarly examined." 15. Now, the obvious intention behind this order, read as a whole, was that persons connected with the several links in the chain of contracts and series of payments concerned in these transaction should be examined with a view to elucidate the true position, and the managing director was mentioned as the person who was likely to have entered into these transactions. Durgaprasad Mandalia was the manager of the appellant company, and he gave evidence that he put the present transactions through the brokers, and that has been considered. If Birlas wanted themselves to give evidence, there was nothing to prevent them from doing so, and indeed, no complaint was made in the court below that their evidence had not been taken. There is no substance in this contention. 5. However, counsel for the appellant has relied on the

(5 of 7) [ITA-476/2009] judgment rendered by the Delhi High Court in the case of Commissioner of Income Tax Vs. Vipin Batra reported in (2007)293ITR 389 (Delhi) wherein the High Court has observed as under:- 10. In Raymond Woollen Mills Ltd. v. Income-tax Officer and Ors. , the Supreme Court held that what is required to be seen in a case such as this is whether prima facie there was some material before the Assessing Officer on the basis of which he could reopen the case of the assessed. The sufficiency or correctness of the material is not to be considered because it is open to the assessed to prove that the facts assumed by the Assessing Officer in the notice were erroneous. 11. Much earlier, in Phool Chand Bajrang Lal and Anr. v. Income-tax Officer and Anr. , the Supreme Court reviewed the entire case law and concluded that: (a)There must be some specific, reliable and relevant information available with the Assessing Officer. (b) The Assessing Officer must have reasons, which he must record, that income has escaped assessment. (c) The case should not be one of a mere change of opinion by the Assessing Officer or the drawing of a different inference from the same facts but that those reasons must be based on facts which have subsequently come into possession of the Assessing Officer. (d) The sufficiency of reasons for forming the belief is not for the Court to judge although the assessed can contend that the belief was not bona fide or was based on vague, irrelevant and non-specific information or that the material did not have any rational connection or a live link for the formation of the requisite belief. This is what the Supreme Court said: From a combined review of the judgments of this Court, it follows that an Income-tax Officer acquires jurisdiction to reopen an assessment under Section 147(a) read with Section 148 of the Income-tax Act, 1961, only if on the basis of specific, reliable and relevant information coming to his possession subsequently, he has reasons, which he must record, to believe that, by reason of omission or failure on the part of the assessed to make a true and full disclosure

(6 of 7) [ITA-476/2009] of all material facts necessary for his assessment during the concluded assessment proceedings, any part of his income, profits or gains chargeable to income-tax has escaped assessment. He may start reassessment proceedings either because some fresh facts had come to light which were not previously disclosed or some information with regard to the facts previously disclosed comes into his possession which tends to expose the untruthfulness of those facts. In such situations, it is not a case of mere change of opinion or the drawing of a different inference from the same facts as were earlier available but acting on fresh information. Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge but it is open to an assessed to establish that there in fact existed no belief or that the belief was not at all a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extend, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on the record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection or a live link for the formation of the requisite belief. 12. This Court also had occasion to deal with the issue of reopening a completed assessment in United Electrical Co. P. Ltd. v. Commissioner of Income-tax and Ors. (2002) 258 ITR 317. This decision has been relied upon by the Tribunal but we find that it is clearly distinguishable because in that case the Division Bench came to the conclusion that the statement on the basis of which reopening was sought was too general and it did not mention any name, much less the name of the assessed. It was, therefore, held that there was no information on record which could provide a foundation for the Assessing Officer's belief that the assessed's transaction was not genuine and that this income had escaped assessment on that account.” 6. Counsel for the respondent has relied upon the decision of Punjab and Haryana High Court in the case of Commissioner of Income Tax Vs. Anupam Kapoor reported in (2008) 299ITR 0179 as well as the judgment of the Supreme Court confirming the decision rendered by the Allahabad High Court in the case of

(7 of 7) [ITA-476/2009] Commissioner of Income Tax (Central) Kanpur Vs. Dilbagh Rai Arora arising out of judgment and order dated 15.09.2010 in ITA No.125/2009. 7. In view of the above, the issue is answered in favour of the assessee and against the department. 6. The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Jyoti Item No.35