SHRI.J M VRUSHABENDRAIAH ,HOSPET vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-1 , BELLARY

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of CIT(A) dated 18.12.2018 for the assessment year 2010-11.

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Page 2 of 58 been an assessment originally and therefore the entire proceedings is void- ab-initio on the facts and circumstances of the case. 3. The Commissioner of Income-tax (Appeals) failed to appreciate that the process initiated under section 148 of the Act is bad in law as no proceedings can be initiated under section 148 if the information based on which the assessment is re-opened is pursuant to a material gathered in a search proceedings in the case of Madhu, Renuka Raghavasharyulu and others which is evident from the ‘reasons’ recorded by the learned assessing officer, hence if any proceedings are to be commenced then the same ought to have been under section 153C of the Act and not otherwise, on the facts and circumstances of the case. 4. Without prejudice, the Commissioner of Income-tax (Appeals) failed to appreciate that the learned Assessing Officer has not followed proper procedure before and after issuance of a notice under section 148 of the Act and consequently, subsequent proceedings on an invalid procedure adopted by the learned assessing officer becomes void and does not have any legs to stand the test of law which renders the order unsustainable in law on the facts and circumstances of the case. 5. The Commissioner of Income-tax (Appeals) failed to appreciate that the order of assessment is bad in law as the mandatory conditions necessary to invoke the provision of section 147 are did not exist and therefore issue of notice u/s 148 was unjustified on the facts and circumstances of the case. 6. The Commissioner of Income-tax (Appeals) failed to appreciate that the reasons recorded by the Appellant are only reason for suspicion and not reasons to believe and accordingly the reassessment proceeding is not in accordance with law and on the facts and circumstances of the case. 7. The Commissioner of Income-tax (Appeals) failed to appreciate that the addition of Rs. 4,05,37,500/- on account of unaccounted purchases is not in accordance with law on the facts and circumstances of the case. 8. The Commissioner of Income-tax (Appeals) failed to appreciate that the addition of Rs. 1,26,43,647/- being the net profit margin of 31.19% arrived by the learned AO is not in accordance with law on the facts and circumstances of the case.” 9. The Commissioner of Income-tax (Appeals) failed to appreciate that the Appellant having involved himself only in act of mining and selling, there is not a whisper of evidence to suggest that the Appellant actually purchased any ore from the Group entities and paid them in cash/account payee as alleged by the AO and the addition made on this basis is not in accordance with law and on the facts and circumstances of the case. 10. The Commissioner of Income-tax (Appeals) failed to appreciate that the additions are based purely on suspicion and surmises and are not corroborated by anything on record and the addition made on the basis of

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Page 3 of 58 surmises and conjectures is not in accordance with law and on the facts and circumstances of the case. 11. The Commissioner of Income-tax (Appeals) failed to appreciate that the appellant having supported the particulars filed in the IT Return with the details of sales made to the sole buyer, returns filed with Department of Mines, the return filed by the Appellant needs to be accepted in the absence of any material to the contrary and the addition made is not in accordance with law and on the facts and circumstances of the case. 12. The Commissioner of Income Tax (Appeals) ought to have held that the learned Assessing Officer did not appreciate the fundamental of accounting during the assessment of return of income of the Appellant on the facts and circumstances of the case. 13. Without prejudice to the right to seek waiver with the Hon’ble Chief Commissioner of Income Tax, the Appellant company denies itself liable to be charged to interest under sections 234A, 234B & 234C of the Act which under the facts and circumstances of the case deserves to be cancelled. The calculation of interest under sections 234A, 234B & 234C is not in accordance with law as the rate, amount and method for calculating interest is not discernible from the order of assessment. 14. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 15. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.

2.1 The additional grounds raised by the assessee along with petition for admission of the same in this appeal are as follows:

Additional grounds:- 16. Without prejudice, the learned Assessing Officer before relying upon the information that was found from the premises of Mr. Mahfuz Ali Khan, ought to have summoned Mr. Mahfuz Ali Khan and recorded his statement to verify the contents of the spreadsheet and further provided opportunity of cross examination in the interest of natural justice on the facts and circumstances of the case. 17. The Appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 18. The authorities below failed to comply with mandatory requirements of Section 65B of the Indian Evidence Act, 1872 in respect of the file “portwise

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Page 4 of 58 details.xls” that allegedly contains the details of how rate of iron ore was fixed to henchman companies and based on one such noting found in the said file the assessing officer having made the addition on account of unaccounted purchase and net profit thereon, the material relied upon is inadmissible as evidence and the assessment order passed in consequence to the same is unsustainable in law on the facts and circumstances of the case.

2.2 We have heard the both the parties on admission of additional grounds. In our opinion, all the facts are already on record and there is no necessity of investigation of any fresh facts for the purpose of adjudication of above additional grounds. Accordingly, by placing reliance on the judgement of Hon’ble Supreme Court in the case of NTPC Vs. CIT 229 ITR 383 (SC), we admit the additional grounds for adjudication as there was no investigation of any fresh facts otherwise on record and the plea of the assessee is bonafide.

Additional Evidence: 2.3 The assessee has also filed additional evidence-1 along with application for admission of the same as follows:-

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2.4 The assessee has filed further additional evidence vide application dated 8.7.22 (Kannada version), which is a copy of statement of Sri Ali Khan recorded before the Special Investigation

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Page 6 of 58 Team (SIT) of Karnataka Lokayukta on 23.11.2015 (English version), which are reproduced below:- (Kannada version)

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(English version)

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Page 9 of 58 same ought to have been under section 153C of the Act and not otherwise, on the facts and circumstances of the case. 4. Without prejudice, the Commissioner of Income-tax (Appeals) failed to appreciate that the learned Assessing Officer has not followed proper procedure before and after issuance of a notice under section 148 of the Act and consequently, subsequent proceedings on an invalid procedure adopted by the learned assessing officer becomes void and does not have any legs to stand the test of law which renders the order unsustainable in law on the facts and circumstances of the case.

4.1 Facts of the case are that the Assessee is an individual and a mine owner, engaged in the activity of extraction and sale of iron- ore from the mines. The Assessee is filing his return of income regularly and paid his taxes on time. The Assessee is subjected to audit u/s 44AB of the Act. For the impugned assessment year i.e., 2010-11 the Assessee filed his return of income declaring a total income of Rs. 52,25,040/-. The Assessee declared income from Business as Rs. 46,32,396/-. The return of income was processed u/s 143(1) of the Act and accepted. The Assessee received notice u/s148 of the Act calling upon the Assessee to file his return of income in compliance with section 148 of the Act. The Assessee requested that the return of income originally filed may be considered as the return for the purposes of section 148 of the Act. The AO called for details and all the details were furnished by the Assessee. The learned AO concluded the Assessment proceedings and passed the order of assessment dated 28/03/2015 determining

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Page 10 of 58 the total income of the Assessee as Rs. 5,84,06,187/- as against the declared total income of Rs.52,25,040/- by making an addition on account of unaccounted purchase of Rs.4,05,37,500/- and also an addition on account of Net Profit of 31.19% thereon of Rs.1,26,43,647/-. Thus, the total addition made was Rs.5,31,81,147/-. Aggrieved by the same the Assessee filed an appeal before the learned CIT(A. The learned CIT(A) however failed to appreciate the submissions of the Assessee and passed the appellate order u/s 250 of the Act dated 18/12/2018 dismissing the appeal of the Assessee. Aggrieved by the order of the Ld. CIT(A), the Assessee is before this Hon’ble Tribunal in statutory appeal u/s 253 of the Act.

4.2 The following are the issues involved in this appeal for the adjudication by this Tribunal:-

a. The mandatory condition for issuing notice u/s 148 of the Act was absent insofar as the AO did not have reasons to believe, but only reason to suspect and therefore the entire proceedings were void-ab-initio on the facts and circumstances of the case. b. The notice issued under section 148 of the Act is not in accordance with law as the learned Assessing officer has proposed to reassess, whereas there has never been an assessment originally and therefore the entire proceedings is void-ab-initio on the facts and circumstances of the case. c. The process initiated under section 148 of the Act is bad in law as no proceedings can be initiated under section 148 if the information based on which the assessment is re-opened is pursuant to a material gathered in a search proceedings in the case of Madhu, Renuka

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Page 11 of 58 Raghavasharyulu and others which is evident from the ‘reasons’ recorded by the learned assessing officer, hence if any proceedings are to be commenced then the same ought to have been under section 153C of the Act and not otherwise, on the facts and circumstances of the case. d. Without prejudice, the learned Assessing Officer has not followed proper procedure before and after issuance of a notice under section 148 of the Act and consequently, subsequent proceedings on an invalid procedure adopted by the learned assessing officer becomes void and does not have any legs to stand the test of law which renders the order unsustainable in law on the facts and circumstances of the case. e. The addition on account of unaccounted purchase and net profit thereon is not sustainable in law and on the facts and circumstances of the case.

5.1 Ground No. 2: The Commissioner of Income-tax (Appeals) failed to appreciate that the notice issued under section 148 of the Act is not in accordance with law as the Assessing officer has proposed to reassess, whereas there has never been an assessment originally and therefore the entire proceedings is void-ab-initio on the facts and circumstances of the case.

a) The Assessee submits that the notice issued under section 148 of the Act is bad in law on account of non-application of mind to the material facts of his case. Copy of the notice u/s 148 dated 21/11/2013 is enclosed at Paper book compilation at Page 95.

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Page 12 of 58 b) The relevant portion i.e., paragraph 2 of the notice u/s 148 is reproduced below for ease of reference: Whereas I have reason to believe that your income chargeable to tax for the Assessment Year 2009-10 has escaped Assessment within the meaning of section 147 of the Income Tax Act, 1961. I, therefore, propose to assess / reassess the income / loss for the said Assessment Year and I hereby require you to deliver to me within 30 days from the service of this notice, a return in the prescribed form for the said Assessment Year. [emphasis supplied] c) The Assessee states that the AO has demonstrated the lack of application of mind to the material facts of the Assessee insofar he is not clear on whether the Assessee is to be assessed or reassessed and whether the Assessee incurred loss or had taxable income during the year under consideration. This manifest non-application of mind results in jurisdictional mistake, because the AO has assumed the jurisdiction without performing his duty of conscious application of mind and initiating the proceedings in accordance with law. d) It is submitted that this issue goes to the very root of the matter, for the reason that it is not an item in the return of income which was not looked into or was not properly disclosed, but a wholly new source of income has been alleged by the learned Assessing Officer in the form of purchases from Sri Gali Janardhan Reddy. Since this is a new source of income purportedly discovered by the learned Assessing Officer, the correct initiation of the proceedings under section 147 of the Act should have been by way of proposition to assess and not reassess.

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Page 13 of 58 e) Reliance is placed on the decision of the Hon’ble Supreme Court in re M/s Standard Chartered Finance Limited v. Commissioner of Income Tax in SLP (Civil) No. 13512/2012 where the Hon’ble Court held that where there was no original assessment, proceedings initiated by way of notice under section 148 of the Act for reassessment is not in accordance with law. f) It is submitted that although the word assessment has been defined to include reassessment too, it is well known that the procedure and scope for both is different in all respects. Where after a return of income is filed and notice is issued under section 143(2) to scrutinize the said return of income and thereafter such scrutiny is concluded with passing of assessment order, then in such a case if the Assessing Officer is of the opinion that some income has escaped assessment, he initiates reassessment through power vested in him under section 147 of the Act. g) Where however, no scrutiny assessment or original assessment is conducted initially in pursuance to the return of income filed, then in such a case, proceedings are initiated to conduct assessment of such return of income through power vested in him under section 147 of the Act. h) Thus, it is clear from the above that although the section is the same, the scope and modus-operandi of the proceedings are totally different. In the present case, there was no regular assessment under section 143(3) of the Act. Yet the learned Assessing Officer proposed to adopt the reassessment proceedings and not the assessment proceedings and therefore rendered the whole proceedings unsustainable in law and incurable by any subsequent

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Page 14 of 58 actions as the very initiation of proceedings vide notice under section 148 of the Act goes to the very root of the matter on the facts and circumstances of the case. i) Reliance is placed on the parity of reasoning in the decision of this Hon’ble Court in re Manjunatha Cotton & Ginning Factory v. CIT reported in 359 ITR 565 (Kar) where the Hon’ble Court has held that a statutory notice issued without application of mind lack authority and the proceedings initiated become void-ab-initio. j) Therefore, the order passed by the learned Assessing Officer is not in accordance with law for the reasons submitted above and it was prayed before the CIT(A) to cancel the order of reassessment on the above ground in the interest of justice. The learned CIT(A) however failed to appreciate the submissions and adjudicated the ground by merely holding that assessment u/s 2(8) includes reassessment and that since in this case no assessment u/s 143(3) took place, therefore the AO was justified in initiating reassessment u/s 147 of the Act and mentioning reassessment instead of assessment does not vitiate assessment proceedings. k) Wherefore it is prayed that this Tribunal may be pleased to appreciate this submission and hold that the notice u/s 148 being issued without application of mind, the entire assessment proceedings loose its sanctity and the proceedings are liable to be held null and void on the facts and circumstances of the case.

5.2 Ground No. 3: The Commissioner of Income-tax (Appeals) failed to appreciate that the process initiated under section 148 of the Act is bad in law as no proceedings can be initiated under section 148 if the information based on which the

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Page 15 of 58 assessment is re-opened is pursuant to a material gathered in a search proceedings in the case of Madhu, Renuka Raghavasharyulu and others which is evident from the ‘reasons’ recorded by the learned assessing officer, hence if any proceedings are to be commenced then the same ought to have been under section 153C of the Act and not otherwise, on the facts and circumstances of the case.

a) It is not in dispute that the information that is being used against the Assessee emanated from the hard disk belonging to one Sri Ali Khan that is claimed to have been found during course of search u/s 132 of the Act. It is claimed by the AO that the said hard disk purportedly contained a file named as “Portwise details.xlsx”. b) It is stated by the Assessing Officer that one of the persons in the said list containing the details of henchman companies was the concern ‘Vrushabendra Mines’ owned by the Assessee. The learned AO has reproduced in page 2 of the assessment order the extract from the appraisal report prepared by the DDIT (Investigation) wherein it is recorded that information relating to the Assessee was found in the spreadsheet (excel sheet) that was stored in the hard disk of Sri Ali Khan. c) It is submitted that the learned Assessing Officer is not justified in initiating the proceedings under section 148 of the Act as the law does not permit the Assessing Officer to invoke the proceedings under section 147 of the Act when information contained in any material seized during a search relates to the Assessee as the same comes within the purview of section 153C of the Act.

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Page 16 of 58 d) The Act provides under section 153C of the Act that notwithstanding the provisions of sections 147, 148, 149, 151 and 153 where the Assessing Officer is satisfied that any books of account or documents, seized or requisitioned belongs or belong to a person other than the person referred to in section 153A, then, the books of account or documents or assets, seized or requisitioned shall be handed over to the Assessing Officer having jurisdiction over such other person and that Assessing Officer shall proceed against each such other person and issue notice and assess or reassess the income of the other person in accordance with the provisions of section 153A, if, that Assessing Officer is satisfied that the books of account or documents or assets seized or requisitioned have a bearing on the determination of the total income of such other person for the relevant assessment year or years referred to in sub-section (1) of section 153A.

e) It is submitted that since the section 153C begins with non-obstante clause, the powers vested in the learned Assessing Officer under section 147 of the Act to assess are curtailed and he is mandated to invoke provisions of section 153C of the Act as the basis of the proceedings is material seized during search action under section 132 of the Act and consequently provisions of section 147 cannot be invoked on the facts of the case. f) Be that as it may, the Assessee submits that the condition precedent for initiating proceeding under section 147 is that AO should have reason to believe that income has escaped assessment. After initiating the assessment, it is required for the AO to further

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Page 17 of 58 corroborate the material on the basis of which proceeding is initiated to the facts of the case of the Assessee and make a determination on the basis of evidences, of income that has escaped assessment, if any. The liberty to presume the books or document found to belong to the Assessee is available to the AO only under the provisions of Section 132(4A) and Section 292C of the Act in the case of a searched person. g) In the present case, the learned AO has initiated and concluded the assessment on the presumption that the material that emanated out of search u/s 132 in the case of certain parties belonged to the Assessee which is impermissible under law as the Assessee is not a searched person. Attention is invited to the page 4 of the assessment order where the AO has noted – “As could be seen from the above statement recorded on oath and the assessee Sri J M Vrushabendraiah simply denied knowledge about any transaction with Sri Gali Janardhan Reddy. However it should be noted that the details of unaccounted transactions in iron ore between the assessee and parties mentioned in Appraisal report was discovered in search under search under section 132. The details found at the premise during 132 search action are sufficient enough to be treated as a valid document and the assumption of assessee having carried out transaction with the parties stands valid.” h) The learned AO has erred in attaching sanctity to the information purportedly revealed during a search action as such a presumption is only available in accordance with section 132(4A) and section 292C of the Act and not against the Assessee. It was required for the AO to make additions only on the basis of corroborating evidence in support of information supplied to him by the investigating authorities and conclusion of assessment purely on the basis of unsubstantiated information

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 18 of 58 supplied by the investigation authorities is arbitrary and required to be cancelled. i) Attention is invited to reasons recorded by the AO [para 80 of the paper book] where the AO has reproduced the extract from the appraisal report prepared by the DDIT (inv) and the said investigation authority clearly noted at para 8.26.3 that “the AO is requested to centralize M/s Vrushabendra or intimate the jurisdictional AO to disallow purchase expenses claimed by M/s Vrushabendraiah with regard to this material…” Thus even according to the investigation authorities the assessment was required to be made under section 153C of the Act. j) Reliance is placed on the following decisions on the proposition that information that emerges during a search action or seized material can be used only in a proceeding under section 153C and not under section 147 of the Act – i. ACIT v. Srinivas Rao Hoskote in ITA No. 1154 & 1155/Bang/2015 dated 21/02/2018 ii. ITO v. Arun Kumar Kapur in ITA No. 147/ASR/2010 reported in 140 TTJ 249 iii. ACIT v. Radheshyam B Agarwal reported in 170 TTJ 371 (Pune Trib); iv. Rajat Shubra Chaterji v. ACIT in ITA No. 2430/Del/2015 dated 20/05/2016; v. G Koteshwara Rao v. DCIT in ITA No. 400- 407/Vizag/2014 dated 29/10/2015 vi. Smt. Samanthapudi Lavanya v. ACIT in [2021] 127 taxmann.com 188 (Visakhapatnam - Trib.)

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Page 19 of 58 k) The learned CIT(A) however failed to appreciate the submissions, and held that the learned AO has rightly initiated proceedings u/s 147 and that provisions u/s 153C are not applicable to the Assessee’s case. The learned CIT(A) rather focussed on the interpretation of the word ‘belonged to’ vis-à-vis ‘relates to’ in the section 153C instead of appreciating that once an information arises on the basis of seized material or search action, then assessment can only be made under section 153A or 153C and not under section 147 in view of the non- obstante clause. l) It is prayed that this Hon’ble Tribunal may kindly appreciate the above submissions and hold that present proceedings are void ab initio and cancel the assessment on this ground in the interest of justice

5.3 Ground No. 4: Without prejudice, the Commissioner of Income-tax (Appeals) failed to appreciate that the learned Assessing Officer has not followed proper procedure before and after issuance of a notice under section 148 of the Act and consequently, subsequent proceedings on an invalid procedure adopted by the learned assessing officer becomes void and does not have any legs to stand the test of law which renders the order unsustainable in law on the facts and circumstances of the case.

a. The Assessee invites the attention of this Tribunal to notice under section 148 [at page 95 of the paper book compilation] where it can be noted that there is no mention of the authority from whom the AO secured sanction before issuing the said notice. b. The Assessee submits that section 151 of the act provided as under –

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Page 20 of 58 “Sanction for issue of notice

5.4 Ground No. 5: The Commissioner of Income-tax (Appeals) failed to appreciate that the order of assessment is bad in law as the mandatory conditions necessary to invoke the provision of section 147 are did not exist and therefore issue of notice u/s 148 was unjustified on the facts and circumstances of the case.

5.5 Ground No. 6: The Commissioner of Income-tax (Appeals) failed to appreciate that the reasons recorded by the Assessee are only reason for suspicion and not reasons to believe and

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Page 21 of 58 accordingly the reassessment proceeding is not in accordance with law and on the facts and circumstances of the case. a. It is submitted that for the purpose of initiating reassessment proceedings, the AO is required to have a belief that certain income has escaped assessment in the hands of the Assessee and such reason to believe should have been derived out of proper reasoning and application of mind.

b. In the present case the AO has simply relied on what the Investigation Department has communicated to him and not applied his mind on the ramifications of the statement of Shri Ali Khan. It is important to understand the same, in order to appreciate the fallacy committed by the AO. c. The Assessee invites attention of the Tribunal to reasons recorded [ at Page 80 of the paper book] where it can be clearly seen that the AO has blindly relied upon the information sent to him by the investigation wing and not applied his mind to the facts of the case. The AO has made no reference to the income disclosed by the Assessee, returns furnished by the Assessee, mining exercise conducted by the Assessee and blindly concluded that income as escaped assessment which is impermissible under law. d. It is important to understand what the AO has recorded in the reasons recorded. (i) The AO has clearly stated that there are Henchmen Companies who purchased the Group’s illegally mined Iron ore and that the Assessee is one such Henchmen entity, as the name of the Assessee is found in one of files saved in drive of one Mr. Ali Khan.

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Page 22 of 58 (ii) The AO further recorded that such Henchmen entities recorded the purchases from the Group as purchases from unregistered dealers and made payments to such non-existent dealers in cash or self-cheque. (iii) That in the Appraisal Report the Investigation Department has recorded that the Spreadsheet titled VRUSHABENDRA contains details of cost, quantity supplied and payments received by the group from the Assessee, and according to the spreadsheet data the Assessee has sold illegal iron ore of quantity 37,500 metric tonnes at a cost of Rs.4,05,37,500/- @ Rs.1,081/- per metric tonne and another tranche of 15,910 metric tonnes at a cost of Rs.2,54,56,000/- @ Rs.1,600/- per metric tonne. (iv) That the Investigation Department in its appraisal report has called for disallowing the purchase expenses claimed by the Assessee u/s 37 r.w.s. 40A(3) of the Act. e. The Assessee wishes to submit that the reasons recorded by the learned AO are merely reasons to suspect and there is no belief that the income has escaped assessment. It is submitted that the provisions of section 147 of the Act require that the AO should have reasons to believe that income chargeable to tax has escaped assessment and for that the AO should have satisfied himself by way of proper enquiry/perusal of the material on record. The AO should not act mechanically on the basis of information provided by some other person/authority. It is clear from the above that the AO has simply followed the dictate of the

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Page 23 of 58 investigation department and has not made any independent application of mind. Therefore, the satisfaction derived is a borrowed satisfaction and not one derived on his own. f. It is clear from the reasons recorded that the AO has not even bothered to verify from the IT return furnished by the Assessee as to whether there are any purchases at all by the Assessee. The deposition of Shri Ali Khan and the noting by the Investigation Department clearly specify the requirement of Purchases having been recorded by the buyers from the Group as Purchases from Unregistered Dealers. However, since the Assessee made no purchases at all, the question of the Assessee being one of the Henchmen does not make any sense on the facts and circumstances of the case. g. The AO is not justified in blindly accepting the suggestion of the investigation authorities without any perusal of the facts of the case. h. The above submissions of the Assessee were not appreciated by the CIT(A), who adjudicated this substantial ground vide a single paragraph viz., Para 5. The learned CIT(A) simply held that since the reasons mention information received from DDIT about supply of specific quantity of iron ore by the Assessee. What the learned CIT(A) ought to have appreciated is that information received was extracted from a spread sheet, on which a person may write whatsoever one wishes. It is not the case of the department that bills, permits, vouchers bearing the Assessee’s signatures were found which attests to the fact of purchase of ore by the Assessee or

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 24 of 58 unrecorded sale of such iron ore, nor is there any other information available apart from the scrambling in the excel sheet. Thus, the CIT(A) failed to appreciate the detailed submissions of the Assessee. i. It has been held by the Delhi High Court that a notice issued mechanically merely on the information supplied by the Investigation Wing has unjustified in the case of CIT v. Kamadhenu Steel Alloys Ltd., reported in [2014] 361 ITR 220 (Delhi). j. The Delhi High court in re Mrs.Vinita Jain v. ITO 158 Taxman Magazine 167 (Del) has held that where the AO reopened assessment merely because the DDIT (Inv) believed that the transaction of capital gains shown by the Assessee was bogus and no separate reason disclosing satisfaction of the assessing officer for formation of belief that income of assessee had escaped assessment had been recorded, notice issued under section 148 was to be quashed and the consequential assessment was to be annulled. k. Reliance is also placed on the parity of reasoning laid down in the following decisions –

(a) ACIT v. Dhariya Construction Co. 328 ITR 515 (SC)

(b) CIT v. Shree Rajasthan Syntex 313 ITR 231 (Raj) [SLP dismissed]

(c) ICICI Home Finance Co. Ltd., v. ACIT 2012-TIOL- 590-HC-MUM-IT

(d) Mrs.Vinita Jain v. ITO 158 Taxman Magazine 167 (Del)

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 25 of 58 (e) CIT v. Shardaben K Modi reported in [2013] 35 taxmann.com 264 (Gujarat)

(f) Shree Chalthan Vibhag Khand v. Dy. CIT reported in [2015] 376 ITR 419 (Guj);

(g) Shree Sayan Vibhag Sahakari v. Dy. CIT reported in [2016] 69 taxmann.com 245 (Gujarat);

(h) Shree Chalthan Vibhag Khand v. Dy. CIT reported in [2015] 376 ITR 419 (Gujarat)

l. Further reliance is placed on the parity of reasoning of the decision of the Hon’ble Delhi High Court in re CIT v. SFIL Stock Broking Ltd., reported in 325 ITR 285 where the Hon’ble Court held: “9. In the present case, we find that the first sentence of the so-called reasons recorded by the Assessing Officer is mere information received from the Deputy Director of Income-tax (Investigation). The second sentence is a direction given by the very same Deputy Director of Income-tax (Investigation) to issue a notice under section 148 and the third sentence again comprises of a direction given by the Additional Commissioner of Income-tax to initiate proceedings under section 148 in respect of cases pertaining to the relevant ward. … 10. ... it is clear that the Assessing Officer referred to the information and the two directions as "reasons" on the basis of which he was proceeding to issue notice under section 148. We are afraid that these cannot be the reasons for proceeding under section 147/148 of the said Act. The first part is only an information and the second and the third parts of the beginning paragraph of the so-called reasons are mere directions. From the so-called reasons, it is not at all discernible as to whether the Assessing Officer had applied his mind to the information and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment." m. Reliance is also placed on the following –

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 26 of 58 (i) General Mrigendra Shum Sher Jung Bahadur Rana v. ITO [1980] 123 ITR 329 (Delhi); (ii) United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 (Delhi); (iii) Sarthak Securities Co. (P.) Ltd. v. CIT [2010] 329 ITR 110 (Delhi) n. It is further submitted that he learned AO had no reason to believe, but only reason to suspect and the impugned proceedings have been initiated on the basis of mere suspicion and not on any belief. It is a settled position in law that where reassessment proceedings are initiated on mere reason to suspect and reason to believe is not forthcoming, then such proceedings are not sustainable in law. o. The Assessee relies on the decision of Hon’ble Apex Court in the case of Indian Oil Corporation Vs. Income Tax Officer, reported in 159 ITR 956 has held as under:

“reason to believe is not the same thing as reason to suspect. The Apex court reiterated its view expressed in the case of Sheo Nath Singh v AAC, 82 ITR 147”. p. The Hon’ble Supreme Court in Ganga Saran and Sons Pvt Ltd vs ITO and Others [130 ITR 1] has reiterated that :

“It is well settled as a result of several decisions of this court that two distinct conditions must be satisfied before the Income- tax Officer can assume jurisdiction to issue notice under s. 147(a). First, he must have reason to believe that the income of the assessee has escaped assessment and, secondly, he must have reason to believe that such escapement is by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment. If either of these conditions is not fulfilled, the notice issued by the Income-tax Officer would be without jurisdiction. The important words under s. 147(a) are " has reason to believe " and these words are stronger than the words " is satisfied ". The belief entertained by the Income-tax Officer must not be arbitrary or irrational.

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Page 27 of 58 If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Income-tax Officer could not have reason to believe that any part of the income of the assessee had escaped assessment and such escapement was by reason of the omission or failure on the part of the assessee to disclose fully and truly all material facts and the notice issued by him would be liable to be struck down as invalid”. q. The Hon’ble High court of Karnataka in H. Noronha V. Income Tax Officer [133 ITR 199] has held that mere suspicion would not be sufficient for re-opening of the case unless there existed some other prima facie evidence to warrant re-opening. r. The Hon’ble Supreme Court in Chhugamal Rajpal V. S. P. Chaliha And Others [79 ITR 603 ] has held that :

“Before issuing a notice under section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under section 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the Income- tax Officer has no jurisdiction to issue a notice under section 148”. s. The Hon’ble Supreme Court in ITO V. Lakhmani Mewal Das [103 ITR 437] wherein it was a case arising under section 147[a]. The Hon’ble Supreme Court reiterated that the reasons for the formation of the belief by the ITO, must have a rational connection or relevant bearing on the formation of the belief. It was further explained that

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Page 28 of 58 this aspect is justiciable issue to be examined by the Court. t. The Hon’ble Supreme Court in Calcutta Discount Company Limited vs. ITO and Another [41 ITR 191] has held that :

“The expression "reason to believe" postulates belief and the existence of reasons for that belief. The belief must be held in good faith : it cannot be merely a pretence. The expression does not mean a purely subjective satisfaction of the Income-tax Officer: the forum of decision as to the existence of reasons and the belief is not in the mind of the Income-tax Officer. If it be asserted that the Income-tax Officer had reason to believe that income had been under-assessed by reason of failure to disclose fully and truly the facts material for assessment, the existence of the belief and the reasons for the belief, but not the sufficiency of the reasons, will be justifiable. The expression therefore predicates that the Income-tax Officer holds the belief induced by the existence of reasons for holding such belief. It contemplates existence of reasons on which the belief is founded, and not merely a belief in the existence of reasons inducing the belief; in other words, the Income-tax Officer must on information at his disposal believe that income has been under-assessed by reason of failure fully and truly to disclose all material facts necessary for assessment. Such a belief, be it said, may not be based on mere suspicion; it must be founded upon information”. u. A three-Judge Bench of the Supreme Court in S. Narayanappa v. CIT [1967] 63 ITR 219 held as under:-

"Again the expression "reason to believe" in section 34 of the Income-tax Act does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. To put it different, it is open to the court to examine the question whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under section 34 of the Act is open to challenge in a court of law (see Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies District 1, Calcutta)." v. The single bench judgment of the Hon’ble Karnataka High Court in the matter of A. Nagappa V. ACIT, wherein the

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Page 29 of 58 reasons of the Assessing Officer, were elaborate, were reproduced. Yet the Hon’ble High Court proceeded to quash the notice issued to the Assessee under section 148 of the Act. This Order was the subject matter of challenge at the instance of Revenue in W.A. No. 928/1991 (unreported) before the Division Bench of the Hon’ble Karnataka High Court which held as under :

“More than the ADI’s report which the learned judge characterized as evasive and speculative, it is the statement of reasons for the reopening which is evasive and speculative. We find no basis therein which could have led the assessee to entertain reasons to believe that income chargeable to tax had escaped assessment for the relevant assessment year. It is imperative that the reasons should have a rational and relevant nexus to the formation of such belief. We do not find such nexus”. w. It is also relevant to refer to the following judgments that have reiterated the same principle of law – (i) Constitution Bench of the Hon’ble Supreme Court in M. Ct. Muthiah v. CIT AIR 1956 SC 269 (ii) Commissioner of Income-tax v. Daulat Ram Rawatmul [1973] 87 ITR 349 (SC), (iii) Equitable Investment Co. [P.] Ltd. vs ITO G- Ward And Others 174 ITR 714 (Cal) (iv) Hindustan Lever Limited V. R.B. Wadkar, Assistant Commissioner of Income Tax, 268 ITR 332 (Bom) (v) Birla VXL Ltd Vs ACIT [1995] 217 ITR 1 (Guj) (vi) CIT Vs. N. Thippashetty [2010] 322 ITR 525 (Kar) (vii) Assam Co. Ltd v. UOI 150 Taxman 571 (Gau) (viii) Commissioner of Income-tax-V v. Orient Craft Ltd. [2013] 29 taxmann.com 392 (DELHI)

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Page 30 of 58 (ix) Prashant S. Joshi v. Income-tax Officer, Ward 19(2)(4) [2010] 189 TAXMAN 1 (BOM.)

GROUND No 3 : ACTION U/S 147 IS NOT VALID AS 153C WAS APPLICABLE 6.1 In this case, the Assessing Officer of the assessee [AO] had received certain information from the DCIT Central Circle 1(3), Bangalore [the AO of the searched person] vide letter dated 16- 09-2013, along with details as Annexure-I 85 II. (A copy of the said letter is placed at page nos. 1-2 of the paper book). The subject matter of aforesaid letter reads as under:

"Forwarding the information pertaining to M/s J.M. Vrishabendraiah-reg" 6.2 Further, from a perusal of the contents of the letter, it is clear that DCIT Central Circle 1(3), Bangalore had only forwarded certain information to the AO of the assessee. The AO had not received any satisfaction note (as required u/s 153C) from the AO of the searched person. Therefore the AO could not have invoked the provisions of Section 153C. Therefore, after examining the said information, the AO recorded the reasons to the effect that the income has escaped assessment and invoked the provisions of Section 147 of the Income Tax Act 1961 [Act].

6.3 It is a settled position of law that, in order to invoke the provisions of Section 153C, it is a mandatory condition that the AO of the searched person has to record a satisfaction to the effect that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned,

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Page 31 of 58 belongs or belong to other person. In the present case, DCIT Central Circle 1(3), Bangalore had not recorded any such satisfaction. Therefore, the provisions of Section 153C were not applicable in the case of Assessee. Therefore, the AO, after perusal of the information about income escaping assessment, has rightly invoked the provisions of Section 147.

6.4 Without prejudice to the above, it may be pertinent to examine whether the AO of the searched person could have recorded the satisfaction, as required u/s 153C?. As mentioned earlier, a search u/s 132 was conducted by the Department in the case of Mr. Ali Khan. During the course of search, a CPU 85 hard disk found at the premises of Mr. Ali khan were seized. The information/documents were retrieved from the said CPU. One such document was "Port wise details.xlx" which contains the details of sale rate of illegal iron ore fixed to the henchmen companies. One such henchmen entity was owned by Sri J.M. Vrushabendraiah, the assessee herein. Thus, it is clear that, the details in the CPU/ Document do not belong to the assessee but only relate to him. In these circumstances, prior to 01-06-2015, the AO of the searched person, could not have recorded a satisfaction as required u/s 153C of the Act.

6.5 There are many decisions of various Courts & Tribunals (including this Tribunal) holding that the provisions of Section 153C (as existed prior to 01-06-2015) cannot be invoked unless there is satisfaction by the AO of the searched person to the effect that any money, bullion, jewellery or other valuable article or thing or books of account or documents seized or requisitioned "belongs or belong to a person" other than the person referred to in section 153A. The landmark decision was of Hon'ble Delhi High court in Pepsico India Holdings (P.)

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Page 32 of 58 Ltd. v. Assistant Commissioner of Income-tax [2014] 50 taxmann.com 299 (Delhi).

6.6 In view of above submissions, the case laws cited at point no 2(j), are distinguished. Therefore, it is prayed that the Ground of Appeal in this regard may please be rejected.

7.1 In this case, the AO had received certain information from the DCIT Central Circle 1(3) Bangalore. After examining the said information, the AO recorded the reasons to the effect that income has escaped assessment and invoked the provisions of Section 147. (A copy of the said reasons is placed at page nos. 11-12 of the paper book) After recording the reasons, the AO had proceeded to issue notice under Section 148, requiring the assessee herein, to furnish a return of income within the specified period.

7.2 It is submitted that, the purpose of Section 148 notice is only to call for the return of income and not to communicate whether the AO wants to assess or reassess or re-compute the income. Further, it is submitted that, the Section 148 does not mandate that, in the notice, the AO has to communicate whether he wants to assess or reassess or re-compute the income. In the absence of any such requirement, the action of AO in choosing re-assessment, does not make any material difference to entail the notice invalid.

7.3 The Explanation-2 (b) to Section 147 (as extracted below) provides for re-opening of assessments, even in cases where return was furnished but no assessment made earlier:

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Page 33 of 58 “Explanation 2 – For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—

(a) XXX (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss. deduction, allowance or relief in the return ;”

7.4 From the above it is clear that, the provisions of Section 147 are applicable to the cases where there was no assessment earlier. Hence it is submitted that, the AO has correctly chosen the words Re-assessment/Re-computation in the notice u/s 148.

7.5 It is a settled position of law that, the AO is free to take action u/s 147, even when there was no assessment and only intimation u/s 143(1) had been issued. The land mark decision in this regard is ACIT' v Rajesh Jhaveri Stock Brokers (P) Ltd, (2007) 161 Taxman 316 (SC), wherein the Hon'ble Apex court vide para 18 has held as under: “So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings even when intimation under section 143(1) had been issued.”

7.6 The CIT(A), has rightly observed that Section 2(8) of the Act defines assessment to include Re-assessment". Moreover, the Act does not lay down separate & distinct procedures for assessment of a return filed in response to notice u/s 148 vis-à-vis the one filed u/s 139.

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Page 34 of 58 7.7 The section 148 (1) [as it stood at the relevant point of time] reads as under: “148. [(i)] Before making the assessment, reassessment or re-computation under section 147, the Assessing Officer shall serve on the assessee a notice requiring him to furnish within such period, 1* * *.] as may be specified in the notice, a return of his income or the income of any other person in respect of which he is assessable under this Act during the previous year corresponding to the relevant assessment year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed,. and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139” 7.8 The concluding part of the above section, clearly lays down that, all provisions of this Act will apply to a return filed in response to notice u/s 14'8, as if such return was filed u/s 139. Therefore, the original assessment is done u/s 143(3) and the re- assessment (which is also an assessment) is done u/s 143(3) read with section 147.

7.9 Without prejudice to the submissions in the preceding paragraphs, assuming but not admitting, that the AO has incorrectly chosen the option "re-assess" instead of "assess", even then, the 148 notice is valid, in view of the following reasons:

i. In this case, the AO has duly recorded the reasons for initiation of proceedings u/s 147 and subsequently proceeded to issue notice u/s 148. This is in substance and effect, in conformity with and according to the intent and purpose of this Act.

ii. The validity of such notices ise protected in view of the Section 292B, extracted below:

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Page 35 of 58 “292B. No return of income, assessment, notice, summons or other proceeding, ,furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall he deemed to be invalid merely by reason of any mistake, defect or omission in suchreturn of income, assessment, notice, summons or other proceeding if such return of income, assessment, notice, summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act.]” 7.10 The Hon'ble High Court of Calcutta in Mulchand Rampuria v ITO [2002] 125 Taxman 291(Cal) (A copy of the said decision is placed at page nos. 24-28 of the paper book) had an occasion to consider this aspect and held that after the enactment of section 292B, no notice shall be deemed to be invalid merely by reason of any mistake, defect or omission therein if the notice is in substance and effect -in conformity with or according to the intent and purpose of this Act. The relevant para of the decision is extracted below: “Section 148 specifically empowers the Assessing Officer that before making the assessment and reassessment or re- computation under section 147, the Assessing Officer shall serve. On the assessee notice requiring him to do so under the said section within such period mentioned therein. A notice under this section is a condition precedent to the validity of any assessment under section 147. The notice would be invalid if it .does not specify the correct assessment year or is not signed, or is issued io a dead man or to the assessee as an individual when the correct status of the assessee is that of a Hindu undivided family. This principle had already been settled by the court in several judgments. After the enactment of section 292B which came into force on 1-10-1975, no notice shall be deemed to be invalid merely by reason of any mistake, defect or omission therein if the notice is in substance and effect in conformity with or according to the intent and purpose of this Act. (Ernphasis supplied)”.

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Page 36 of 58 7.11 The assessee has also relied on the decision of Hon'ble Jurisdictional High court in Manjunatha Cotton & Ginning Factory v CIT [359 ITR 565 (Kar)] and pleading to declare the notice as invalid on the ground that, the correct option is not chosen. It is respectfully submitted that there are conflicting decisions on the matter. Further, it is also submitted that the notices u/s 271(1(c) & u/s 148 are poles apart due to huge difference in the requirement of law u/s 271(1)(c) vis-à-vis u/s148, as mentioned below:

i. “As per Section 271(1)(c), it is legally required on the part of the AO to record a satisfaction whether the proposed penalty is for concealment of particulars of income or for furnishing inaccurate particulars of income.

ii. As per Section 148, there is no requirement that he has to record a finding specifically whether proceedings u/s 147 are initiated for the purpose of assessment or re-assessment.”

In view of the above, no reliance can be placed on the above decision.

7.12 The assessee has placed reliance on the decision of Hon'ble Apex Court in M/s Standard Chartered Finance Ltd v CIT in SLP (Civil) No 13512/2012, to buttress the argument that, where there was no original assessment, there cannot be re-assessment. As submitted in earlier paragraphs, the Income tax Act u/s 147 permits re-assessment even in cases where there was no assessment originally. Further, the above decision is also distinguished for following reasons:

i. The said decision was rendered in the context of Assessment/Reassessment as provided in the

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Page 37 of 58 Interest Tax Act 1974. (A copy of the relevant Sections 8 to 10, dealing with Assessment and Re- assessment are placed as Page no 29-30 of the paper book). As could be perused from Section 8 of the said Act, there is no provision which provides for processing of the return, akin to Section 143(1) of the Income Tax Act 1961.

ii. The provisions for Re-assessment are contained in Section 10 of the said Act. As could be perused, the said section does not cover situations where return was filed and the same was not subject to assessment.

iii. As submitted Supra the Section 147 of the Act, permits reassessment in cases, where the return was filed and the same was not subjected to assessment.

7.13 In view of submissions contained in all preceding paragraphs, it is prayed that the Ground of Appeal in this regard may please be rejected.

8.1 In the present case, the return was filed on 02-11-2010 for the Asst year 2010-11. The said return was processed u/s 143(1) 86 there was no assessment u/s 143(3). In such a situation, the provisions of Section 151(2) extracted below are applicable:

“151. (1) ………………………….. (2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148 by an Assessing Officer, who is below the rank of [Joint] Commissioner, after the expiry of four years from the end of the relevant assessment year, unless

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Page 38 of 58 the [Joint] Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.]”

8.2 In this case, the notice u/s 148 was issued on 21-11-2013, which was well within the period of 4 years from the end of the Asst year 2010-11. Therefore, there was no requirement for the AO to seek any sanction for issue such notice.

8.3 In view of above submissions, it is prayed that the Ground of Appeal in this regard may please be rejected.

9.2 It is submitted that the word "reason'' in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income

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Page 39 of 58 had escaped assessment, it can be said that he had reason to believe that, an. income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion.

9.3 He relied on the judgement of the Hon'ble Supreme Court in the case of ACIT v Rajesh Jhaveri Stock Brokers (P.) Ltd. (291 ITR 500) (SC).

9.4 The above observations are squarely applicable to the present case, as the AO had received credible information and hence he had reason to believe that the income has escaped assessment.

9.5 The I.T. Act or I.T Rules have not prescribed any specific format for the purpose of recording of the reasons u/ s 147. Therefore, it is wrong to argue that the reasons recorded are not valid if, the details like, date of filing of the return, income declared, assessment made etc. are not mentioned in said reasons.

9.6 In view of above submissions, it is prayed that these Grounds of Appeal in this regard may please be rejected.

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Page 40 of 58 registered dealers and made payment to such non-existent dealers either in cash or self-cheque. During the course of search, a CPU and hard disk were found at the premises of Mr. Ali Khan marked as A/AK/2. The said hard disk was subjected to cloning and various incriminating documents were retrieved from the CPU. One of the important files retrieved named as “Port-wise details of how the rate of illegal iron ore was fixed to henchman companies.” One of such henchman entity was owned by V. Vrushbendraiah, which is evident from the excel sheet containing port-wise details in respect of iron ore purchased of Shri V. Vrushabendraiah for the financial year 2009-10 retrieved from the CPU, which was found and seized from the premises of Ali Khan during the course of search u/s 132 of the Act. The para 8.26 of Appraisal report prepared by search conducting DDIT (Inv.) which is relevant in respect of transactions of Sri J.M. Vrushabendraiah is as under:- “8.26 SPREADSHEET VRUSHAVNDRA” 8.26.1 Spreadsheet VRUSHABENDRA contains the working of cost, quantity supplied and the payment received by the group from Vrushabendra Mines, mine owner. The group has an illegal sharing arrangement with Vrushabendra.

8.26.2 The group has supplied illegal iron ore of quantity 37,500 metric tons at a cost of Rs.4,05,37,500/- @Rs.1081 per metric ton and another tranche of 15,910 metric tons at a cost of Rs.2.54,56,000/- @ Rs.1,600/- per metric tons.”

10.1 Based on the above findings of the DDIT (Inv.), Central Circle- 1(3), III Floor, Central Revenue Building, Queens Road, Bangalore 560 001, has issued notice u/s 148 of the Act to Sri J.M. Vrushabendraiah on 21.11.2013 for AY 2010-11. In response to this notice, assessee submitted the copy of return of AY 2010-11

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Page 41 of 58 filed on 02.11.2010 and requested to treat the return as filed in response to the notice u/s 148 of the Act.

10.2 Now the contention of the Ld. A.R. is that there is no information available with the AO so as to reopen the concluded assessment. However, we find that the AO received the information from DDIT, Investigation, Central Circle-1(3), 31st Floor, Central Revenue Building, Queens Road, Bengaluru. Pursuant to receipt of information from the investigation wing, with regard to unaccounted purchase of iron ore by the assessee, the AO initiated the proceedings u/s 147 of the Act against this assessee. Section 147 of the Act could be initiated against the assessee, if AO has a “reason to believe that any income chargeable to tax has escaped assessment.” In this case, information available to the assessee from the DDIT, Investigation wing, Central Circle-1(3), Bengaluru with regard to purchase of iron ore by assessee from Mr. Ali Khan in the form of seized material, which is as follows:

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10.3 On receipt of these seized materials, the AO recorded the reasons and issued notice u/s 148 of the Act. At the time of issuing notice u/s 148 of the Act, the AO “has reason to believe” that income chargeable to tax has escaped assessment. As per this section 147 of the Act if the AO “has reason to believe” that income chargeable to tax has escaped assessment, he could reopen the assessment. The term “has reason to believe” is wider enough to cover various circumstances including the information, material under assessment. In the present case, on receipt of information from the Central Circle, initiated reassessment proceedings after recording the reasons for reopening the assessment. In our opinion, the reopening of assessment is valid as argued by Ld. D.R. against the argument of Ld. A.R. that on assessment u/s 153C of the Act on the reason that seized material recovered in the case of search of Mr. Ali Khan. In our opinion, similar issue came for consideration before Hon’ble Madras High Court in the case of Karti P. Chidambaram reported in 436 ITR 340 (Mad), wherein held as follows:-

• “The recourse under section 153A and section 153C is a special procedure that gets triggered upon receipt of incriminating -material post any search or requisition. The normal course of assessment and reassessment is fundamentally altered when a search or requisition takes place under section 132/132A and the moment, the seized materials are received by the Assessing Officers, the special procedure laid out under section 153A or section 153C shall come into effect. The use of the non obstante clause coupled with the abatement mechanism contained in the provisions makes it clear that the legislative intent was for Assessing Officers to proceed only under section 153A or section 153C upon receipt of material seized or requisitioned. This special procedure is a derogation from the regular procedure for assessment or reassessment and only some immunity has been carved out for completed assessments. Therefore, the concerned jurisdictional Assessing Officer, upon receipt of material seized or requisitioned, can only proceed under section 153A or 153C and they cannot proceed with any other pending assessment or proceeding. [Para 83]

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 43 of 58 • Section 147 may be invoked by the Assessing Officer, if he has 'reason to believe' that any income chargeable to tax has escaped assessment. However, there is no such 'reason to believe' clause or otherwise under section 153A or section 153C. These two provisions shall be invoked by the Assessing Officer based on the materials seized during search operations conducted under section 132A and handed over to the jurisdictional Assessing Officer. [Para 95] • Undoubtedly, the informations communicated to the Assessing Officer through Investigation wing were the informations collected pursuant to the search conducted on in the premises of buyer, AE. However, in the absence of handing over of the searched materials as per the procedures contemplated under the provisions of the Act, it would be improper on the part of the Assessing Officer to initiate proceedings under section 153C. Thus, on receipt of the informations from Investigation wing, the Assessing Officer has initiated proceedings under section 147, knowing the fact that the informations are collected pursuant to the search conducted in the premises of AE. However, at that point of time, the Assessing Officer could not able to initiate any action under section 153C as the procedure mandates handing over of all seized materials to the Assessing Officer. After handing over and receipt of the entire seized materials, the Assessing Officer could prepare 'Satisfaction Note' and initiated section 153C proceedings. The cogent consideration of facts, circumstances as well as the perusal of original files would reveal that the Assessing Officer has initiated action under section 147/148 initially and thereafter on receipt of the entire search and impounded materials, he has prepared a 'Satisfaction Note' an issued notice under section 153C. The procedural differences between these proceedings are well enumerated in the Act. Certain facts were not available at the initial stage. The complete documents and materials were handed over to the Assessing Officer after the centralization was done. Thereafter, the Assessing Officer prepared the 'Satisfaction Note' and issued show cause notice under section 153C. [Para 122] • The scope of section 147/148 and sections 153A and 153C are not comparable. These two sets of provisions contain different set of procedures as contemplated under the Act. Generally, the procedures contemplated for assessment under these provisions may be divided in three parts: for better understanding. The first procedure is return of income filed by the assessee and secondly, in case of availability of any informations or materials, or if any received by the Assessing Officer and he has 'reason to believe' that any income chargeable to tax has escaped assessment, he is empowered to proceed under section 147/148. Thirdly, in the event of search operations under section 132, and the searched materials are handed over to the Assessing Officer of the searched person, issue notice to the searched person and if the materials seized are handed over to the Assessing Officer of the other person, issue notice to the other person under section 153C. [Para 124]

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Page 44 of 58 • The date of search for the proceedings under section 153C in the instant case, on which date, the reopening proceedings under section 147 was pending. Thus, the said reopening proceedings stood abated on initiation of assessment/reassessment proceedings under section 153C pursuant to the proviso clause to section 153C. Thus, the ground of legal malice is not established. [Para 128]”

10.4 Further, Hon’ble Supreme Court in the case of ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (291 ITR 500), wherein held as follows:-

“16. Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment. it can he said to have reason to believe that an income had escaped assessment. The expression cannot he read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [19917 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe". but not the established fleet of escapement of income. At the stage of issue. of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the, formation of belief by the Assessing Officer is within the realm of subjective satisfaction ITO v. Selected Daurband Coal Co. (P.) Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC). 17. The scope and effect of section 14.7 as substituted with effect from 1-4-1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (h) laid down the

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Page 45 of 58 circumstances under which income escaping assessment for the past assessment years could he assessed or reassessed. To Confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a). But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. Itis however to be noted that both the conditions must he fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.”

10.5 Being so, in our opinion, the above grounds with regard to reopening of assessment have no merit and fully covered against assessee by the judgement of Madras High Court cited supra. Accordingly, all the above grounds of assessee in 1 to 6 are dismissed.

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Page 46 of 58 Appellant actually purchased any ore from the Group entities and paid them in cash/account payee as alleged by the AO and the addition made on this basis is not in accordance with law and on the facts and circumstances of the case. 10. The Commissioner of Income-tax (Appeals) failed to appreciate that the additions are based purely on suspicion and surmises and are not corroborated by anything on record and the addition made on the basis of surmises and conjectures is not in accordance with law and on the facts and circumstances of the case.

11.1 Facts of these issues are that on the basis of seized material, AO observed that there was unaccounted purchase of Rs.4,05,37,500/- which is purchased from Mr. Ali Khan, which is treated as unaccounted purchase. After treating the above amount as unaccounted purchase, he also treated net profit on it at 31.19% and he made addition on this count as follows:- Unaccounted purchases 4,05,37,500/- Net profit at 31% on the above 1,26,43,647/- Total 5,31,81,147/- Thus, he made an addition of Rs.5,31,81,147/- as above. Against this, assessee is in appeal before us by way of above grounds.

12.1 Ground No. 7: The Commissioner of Income-tax (Appeals) failed to appreciate that the addition of Rs. 4,05,37,500/- on account of unaccounted purchases is not in accordance with law on the facts and circumstances of the case.

12.2 Ground No. 8: The Commissioner of Income-tax (Appeals) failed to appreciate that the addition of Rs. 1,26,43,647/- being the net profit margin of 31.19% arrived by the learned

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Page 47 of 58 AO is not in accordance with law on the facts and circumstances of the case. 12.3 It is submitted that the whole case of the AO rests on the input received from the Investigation wing wherein also the only argument pitted against the Assessee is that the Assessee has purchased ore from certain parties who conducted illegal mining (referred to as the Group by the AO in the reasons recorded).

12.4 It is submitted that the order of the AO is perverse, as the AO has failed to establish that there have been any purchases at all. The Investigation wing having communicated to the AO that the Assessee was one of the so-called Henchmen entities who purchased illegally mined ore from the Group, the right course of action for the AO was to establish that the Assessee had in fact purchased ore and in fact made payments to the Group.

12.5 It is submitted that the decision of the AO that the Assessee indeed made purchases from the Group is not supported by any corroborating evidence. Bereft of any proof in support of the allegations, the AO holds that the additions are made in the interest of the revenue. It is submitted that the Assessing Officer being a quasi-judicial authority, is required to act in the interest of justice and not act arbitrarily in the interests of the revenue.

12.6 Further argued that the learned AO failed to appreciate the submission of the Assessee during the course of assessment proceedings, which was reiterated at the time of recording of statements u/s 131 of the Act on 05/03/2015 that the Assessee does not purchase ore, but is involved solely in extraction of iron ore and selling it.

12.7 The learned CIT(A) failed to appreciate that the Assessee was not engaged in the business of purchasing of iron ore, but the activity of Assessee was purely based on extraction of iron

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Page 48 of 58 ore and selling it. It is submitted that purchase of iron ore amounts to trading activity and the Assessee did not have any trading license, which is a mandatory requirement under law.

12.8 The learned CIT(A) further failed to appreciate that the Assessee was engaged in extraction of iron ore and sale of the same to sole buyer viz., Sri Srinivasa Minerals Trading Company. A ledger extract of the Sales Account, Buyer (Sri Srinivasa Minerals Trading Co.) Account are submitted at pages 4 to 5 of the paper book. A copy of the ledger of the Assessee in the books of the said buyer (Sri Srinivasa Minerals Trading Company) is also submitted at page 6 of the paper book.

12.9 According to Ld. AR it can be noted from the ledger extracts that the entire sales of the Assessee of 75000 metric tonnes of iron ore are to the said sole buyer and the books of the said buyer too confirms the purchase of the ore from the Assessee. That being the case, the question of Assessee purchasing the iron ore from the Group and selling it to anyone else does not arise. The AO too having failed to bring any material in support thereof on record, the CIT(A) ought to have cancelled the addition for being based purely on suspicion and not on any tangible material.

12.10 The learned CIT(A) failed to appreciate that the Assessee has been diligently filing statutory returns/statements with the Department of Mines, Govt. of Karnataka and any purchases, as alleged by the AO, if actually made, would have been disclosed by the Assessee in the returns to the statutory authority. And without prejudice, even if it is assumed that the Assessee actually purchased ore from the Group but did not disclose it in the statements with the Dept. of Mines, then in that event the said department would have initiated action against the Assessee. It is submitted that the returns/statements filed by the Assessee have been duly accepted by the Dept. of Mines and has not been

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Page 49 of 58 disputed. This is again a proof in support of the submission of the Assessee that the particulars furnished in its return are the correct particulars and there is no undisclosed purchases made by the Assessee resulting in an undisclosed profit as held by the AO and the addition of the AO is unsustainable for this reason also. Copy of the statements filed by the Assessee with the Dept. of Mines are submitted at pages 7 to 33 of paper book. The statement/returns clearly indicate the sale of metric 75000 tonnes of ore mined by it and rent and royalty paid in that respect to the Govt. of Karnataka.

12.11 The Assessee also submits that where ore is transported, whether it is a mined/extracted ore or purchased ore, the transportation thereof requires that the Assessee obtain appropriate permits from the state government. The Assessee furnished before the CIT(A) the copies of all the permits obtained by him, wherein it is clear that the total ore mined by the Assessee is 75,000 metric tonnes and the same is transported ore by way of valid permits and there is no discrepancy in this regard. Copy of the Permits are submitted at pages 34 to 46 of paper book.

12.12 The learned AO failed to appreciate that the Assessee is a law-abiding citizen, as opposed to the people of the Group who are being prosecuted by the Central Bureau of Investigation. It is submitted that had the Assessee really been one of the henchmen entities, then the same amounts to abetting of crime and the Assessee ought to have been prosecuted. However, even the CBI has acknowledged that the Assessee is nothing but a victim of the Mining Mafia.

12.13 It is submitted that no action has been initiated by the CBI in its enquiry on Bellary Illegal Mining matter and the Assessee has not been charged with any offence in the whole matter, which in itself should stand to clarify that the statement of Shri Ali Khan is nothing but a lie, and the Assessee’s name has been deliberately

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Page 50 of 58 used as a scapegoat to cover the illegal sale of the ores done to some unknown entities.

12.14 It is pertinent to note that purchasing of illegally mined iron ore is an offence and if what the AO states is true, the Assessee ought to have been made an accused in the prosecution, whereas the Assessee is actually a prosecution witness, testifying against the Accused Sri Gali Janardhan Reddy. It is the case of the Assessee that his mine was adjacent to the mines of Sri Gali Janardhan Reddy group and when the said group started illegally mining in the land of Assessee, the Assessee complained to the statutory authorities and shut his mine since October 2009 and has remained shut ever since. The AO has failed to appreciate all these material facts and concluded assessment blindly on the basis of information supplied by the AO. He also relied on additional evidence filed before us for supporting his arguments that the present assesse is not having any knowledge of Mr. Alikhan which is evident from his statement before SIT, (Lokayukta, Karnataka)

12.15 In view of the above it is prayed that this Tribunal may delete the addition made on account of unaccounted purchase of illegally mined ore from the said Group.

12.16 It is submitted that the second addition on account of net profit on the said unaccounted purchase is a consequential addition and upon deletion of the first addition, the second addition automatically stands deleted.

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Page 51 of 58 is not in accordance with law and on the facts and circumstances of the case.

14.1 It is submitted that the entire addition being made purely on the basis of assumptions, surmises and conjectures and on the basis of information supplied by the investigation authorities and there is no shred of evidence produced by the AO to buttress his allegation that the Assessee made purchase of illegal ore from the said Gali Janardhan Reddy group.

14.2 It is a settled law that suspicion, howsoever strong, can never take place of evidence and can never be used against the Assessee. This principle is supported by the decision of Hon'ble Supreme Court in the case of Umacharan Shaw & Bros vs. CIT (1959) 37 ITR 271(SC). Reliance is also placed on following judgments where in it was held that there must be something more than mere suspicion in support of an assessment and mere suspicion cannot take the place for the purpose of passing an order of assessment –

(i) Dhakeshwari Cotton Mills Ltd. vs. CIT 26 ITR 775(SC); (ii) Omar Salay Mohd. Salt vs. CIT 37 ITR 151 (SC); (iii) Lalchand Bhagat Ambica Ram vs. CIT 37 ITR 288 (SC)

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 52 of 58 14.3 The assessee further submits that it has been held in the under noted cases, that without having any corroborating evidence/material, any of the figures mentioned / appearing on the unsigned loose papers seized / collected by the Dept., during the course of search/survey, having no evidentially value under the provisions of law even U/S 292C of the I.T. Act:

(i) CIT v. Vatika Landbase (P) Ltd., 383 ITR 320 (Del) (ii) PCIT v. Delco India (P) Ltd., [2016] 67 taxmann.com 357 (Delhi) (iii) Samta Khinda Vs. ACIT, Central Circle-22, ITA No. 336/Del/2012A.Y 2009-10 date of order 29.11.2016 (iv) P. Koteshwara Rao order dated 12.8.2016 ITA No. 251 & 252/Vizag/2012 (v) K V Lakshmi Savitri Devi vs. ACIT (2012) 148 TTJ 157, ITAT Hyderabad Benches. (vi) CBI vs. VC Shukla (1998) 3 SCC 410) (vii) CIT vs. PV Kalyansundaram (294 ITR 49) (viii) CIT vs. Girish Chaudhary (2008) 296 ITR 619 (Delhi)

14.4 It is humbly submitted that without any corroborating evidence the AO is not justified in making additions and such an addition based purely on surmise and conjecture is liable to be cancelled on the facts and circumstances of the case.

14.5 Assessee submits that Ground No. 10 and 11 are consequential grounds and have been answered in the above submissions.

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Page 53 of 58 and proceeded to make addition. The same was rightly upheld by the CIT(A).

15.1 In the Assessment order, after examination of the evidences, the AO gave finding that the appellant has done unaccounted purchases of Rs 4,05,37,500. Further the AO has made addition of Rs 1,26,43,647 on the basis of Net profit rate disclosed by the appellant. This addition is fair and reasonable and hence the CIT(A) has rightly upheld the addition. It is submitted that Hon'ble Bench may please uphold the addition.

15.2 On the plea of not providing the opportunity of cross examination, it is submitted that the AO had relied on document in the form of an electronic record found and seized at the premises of Mr. Ali Khan. He had not relied on the statement of Mr. Ali Khan. Hence there was requirement for the AO to allow cross examination of the said Mr. Ali Khan.

15.3 It is also submitted that the coordinate bench of this Hon. Tribunal in the case of Ms. Sarita Dudheria v ACIT Central Circle 1(2) ( ITA Nos 380 to 382/Bang/ 2020) ( A copy placed at page nos. 76-83 of the paper book) interalia observed as under:

“6.11. Further Hon'ble Mumbai Tribunal in case of GTC Industries Ltd. V. Asstt. CIT reported in (1998) 60 TTJ308 , held that, where statement and report of third parties are only secondary and subordinate material which were used to buttress the main matter connected with the quantum of addition, denial of opportunity to cross examine third parties did not amount to violation of natural justice. 6.14. At the outset we also hold that the statements recorded are secondary and subordinate evidence, and therefore cross examination is not relevant. Ld.A0 is directed to re-examine the case of assessee in the light of afore stated direction in accordance with law. Needless to say that proper opportunity shall be granted to assessee to represent its case as per.”

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Page 54 of 58

Qn 5 Do you know Sri Gali Janardhan Reddy, Ex MLC, Bellary personally? Do you have any busineSs transactions with Sri Gali Janardhan Reddy. Ans No, I do not know Sri Gali Janardhan Reddy personally. I never had any kind of business transactions with him.

Qn 6 Do you know any person by name Sri Ali Khan? Ans No. I do not Know.

Qn 7 Do you know any person by name Sri Ali Khan in connection with Sri Gali Janardhan Reddy, Ex MLC, Bellary. Ans No. I do not Know.

Qn 8 I am showing you the excel sheet marked as page no. 27 in Annexure- I, which is pad of the letter of DCIT, Central Circle-1(3), Bangalore. This excel sheet was found from premises of Mr. Ali Khan (a close confidante of Me. G. Janardhan Reddy) during Search u/s 132 of the Income Tax Act, conducted on 25-10-2010 in the case of Madhu, Renuka, Ragliavacharyulu. Please go through the same and comment.

Ans I am not aware of any such purchase as shown in the excel sheet marked as page no. 27. I want to add that being a mine owner, I only supply the iron ore produced/extracted from my mines.

Qn 9 As per the spreadsheet 'Vrushvendhra' which contains the working of cost, . quantity supplied. As per this sheet iron ore quantity of 37,500 Metric Tonnes 'his

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Page 55 of 58 supplied to Vrushabendra Mines at the rate of Rs 1081 per metric tonnes during the period May 2009 to July 2009. Against this supply Rs 4,05,37,500/- was paid by Vrushbendra Mines to the group persons searched. Please offer your comments. Please state whether this purchase was accounted in your books for AY 2010-11

. Ans As already stated in answer to question no. 6, I am not aware of any such purchase as' shown in the excel sheet. Further being a mine owner, I only supply the iron ore produced/extracted from my mines. It can be evidenced from my financial statements of AY 2010-11, which no purchase was made in AY 2010-11. Hence, I again submit that no such alleged purchase was ever made by me.

Qn 10 Do you want to say anything else?

Ans No. I want to again submit that 1 had never had any transactions with Sri Ali Khan from where such alleged papers are found and shown to me.

16.1 The Ld. AO recorded in his order as follows:-

“As could be seen from the above statement recorded on oath and assessee Sri JM Vrushabendraiah simply denied knowledge about any transactions with Sri Gali Janardhan Reddy. However, it should be noted that the details of unaccounted transactions in iron ore between assessee and parties mentioned in Appraisal report was discovered in search under section 132. The details found at the premise during 132 search action are sufficient enough to .be treated as valid document and assumption of assessee having carried out transaction with the parties stands valid. Further in the interest of revenue, the whole purchase of Rs 4,05,37,500/- is assessee as unaccounted purchases in the hands of Sri J M Vrushabendraiah for AY 2010-11 and net profit declared for AY 2010-1.1 is taken as 'undisclosed income of the assessee. Assessee has declared net profit of Rs 31.19% during AY 2010-11. Therefore, net profit on Rs.4,05,37,500/- works out to Rs.1,26,43,647/-, the same is added to the returned income of the assessee.”

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Page 56 of 58 16.2 As seen from above, the A.O. clearly recorded that present assessee has denied the knowledge about any transaction with Gali Janardhan Reddy as well as Mr. Ali Khan. Further, the assessee also filed additional evidence with an application for admitting the same wherein Mr. Ali Khan has stated before the Karnataka Lokayukta SIT as he does not know Mr. Vrushabendraiah in his statement.

16.3 Other than the seized material, which is an excel sheet recovered from the computer of Mr. Ali Khan there was no other material to support the case of the assessee. On the basis of that entries in excel sheet, AO came to the conclusion that assessee had purchased the iron ore to the tune of Rs.4,05,37,500/- and earned net profit of 31.19% on that purchase. There was no examination of any witness or cross examination of any parties. Entire case of the department based on the uncorroborated entries found in the excel sheet retrieved from the premises of Mr. Ali Khan. These alleged documents collected by the department from the computer of Mr. Ali Khan cannot be described as evidence so as to fasten the tax liability on the present assessee without any corroborated material. These are not corroborated by any further material and this excel sheet have mentioning of no date on which alleged purchases are made. The name of the assessee was only mentioned therein as “Vrushabendra”.

16.4 There was no date of purchase, quantity of purchase; means of transport i.e. truck number, etc. There is only details of numbers not mentioning the weight i.e. tonnes or quintals and there is no evidence regarding the payment made by present assessee to Mr. Ali Khan towards this purchase. It was alleged that assessee made cash payment towards this supply of material. However, there was no evidence collected by the department with

ITA No.299/Bang/2019 Shri J.M. Vrushabendraiah, Hospete Page 57 of 58 regard to these payments made to Mr. Ali Khan by the assessee. The payments were within the knowledge of the person who entered into the computer of Mr. Ali Khan. He was not examined. More so, Mr. Ali Khan also denied before Lokayukta that he does not know Mr. V. Vrushabendra. In such circumstances, we are not in a position to rely on the said seized material to sustain the addition. The seized document retrieved from the computer of Mr. Ali Khan did not raise a reasonable ground to believe that there is a valid purchase of iron ore by present assessee from Mr. Ali Khan. The seized material itself cannot be considered as full-fledged evidence unless supported reasonably by any of the material to sustain the additions. Being so, we are of the opinion that the addition cannot be sustained on the basis of uncorroborated dairy entries found in the computer belongs to Mr.Alikhan and accordingly, both additions made by A.O is deleted.

16.5 Further, all the additional grounds raised by the assessee herein above are dismissed as infructuous in view of fact that we have deleted the additions, which are based on the entries found in the diary maintained by Mr. Ali Khan.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 20th Jul, 2022. VG/SPS

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Copy to:

Asst. Registrar, ITAT, Bangalore.