EAST DELHI LEASING P.LTD,NEW DELHI vs. ITO, WARD-8(1), NEW DELHI

PER S. RIFAUR RAHMAN, AM

The Assessee has filed appeal against the order of the Learned Commissioner of Income-Tax(Appeals)-15, New Delhi [“Ld. CIT(A)”, for short] dated 29.08.2019
for the Assessment Year 2010-11. 2. Brief facts of the case are that the return of income for the Asst Year 2010-
11 was originally filed by the assessee company on 15.10.2010 declaring Nil
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income. No assessment was framed on the said return. The Id. AO sought to reopen the assessment for the Asst Year 2010-11 by recording the following reasons: -
“Sir/Madam,
Please refer to your letter dated 03-07-2017 filed in response to notice issued to u/s 142(1) of the IT Act in which you have desired to provide reasons recorded for re-opening of assessment u/s 147 and issuance of notice u/s 148 of the IT Act.
In this regard, as desired, the reasons recorded for re-opening of assessment u/s 147 and issuance of notice u/s 148 of the IT Act, 1961
for the Assessment Year 2010-11 is as under: -
Reasons for re-opening the assessment u/s 147 and issuance of notice u/s 148 of the IT Act, 1961 in the case of M/s East Delhi Leasing Pvt.
Ltd. (PAN: AAACE0240R) for the Assessment Year-2010-11. 1. Return of income for the A.Y. 2010-11 in this case was filed on 15.10.2010 declaring returned income at Nil. As per return of income during the year under consideration the assessee has shown paid up capital of Rs. 3,02,11,700/- and securities premium at Rs.
4,50,00,000/-. Further, the assessee company has made investment of Rs. 6,60,47,400/- and shown bank balance of Rs. 1,45,62,170/-.
Further, the assessee company has also shown Sundry creditors of Rs.
55,18,945/- but not shown any business activity during the year under consideration.
2. Brief facts of the case are as under: -
Information is received from the Investigation wing i.e. Income Tax
Officer, Unit-1, New Delhi that there were various regular RTGS credits of Rs. 1 Crore and Rs 50 Lakh from different entities in the bank account of the assessee company M/s East Delhi Leasing (P)
Ltd., J-47, Sanatan Dharam Mandir Lane, Ramesh Nagar, New Delhi-
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1100015, followed by outgoing RTGS favouring different entities. As per information received from the Investigation wing the total deposits in the bank account bearing No. 0026654227 of the assessee company is Rs. 7,56,49,303/- maintained with CITI Bank, Jeewan
Bharti, 3, Sansad Marg, New Delhi-110001. 3. As per information received from the Investigation wing, it was observed that there were various regular RTGS credits of Rs. 1 Crore and Rs. 50 Lakh from different entities, followed by outgning RTGS favouring M/s BGS Credit Pvt. Ltd.or M/s ARS Metals Ltd., transfers to the account of M/s Leasing Estates Ltd. were also observed, following payments to M/s ARS Metals Ltd. As declared at the time of account opening, M/s East Delhi Leasing (P) Ltd. was engaged into leasing advisory/consultancy services. Credits into the account of M/s
East Delhi Leasing (P) Ltd. were confirmed to be investments by various companies while the debits were confirmed to be investments made by M/s East Delhi Leasing (P) Ltd. in M/s BGS Credit Pvt. Ltd.
and M/s ARS Metals Ltd. On further due diligence, it was observed that Mr. Ashwani Kumar and Mrs. Renu Bhatia are directors of M/s
Leasing Estates Ltd. while Mr. Ashwani Kumari also holds directorship in M/s BGS Credit Pvt. Ltd. Further, Mrs. Renu Bhatia was observed to be a Director in M/s Leasing Estates Ltd., where Mr.
Ashwani Kumar was found to be an authorized signatory.
4. As per Investigation report, bank statement of the assessee company was obtained/gathered from the bank. On perusal of the bank statement it was observed that the assessee company M/s East
Delhi Leasing Pvt. Ltd. has deposited sum of Rs. 7,56,49,303/- in its Bank account No. 0026654227 maintained with CITI Bank. Further, on perusal of bank statements of all related parties, it is observe that all the parties are transactions the huge funds to each other though
RTGS which resembled that huge amount is revolving again and again in the bank accounts of all the parties and therefore source of funds revolving in account of all the parties remains unexplained, therefore forming a valid reasons to believe that same funds are revolving again & again is escaped assessment.
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enclosed herewith for compliance. Your case is fixed for hearing on 28-07-2017."
4. The assessee filed objections to the aforesaid reasons for reopening by stating that the assessee being engaged into the finance business, finance becomes an integral part of that business; that movement of funds is intimately and inalienably connected with such business that the transactions qua transfers from one bank account to another are integral, inseparable and indispensable to the business particularly to one in the financial and leasing sectors; that a mere passage of funds from one entity to another cannot result in taxable income in the absence of other crucial factors; that leasing and finance companies do mobilize funds and funds so mobilized were always amenable to verification in the assessment of the concerned entities; that a mere perusal of the bank statements evidencing fund movements cannot lead prima facie to any correct conclusion for initiation of reassessment of income unless that could comprise factors indicating escapement of income; that the movement of funds were between existing assessee's and not from any clandestine or undisclosed sources.
Accordingly, it was objected that the Id. AO had thus no valid information at all for Initiating reassessment. It was also pointed out that the reasons were recorded by the Id. AO based on borrowed satisfaction of Suspicious Transaction Report
(STR) received by the Id. AO and there was no independent application of mind on the part of the Id. AO to reach to the conclusion that income of the assessee
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had escaped assessment warranting reopening thereon. It was submitted that suspicion howsoever strong cannot partake the character of a legal evidence.
5. The Id. AO disposed of the aforesaid objections by a separate communication dated 8.9.2017 addressed to the assessee. In the said letter, the Id. AO stated that the assessee company has made transactions of huge funds to its related parties through RTGS which resembled that huge amount is revolving again and again in the bank accounts of all the parties and the source of funds revolving in account of all the parties remains unexplained before the investigation wing of the department and also funds transferred to other parties also remain unexplained.
With these observations, the objections filed by the assessee were rejected by the Id. AO and reassessment proceedings were further proceeded with by the Id. AO.
In the reassessment proceedings, the share application money received in the sum of Rs 5.42 crores was sought to be examined by the Id. AO. The assessee had submitted copies of audited financial statements of the aforesaid investors for the relevant years, copy of Income Tax Returns of the investors, bank statements of the investors, confirmations from the investors, share application forms from the investors. In the reassessment, a sum of Rs 5.42 crores was added by the Id. AO as unexplained cash credit u/s 68 of the Act in respect of share application money received from various investors, despite the fact that the assessee had furnished
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all the requisite documents to prove the identity of the investors, creditworthiness of the investors and genuineness of transactions.
6. Aggrieved with the above order, the assessee preferred an appeal before the ld. CIT(A) and Ld. CIT(A) sustained the additions made by Assessing Officer
(‘AO’).
6.1
Aggrieved with the above order, the assessee preferred an appeal before
ITAT in the first round and the Co-ordinate Bench has passed the order dated
10.04.2024. 7. Aggrieved with the above order, the Revenue filed an appeal before the Hon’ble Delhi High court. The Hon’ble Delhi High Court vide ITA No. 61/2025
dated 10.03.2025 remitted the issue back to the ITAT with the following observations:
“4. Keeping in view that though no substantial question of law with regard to this issue has been framed by this court, however, it is deemed appropriate to frame the following Question of Law:
a. Whether the ITAT was not wrong in applying the principles enunciated by the SC in a criminal case where the discharge of burden of proof is beyond reasonable doubt, to the principle of "reason to believe" as provided in section 148 of the Act?
5. It is trite that the concept of "proving beyond reasonable doubt" applies
"strictu senso" to penal provisions/statutes. It is also trite that in taxing statutes, in particular, section 148 of the Act, the "reason to believe", must be based on objective materials, and on a reasonable view. The Hon'ble
Supreme Court in ITO v. Lakhmani Mewal Das, (1976) 3 SCC 757 has 8

upheld the aforesaid principle. Relevant paragraph of Lakhmani Mewal
(supra) is extracted hereunder:
8. The grounds or reasons which lead to the formation of the belief contemplated by Section 147(a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income Tax Officer to form the above belief, that would be sufficient to clothe him with juri iction to issue notice. Whether the grounds are adequate or not is not a matter for the court to investigate. The sufficiency of grounds which induce the Income Tax
Officer to act is, therefore, not a justiciable issue. It is, of course, open to the assessee to contend that the Income Tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income Tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section.
To this limited extent, the action of the Income Tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law"
The aforesaid principle has been followed by the Hon'ble Supreme Court in Deputy Commissioner of Income Tax v. M.R. Shah Logistics, (2022) 14
SCC 101) stating that the basis for a valid reopening of assessment should be availability of tangible material, which can lead the AO to scrutinise the returns for the previous assessment year in question, to determine, whether a notice under section 147 is called for. Predicated on the aforesaid judgments it can be safely inferred that the concept of burden of proof beyond reasonable doubt is not to be applied in cases such as the present one.
6. Though, learned counsel for the respondent (hereafter referred to as the "Assessee") in order to support the reasoning rendered by the learned
ITAT, addressed submissions on the merits of the case, however, we are not persuaded to consider the same. This is for the reason that the learned
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ITAT mi irected itself in predicating its entire reasoning on an incorrect and inapplicable principle of law, which are confined to purely penal provisions, which is not the case here. Thus, on this error alone the impugned judgement is found to be unsustainable in law. Once the edifice of differentiating "reason to suspect" and "reason to believe" itself is on incorrect application of the principle as explained above, the consequential appreciation on merits too would suffer the same fate.
7. Ergo, we have no hesitation in quashing and setting aside the impugned judgement dated 10.04.2024 passed by the learned ITAT, and we do so.
However, we remit the matter to the learned ITAT to consider de novo the appeal of the Revenue on merits including any issue/objections which may arise on law after giving sufficient opportunity to both the parties. The rights and cognitions of the parties are left open. Nothing stated herein shall tantamount to any expression on merits of the case.
8. Accordingly, the appeal is allowed to the aforesaid extent.”

“3. In the impugned reassessment order, the ground leading the AO to formation of the belief of the escapement of income of the Assessee so necessitating a reassessment therefor is indicated in paras 2 to 2.2 of that order. The Ld. CIT(A) has rejected the objections of the Assessee vide his observations and findings recorded in para 4.2 of the Appellate order. In so doing the Ld. CIT(A) has cited the decisions of the apex Court in S.
The satisfaction as recorded by the AO for reopening of the case is placed at pages 1 to 3 of the Assessee’s Paper Book dated 29.10.2022. A perusal of the same would reveal that the message received by the AO from the Investigation Wing stated that there were regular RTGS credits of Rs. 1
crore and Rs. 50 lacs from different entities in the bank account of the Appellant which were followed by outgoing RTGS and transfers favouring
BGS Credits Private Ltd. and ARS Metals Ltd. and M/s Leasing Estates Ltd.
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The bank account opening form of the Assessee company showed that it was engaged in leasing advisory / consultancy services. Credits into the account of the Assessee Company were confirmed to be investments by various companies while the debits were confirmed to be investments made by Assessee in BGS Credits Private Ltd and ARS Metals Ltd. The message further stated that from enquiries it was learnt that Mr. Ashwini Kumar and Mrs. Renu Bhatia were directors of Leasing Estates Ltd. and that Mr.
Ashwini Kumar was a Director in BGS Credits Private Ltd. and Mrs. Renu
Bhatia was a Director in Leasing Estates Ltd. It was further stated that Mr.
Ashwini Kumar was also an Authorised Signatory for Leasing Estates Ltd.
4.2
The report goes on to state that the bank statement of Assessee obtained from the CITI Bank showed that the Assessee Company had deposited a sum of Rs. 7,56,49,303/- in its account No. 0026654227. Perusal of the bank statements of the related parties showed that there were transactions of huge funds between each other through RTGS. That showed huge amounts to be revolving again and again in the bank accounts of the parties. The sources of funds revolving in the accounts of the parties remained to be explained. In that background the Investigation Wing message opined that there were valid reasons to believe Quote ‘that the same funds are revolving again & is escaped assessment’. Unquote
4.3
The enquiry carried out by the AO after the receipt of the communication from the Investigation Wing was about the ingress and egress of funds depicted in the bank statements. The AO also noticed the directorships in the reported Companies. The rotation of funds in the bank statements were also seen by him. The AO noted that some of those details as contained in the bank statement were also reported in the accounts of the Assessee filed with the return of income. With those details at hand, for the AO to agree with the Investigation Wing’s suggestions of Quote ‘valid reasons to believe that the same funds are revolving again and again has escaped assessment’ Unquote was incorrect, improper and against law and procedure. The rotation of funds escaping assessment as opined by the Investigation Wing was wrongly equated by the AO as an escapement of income. Admittedly there was no material either in the communication of the Investigation Wing or otherwise with the AO which could even prima facie indicate that any income accruing or arising to the Assessee out of the rotation of funds had escaped assessment. Thus the belief of escapement of income of the AO was a mere pretence and a make believe with no truth in it and being so, could not give rise to any valid proceedings.
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be appreciated and also agreed to that the rotation of funds in the course of activities of an Assessee are not required to be disclosed in the return of income. It is the net result of the rotational transactions of the year that the accounts of the Assessee accompanying the return disclose. Thus the basic ground on which the allegation of the AO is based is preposterous and being so the room sought by him under the Explanation to Sec.147 of the Act is of no avail.
4.12
The prescribed Authority u/s 151 of the Act who would have granted sanction for the reopening of the case and issuing a notice therefor u/s. 148
of the Act has ignored all the afore-cited defects and deficiencies in the reasons canvassed by the AO for his satisfaction of the income of the Assessee escaping assessment. There is complete non-application of mind on the part of the prescribed Authority too. In this way the case is directly hit by the mandate of the apex Court in Chhugamal Rajpal vs. S.P. Chaliha and Ors. (1971) 79 ITR 603 where the Court cautioned as under:-
“That the Income-tax Officer had not even come to prima facie conclusion that the loan transactions to which he referred were not genuine transactions: he appeared to have only a vague feeling that they might be bogus transactions. Such a conclusion did not fulfil the requirements of section 151(2). Under that section he had to give reasons for issuing a notice under section 148. He should have some prima facie grounds before him for taking action under section 148. His conclusion that there was a case for investigating the truth of the alleged transactions was not the same thing as saying that there were reasons for the issue of the notice. The Commissioner had mechanically accorded permission. The important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Income-tax Officer could not have had reason to believe that income had escaped assessment by reason of the appellant-firm’s failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore, invalid.”
Full discussion is at pages 607 and 608 of the report which is relied upon.
4.13
Specific objections were raised before the AO pointing out the invalidity of the satisfaction note recorded by him for the purpose of 15

initiating reassessment proceedings through a notice u/s 148 of the Act in the subject case. The objections raised by the Assessee have been placed in the Assessee’s Paper Book at pages 6 to 8. Those objections were rejected by the AO pointing out that the rotation of funds had not been explained to the Investigation Wing and that the sources of funds remained unexplained.
Taking umbrage to the disposal of objections by the AO the issue was contested before the Ld. CIT(A)-3. Those contentions of the Assessee are contained on pages A-2 to A-8 of the Paper Book. The Ld. CIT rejected the Assessee’s contentions to confirm the AO’s action without appreciating that the mere rotation of funds could not result in the generation of any income causing it to subsequently escape assessment.
4.14.1 To reject the objections raised by the Assessee, pointing out the insufficiency of reasons for reopening the case, the Ld. CIT(A) inter alia cites decisions of the apex Court and one of the High Court to validate and confirm the validity of the AO’s action. The first of the cases cited by the Ld.
CIT(A) is S. Narayanappa vs. CIT (1967) 63 ITR 219. That was a case where the Hon’ble Court had to consider the juri iction to issue notice after a lapse of four years and of the conditions applicable thereto. In that context the Court inter alia ruled that with regard to the earlier stage of the proceedings which involved the recording of reasons by the AO or the obtaining of the sanction of the Commissioner thereto would be administrative issues and not quasi-judicial. That decision is clearly distinguishable on facts because the objection as raised by the Assessee was neither on the facts nor on the questions as decided in the cited case.
4.14.2 The second case cited by the Ld. CIT(A) of the apex Court is that of Raymond Woollen Mills Ltd. vs. ITO (1999) 236 ITR 34. In that case the Court ruled that whether the commencement of reassessment proceedings was valid or not had to be tested on the basis of the existence of some prima facie material attesting thereto; the sufficiency or correctness of the material, was not to be considered at that stage. In the subject case the dispute is as to the very existence of the material which point was not under consideration of the apex Court in the cited case.
4.14.3 The third case of the apex Court cited by the Ld. CIT(A) is GKN
Driveshafts (India) Ltd. vs. ITO (2003) 259 ITR 19. In that case the procedure to be followed by an Assessee and the duty of the AO in reassessment cases was considered and decided. The Court ruled that when a notice u/s. 148 of the Act is issued, the proper course of action for the Assessee is to file the return and if it so desired seek the reasons for the 16
32 and decisions of the apex Court in Ganga Saran & Sons vs. ITO 130 ITR
1 and in ITO vs. Dalurband Coal Company Private Ltd. (1996) 217 ITR 597. Interestingly the Delhi High Court abided by the observations and rulings in the various decisions of the apex Court on S.147/148 of the Act. Those are not the issues in the subject case where the Assessee is pointing out specific aberrations and anomalies in the action of the AO in recording the satisfaction.
5. The principle of law as evolved for testing the validity of the satisfaction recorded by the AO is that the AO ought to have applied the mind and not to have been led by the belief and opinion of any other authority. In this case the perusal of the satisfaction note would reveal that the AO launched the reassessment proceedings merely on the basis of the opinion of the Investigation Wing even though they too did not complain of escapement of income but opined to the escapement of consideration in the assessment vis-a-vis the figures in the bank statement. The AO did not apply his independent mind to that complaint of the Investigation Wing and on the basis of a mis-understood borrowed satisfaction launched the reassessment proceedings. In doing so, the AO contravened the rules and principles enunciated in this regard by the Delhi High Court in the following cases:-
(i) Sartak Security Company Ltd. vs. ITO (2010) 329 ITR 110;
(ii) CIT vs. SFIL Stocks Broking Ltd. (2010) 325 ITR 285;
(iii) PCIT vs. G&G Pharma India Ltd. (2016) 384 ITR 147; &
(iv) PCIT vs. Meenakshi Overseas Pvt Ltd. (2017) 395 ITR 677. 17

same and make initial investigation into whether there is any escapement of income. Further, Ld AO himself observed in his order that the assessee has not carried out any business during the year under consideration. That being the case, it is only initial year of operation, and the business has not commenced. The Ld.AO himself observes that only share application money was received during the year under consideration. That being the case, we observed that the Ld.AO without forming his opinion on the issue of escapement of income, he proceeded to reopen the assessment.
12. On careful consideration of facts available on record, we observed that no doubt the amount stood credited in the bank account of the assessee were received from the related parties, similarly the amounts that went outside bank account of the assessee were also invested with the related entities. The assessee being engaged in the business of financing and leasing, obviously there are transactions entered by the assessee with the other entities. The result of the investment are not fructified this year, it may earn in the subsequent years. Mere bank transfers do not make to believe that the income escaped from tax. It clearly establishes the fact that the Ld.AO had assumed the juri iction u/s 147 of the Act out of sheer suspicion and in order to make rowing and fishing enquiries. The suspicion cannot partake the place of legal evidence. It is fact on record that the investigation wing had passed on the suggestion of the rotation of funds escaping
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assessment but Ld AO proceeded to initiate reassessment proceeding with the belief of escapement without even making preliminary investigations, the information received by the Ld AO and the inference drawn by the AO had no live link between the material on record and the satisfaction recorded. It clearly indicates that no application of mind, the Ld AO’s formation of belief has to be tested with the judicial precedents. As held in the case of Lakhmani Mewal Das
(supra), the Hon’ble Supreme Court held that the reason for the formation of the belief must be held in good faith and should not be a mere pretense. The powers of the ITO to reopen assessment, though wide, are not plenary. The words of the statute are “reason to believe” and not “reason to suspect”. The reopening of the assessment after the lapse of many years is a serious matter. The act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment, the underlying reason could be concealed income or other reasons brought to the notice of the officers. It is essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the ITO in the present case and the belief which he was to form regarding the escapement of the income from the assessment because of the assessee’s failure or omission to disclose fully and truly all the material fact was missing in the case. From the above reading, it is clear that there should be clear nexus with 21

the information collected and the reasons for belief that the income escaped assessment. Similar views were expressed by the Hon’ble High Court of Bombay in the case of PCIT vs Sheetal Dushyant Chaturvedi (134 taxmann.com 327
Bom), Hon’ble Punjab & Haryana High Court in the case of Vipin Khanna vs
CIT (255 ITR 220 P&H) and Hon’ble Juri ictional High Court in the case of Ranbaxy Laboratories Ltd vs CIT (200 taxmann 242 Del). On the similar facts on record, the Delhi High Court decided the issue in favour of the assessee in the cases of Sartak Security Company Ltd (supra), SFIL Stocks Broking Ltd (supra) and other cases. With regard to the decisions relied by the Ld DR, which are distinguishable to the facts on record.
13. Even on merit, the Ld AO recorded the reason for escapement of income for the reason that the assessee rotated the funds within the group and proceeded to make the addition u/s 68 for issue of share application money even though the assessee had submitted the relevant documents. The reasons recorded and addition made by the Ld AO are completely different. Further funds were rotated within the group has to relevance for presuming escapement of income and proceeding to make the addition on the issue of receipt of share application money.
14. Therefore, we are inclined to allow the grounds raised by the assessee.
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