M/S. SHREE BALKISHAN AGARWAL GLASS INDUSTRIES LTD.,DELHI vs. DCIT, NEW DELHI

Facts of the case, in brief, are that the assessee is an individual and had filed its return of income on 31.03.2006 declaring loss of Rs.2,79,76,590/- which was processed u/s 143(1) on 21.07.2006. A search and seizure operation was carried out at the residential and business premises of Shri S.K Jain and Shri Virendra Kumar Jain on 14th September, 2010. During the course of search proceedings, it was noticed that a number of companies were being managed from the residential as well as the business addresses related to Shri Surendra Kumar Jain and Shri Virendra Kumar Jain. However, all the books of account and other related papers of these companies were found from the residence of Shri Surendra Kumar Jain and Shri Virendra Kumar Jain itself and nothing was found at the other addresses. Detailed information regarding the accommodation entries being given by Shri Surendra Kumar Jain and Virendra Kumar Jain controlled / managed companies was received by the AO from the Directorate of Income-tax (Investigations), Delhi. Looking at the gravity of the information, the AO recorded reasons as required under section 147/ 148(2) and issued notice under section 148 of the Act to the assessee on 28th March 2012. Since the assessee did not file the return of income within 30 days of service of such notice and nobody attended before him, the AO issued a letter dated 15th October 2012 along with notice under section 142(1) and copy of notice under section 148 issued earlier through speed post fixing the hearing for 23rd October 2012. In response to the said letter dated 15th October 2012 and notice under section 142(1), the assessee submitted a letter dated 27th October 2012 through Speed Post wherein the assessee denied accepting of any 2 accommodation entry and objected to the proceedings initiated under section 148. The relevant reply of the assessee which has been reproduced by the AO reads as under:- "…. the notice so issued by you is barred by limitation as no such notice was earlier issued and served upon the assessee company at any point of time prior to this notice which has been served upon the assessee company on 26th October, 2012. Therefore, the notice so issued is bad in law. Notice under section 142(1) of the Act can only be issued during the pendency of any proceedings or otherwise the same can be issued within the time period allowed for filing of return of income in view of the provisions of the section 139 of the Act if the assessee has failed in filing the return of income. In the case of the assessee company, neither any assessment proceedings for the above mentioned assessment year are pending nor has the assessee company failed in filing it return of income. Therefore, issuance of notice under section 142(1) of the Act at this juncture is clearly bad in law and barred by limitation.”

Further, the AO brought to the notice of the assessee that the notice under section 148 of the Act issued on 20th March, 2012 by his predecessor was sent through speed post and a copy of the same speed post was provided to the assessee. It was further informed to the assessee that the notice was sent on the same address on which notice under section 142(1) was sent. Since the assessee did not make any compliance to the notice under section 148 by filing the return of income, the AO did not provide the copy of reasons and other information as requested by the assessee. However, the AO rejected the objections of the assessee by passing a speaking order on 07.11.2012 which was served upon the assessee through speed post.

The order under appeal on the facts and in the circumstances of the case and also in law need be quashed as the assessment has been completed without serving the notice u/s 143(2) to the appellant.

The Ld. CIT (A) has erred both in law and on facts in not quashing the order under appeal ignoring the fact that the assessment has been completed and Assessment Order has been passed by the learned AO after the statutory period of completion of assessment as provided u/s 153 of the I T Act.

The Ld. CIT has erred in conforming Addition of Rs 2,85,80,000/- u/s 68 of the IT Act ignoring the facts that the Assessee had received the share application money of Rs 55,00,000/- from the entities named in the reasons for which the assessee has discharged its burden u/s 68 and there was no adverse material and basis with the AO/CIT to support addition of the balance amount of Rs 2,30,80,000/-.

The ld. counsel for the assessee has also raised an additional ground which reads as under:- "On the facts and circumstances of the case and also in law, the impugned reassessment orderpassed by the Ld AO u/s 147/143(3) of the Act is invalid and void-ab-initio for want of valid notice u/s. 143(2) as per law as evident 9

However, at the time of hearing, the ld. counsel for the assessee did not press for the additional ground stating that this is a part of the grounds of appeal number 1 and 2 and therefore the same is not being pressed.

The ld. counsel for the assessee submitted that the AO, while recording the reasons has simply relied on the conclusion/inference drawn by the investigation wing and the reason does not demonstrate how the AO, after due application of mind, has reached to the above belief. Referring to the decision of the Hon’ble Delhi High Court in the case of Sabh Infrastructure vs. ACIT, 398 ITR 198 (Del), he submitted that the Hon’ble High Court has held that the reasons to believe have to be self-explanatory. He submitted that satisfaction reached by the AO in the instant case is borrowed satisfaction from other authority, i.e., DDIT (Investigation). Referring to page 4 of the assessment order, the ld. counsel for the assessee drew the attention of the bench to the direction issued by the ADIT (Investigations) to the AO for initiation of proceedings under section 148 of the Act. Referring to the following decisions, he submitted that reassessment proceedings cannot be initiated on the basis of direction of the Investigation Wing and the AO has to apply his independent mind:- i) Pr. CIT vs. RMG Polyvinyl (I) Ltd., (201 7) 396 ITR 5 (Del.) Dated: 07.07.2017; ii) Pr. CIT v.G&G Pharma India Ltd 384 ITR 147 (Del.); iii) CIT vs Independent Media Pvt Ltd in ITA 108/2015 (Del); iv) Signature Hotels P. Ltd. Vs. ITO - [2011 ] 338 ITR 0051 (Del); v) Pr. CIT vs. Meenakshi Overseas Pvt. Ltd. 395 ITR 677 (Del); vi) CIT Vs. SFIL Stock Broking Ltd., 325 ITR 285 (Del); vii) Sarthak Securities Co. P. Ltd. Vs. ITO 329 ITR 110 (Del); viii) CIT Vs. Supreme Polypropolene (P) Ltd.ITA No.266/2011 (Del); ix) CIT vs. Multiplex Trading & Industrial Co. Ltd., 378 ITR 351; x) Hindustan Lever Ltd. Reported in [2004] 137 TAXMAN 479 (BOM.); xi) CIT vs. Greenworld Corporation 314 ITR 81 (SC).

The ld. counsel for the assessee referred to page 14 to 20 of the assessment order and submitted that the AO has drawn support to designate the share capital accepted during the year from S.K. Jain group as escaped income on the basis of various evidences dealt in the report of the accommodation entry forwarded by the Investigation Wing. Referring to pages 5 to 24 of the assessment order, he drew the attention of the Bench to various annexures. He submitted that these annexures are relevant material non-consideration of which at the time of recording reasons amount to non application of mind on these vital evidences. The AO has tried to improve the reason by relying on various evidences during assessment proceedings without dealing the same in the reasons recorded.

Referring to the decision of the Hon’ble Bombay High Court in the case of Indivest Pte Ltd. vs. ADDIT, 350 ITR 120, he submitted that the Hon’ble Bombay High Court has held the reassessment proceedings as bad in law wherein the AO has tried to improve the reason by relying on various evidences during assessment proceedings which were not mentioned in the reasons recorded. It was held that improvement of the reasons based on the material not referred to in the reasons recorded is bad in law.

Referring to the decision of the Hon’ble Delhi High Court in the case of Sabharwal Properties Industries Pvt. Ltd. vs. ITO, 382 ITR 547, he submitted that the jurisdictional High Court has held that ‘having regard to the entire scheme and purpose of the Act the validity of the assumption of jurisdiction under section 147 can be decided only by reference to the reasons recorded under section 148(2) of the Act and the AO is not authorised to refer to any other reason even if it can be otherwise inferred and/or gathered from the records. He is confined to the recorded reasons to support the assumption of Jurisdiction. He cannot refer only some of the reasons and keep the others up his sleeves to be disclosed before the Court if his action is ever challenged in a court of law.’

He submitted that the AO in the reasons recorded on page 61 of the paper book mentions that escapement of income is on account of failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. The above statement presupposes the verification by the AO from the records available with him such as return of income, audited balance sheet etc. However the AO in the performa says that the return is not filed. This fact is also corroborated from the non-discussion in the reason of the return of income and balance sheet. Since it is a case of assessment for the first time, therefore, there was no question of he having any opportunity to examine any records whatsoever to give such a finding. He submitted that there is no provision to disclose financial transaction to department except through filing of the return of income. This, according to the ld. Counsel shows that the AO was casual in recording reasons relying solely on the information of the Investigation Wing.

The ld. counsel for the assessee, referring to pages 60 and 61 of the paper book, drew the attention of the Bench to the instances of so-called accommodation entries detailed out. He submitted that even in the said reasons also the AO did not have any adverse information with regard to the credit entry of Rs.5 lakhs dated 28th December 2014 wherein the particulars of pay order is not given. Further, in the reasons recorded the AO has not identified the nature of accommodation entries accepted by the assessee. He submitted that the names forwarded by the Investigation Wing also are in abbreviated form and the AO has not conducted any enquiry to verify the incompetence of the reason which fact is further evidenced from the fact that the AO, during assessment proceedings, has requisitioned under section 133(6) the bank statement from the banks of the parties identified in the reason to confirm the veracity of transactions covered by the information from the Investigation Wing.

The ld. counsel for the assessee submitted that the notice under section 148 was never served on the assessee. Referring to various decisions he submitted that the onus is on the Revenue to prove the service of jurisdictional notice failing which such assessment becomes bad in law. Further, the reason was never supplied to the assessee before completion of the assessment. He submitted that the AO denied the supply of reasons recorded on the basis of non-filing of return of income in response to notice under section 148. Relying on various decisions he submitted that non supply of reasons recorded vitiates the validity of reassessment proceedings. For the above proposition, he relied on the following decisions:-

He submitted that approval in the instant case was given in a mechanical manner and without application of mind by the concerned authority and therefore granting of approval in a mechanical manner under section 151 of the Act makes the reassessment proceedings invalid. Referring to various decisions he submitted that such mechanical approval given by the superior authority is not valid in law.

The ld. counsel for the assessee further submitted that the assessment order has been passed beyond the statutory period of limitation under section 153 of the Act. He submitted that the AO has passed the order on 28th March 2013 whereas the dispatch as per the diary of speed post is on 1st April 2013 at 6:38 p.m. which is evident from the xerox copy of track of speed post, copy of which is placed at page 223 of the paper book. He submitted that since the order has been dispatched after 31.03.2013, therefore, the assessment should be quashed being passed beyond the period of limitation under section 153 of the Act. Referring to the decision of the Hon’ble Gujarat High Court in the case of Kanu Bhai M. Patel (HUF) vs. Hiren Bhatt, 334 ITR 25 (Guj), he submitted that the Hon’ble High Court in the said decision has held that the date of issue would be the date on which the same was handed over for service to the proper officer. Therefore, when last day of limitation for issuance of notice is 31.03.2010 and the same was sent for dispatch in the speed post centre on 7th April 2010, the date of issue of such notice was held to be 7th April 2010 and not the date of signature of the officer as on 31.03.2010 and accordingly it was held that the issuance of notice as barred by limitation. He submitted that since in the instant case also the order was dispatched to the speed post centre on 1st April 2013, therefore, the same is barred by limitation. The ld. counsel also referred to the following decisions for the above preposition:-

So far as the merit of the case is concerned, the counsel submitted that the assessee has accepted an amount of Rs.55 lakh from companies named in the reasons and amount of Rs.2 crores was accepted by cheques on 30th March 2005 which were never encashed and were returned back on 01.04.2005 and an amount of Rs.30,80,000/- from other entities. So far as the amount of Rs.55 lacs is concerned, he submitted that the assessee has substantiated the identity and credit worthiness of the loan creditors and genuineness of the transaction by furnishing copy of income tax return, audited balance sheet, list of directors, share application form, loan confirmation, bank statement and copy of cheques received which are available on page 83 to 189 of the paper book.

So far as the amount of Rs.2 crores is concerned, he submitted that the cheques were returned without encashing them and the ledger accounts of the parties for assessment year 2005-06 and 2006-07 are available at pages 194 to 271 of the paper book. He submitted that the cheques were never encashed and were returned back. Although this fact was brought to the notice of the CIT(A) vide statement dated 19th August 2014, copy of which is placed at page 250 of the paper book, however, the ld.CIT(A) has completely ignored the same. He submitted that no enquiry was conducted by the AO with regard to the amount of Rs.2 crores. Relying on various decision he submitted that when the assessee has not encashed those cheques and were returned on the very first day of the next financial year, the addition made by the AO and sustained by the CIT(A) is not justified.

So far as the amount of Rs.30,80,000/- is concerned, he submitted that the above amount was received from group concerns and nowhere related to Jain brothers and, therefore, in absence of any adverse material before the AO, the same should have been deleted and no addition should have been made. 15. The ld. counsel for the assessee submitted that so far as the amount of Rs.55 lakhs is concerned, summons were issued to those companies which are duly served. There was compliance of summons in case of two companies, namely, M/s Avail Financial Services P. Ltd. and M/s Lovely Securities P. Ltd., through their common directors. So far as the other companies are concerned, he submitted that the assessee has produced sufficient documentary evidences which were completely ignored. Further, the AO has not confronted the adverse material to the assessee for cross-examination despite specific request made vide letter dated 4th March, 2013. Referring to the decision of the Hon’ble Supreme Court in Andaman Timber Industries vs. CCE, 281 CTR 241 (SC), Kishinchand Chellaram v. CIT, 125 ITR 713 (SC) and various other decisions he submitted that in absence of denial of natural justice to the assessee makes the assessment a nullity. He accordingly submitted that the reassessment proceedings are not in accordance with law and the addition on merit also requires to be deleted.

The Ld. DR, on the other hand, heavily relied on the order of the AO and the CIT(A). Referring to the decision of the Hon’ble Supreme Court in the case of PCIT vs NRA Iron and Steel (P) Ltd., 412 ITR 161, the decision of Hon’ble Delhi High Court in the case of PCIT vs. NDR Promoters (P) Ltd., reported in 410 ITR 379, and in the case of CIT vs. Nipun Builders and Developers (P) Ltd., reported in 350 ITR 407, the ld. DR submitted that the addition made by the AO and upheld by the CIT(A) is fully justified. So far as the validity of re-assessment proceedings are concerned, he submitted that the reasons were recorded on the basis of information obtained from Investigation Wing. Referring to the decision of the Hon’ble Supreme Court in the case of Raymond woolen Mills Limited vs. ITO, 236 ITR 34, he submitted that the Hon’ble Supreme Court in the said decision has held that sufficiency and correctness of the material is not to be considered at the time of initiation of reassessment proceedings. It is only to be seen as to whether there was prima facie some material on the basis of which the Department could reopen the case. It was accordingly held that the court cannot strike down the reopening of the case and it will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. So far as the service of notice is concerned, he submitted that the CIT(A) has given justifiable reasons while dismissing the ground raised by the assessee on this issue.

The ld. counsel in his rejoinder submitted that the decision in the case of NRA Iron & Steel (P) Ltd., is not applicable to the facts of the present case since the facts are different. In that case, there was no proper enquiry whereas in the present case there was full enquiry and summons were served. So far as the decision in the case of Raymond Woolen Mills Ltd. is concerned, he submitted that relevance of the reasons has to be gone into and there should be some live link between the reasons recorded and the material on which the case is being reopened. Further, the reasons should not be vague and it should clearly convey for which the case is being reopened due to escapement of income for failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. He accordingly submitted that the reassessment proceedings not being in accordance with law should be quashed.

We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the AO, in the instant case, based on the report of the Investigation Wing that the assessee has received accommodation entries from Shri Surendra Kumar Jain and Virendra Kumar Jain controlled/managed companies, reopened the assessment by recording the following reasons:-

We find, in the performa for recording reasons for initiating proceedings under section 148 and for obtaining approval of the Addl. CIT, the AO at para 7 of the performa has mentioned that the assessee has not filed the return voluntarily.

A perusal of the above shows that at clause 7(a) the AO has categorically mentioned that no return has been filed by the assessee. However, a perusal of the paper book page 1 shows that the assessee has duly filed its return of income on 31.3.2006 declaring total loss of Rs.2,79,76,596/- vide receipt number 0851001128. A perusal of Page 3 of the paper book shows that the return was processed under section 143(1) on 26th July 2006. Thus, it is seen that the AO had no occasion to go through the return filed by the assessee along with the audited accounts before recording reasons and has mentioned that no return has been filed while reopening the assessment and the ld. Addl. CIT, without application of mind, has simply mentioned, “I am satisfied that this is a fit case for issue of notice under section 148.” The Hon’ble Bombay High Court in the case of Kalpana Shantilal vs ACIT 100 CCH 0165 has held that sanction granted by higher authority for issuing of reopening notice had to be on due application of mind and it could not be 25 mechanical approval without examining proposal sent by AO. The Hon’ble Delhi High Court in the case of Yum Restaurants Ltd. vs Dy. Director of Income Tax 99 CCH 232 has held that where authorities appear to have concurred with reasons for reopening assessment without applying their mind, reopening of assessment would be invalid. The Hon’ble Bombay High Court in the case of Ankita A. Choksey vs. Income Tax Officer And Others (2019) 411 ITR 207 (Bom) has held that condition precedent for issue of notice for reassessment is that the reasons to believe that income has escaped assessment must be based on correct facts. Notice based on wrong facts is without jurisdiction and has to be quashed. The Delhi Bench of the Tribunal in the case of DCIT vs. M/s KLA Foods (India) Ltd. and Others, vide order dated 8th April 2019, has held that condition precedent for issue of notice for reassessment is that reason to believe that income has escaped assessment must be based on correct facts. Notice based on wrong facts is without jurisdiction and is to be quashed. The Hon’ble Delhi High Court in the case of PCIT vs. M/s SNG Developers Limited, 404 ITR 312, has held that condition precedent for issue of notice for reassessment is that the reason to believe that income has escaped assessment must be based on correct facts. Notice based on wrong facts is without jurisdiction and has to be quashed. The above decision of the Hon’ble High Court was challenged by the Revenue before the apex court and the apex court dismissed the SLP vide SLP No.42379/2007, order dated 9th February 2018. Since, in the instant case, although the assessee has filed return of income which was processed u/section 143(1), however, the AO proceeded to 26 reopen the assessment by mentioning that no voluntary return has been filed by the assessee and, thus, proceeded to reopen the assessment on wrong appreciation of facts on record.

We further find the Hon’ble Delhi High Court in the case of BPTP vs PCIT, vide Writ Petition No.13803/2018, order dated 11th January 2020, has held that if the AO has failed to perform its statutory duty, he cannot review his decision and reopen on a change of opinion. The reopening is not an empty formality. There has to be relevant tangible material for the AO to come to the conclusion that there is escapement of income and there must be a live link with such material for the formation of the belief. Mearly using the expression ‘failure on the part of the assessee to disclose fully and truly all material facts’ is not enough. The reasons must specify as to what is the nature of default or failure on the part of the assessee. Similarly The Hon’ble Bombay High Court in the case of Anand Developers vs. ACIT, vide Writ Petition No. 17/2020, order dated 18th February, 2020 has held that a mere bald assertion by the AO that the assessee has not disclosed fully and truly all material facts is not sufficient. The AO has to give details as to which fact or the material was not disclosed by the assessee leading to its income escaping assessment otherwise the reopening is not valid.

Thus, we agree with the argument of the ld. counsel for the assessee that the reason to believe that income has escaped assessment is not based on correct facts and the approval has been given in a mechanical manner and, therefore, such notice based on wrong facts and the approval given in a mechanical manner make the re-assessment proceedings invalid being not in accordance with law. Accordingly we hold that the reassessment proceedings initiated by the AO is not valid in the eyes of law. Accordingly the same is directed to be quashed. Since the assessee succeeds on this preliminary legal ground, the other legal grounds as well as the grounds on merit, in our opinion, do not require adjudication being academic in nature.