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Income Tax Appellate Tribunal, DELHI BENCHE : A : NEW DELHI
Before: SHRI H.S. SIDHU & SHRI N.K. BILLAIYA
ORDER PER H.S. SIDHU, JM This appeal filed by the assessee is directed against the order passed by the Ld. CIT(A)-I, New Delhi on 26.03.2019 in relation to the assessment year 2010-11 on the following grounds:-
1. The order passed by the Ld. CIT(A) under section 250 of the Act is bad in law and on the facts and circumstances of the case.
The Ld. CIT(A) has erred in law and on the facts and circumstances of the case in upholding the order passed by the AO, thereby sustaining additions of Rs. 2,18,73,416/- on account of fictitious profit or loss entries received from various clients by misusing Client Code Modification facility without having sufficient material on record. 3. The Ld. CIT(A) has erred in law and on the facts and circumstances of the case in sustaining the non-jurisdictional order passed by the AO u/s. 147 read with Section 143(3) of the Act. 4. The above grounds of appeal
s are independent and without prejudice to one another.
5. The appellant may be allowed to add / withdraw or amend any ground of appeal at the time of hearing.
2. The brief facts of the case are that assessee company is engaged in the business of sale and purchase of shares. The assessee filed its return of income on 30.9.2010 at NIL income. In this case, information was received from ADIT(Inv.), Unit-1(3), Ahmedabad through CD wherein it was informed that assessee company has claimed fictitious losses and profits by misusing the CCM facility in F&O segment amounting to Rs. 2,18,73,416/-.
The assessment in this case was completed at an income of Rs. 2,18,73,416/- u/s. 147/143(3) of the Income Tax Act, 1961 (in short “Act”) vide order dated 10.1.2017. Against the assessment order, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 26.3.2019 has dismissed the appeal of the assessee. Aggrieved with the appellate order dated 26.3.2019, assessee is in appeal before the Tribunal.
Ld. Counsel for the assessee stated that assessee has challenged the reopening u/s. 147 of the Income Tax Act, 1961 on various grounds which have already been adjudicated and decided in favour of the assessee by the various decisions of the ITAT and the Hon’ble High Courts. He argued that the impugned order passed by the Ld. CIT(A) is without jurisdiction, 2 erroneous and wrongly been passed, because the reassessment passed by the AO u/s. 143(3)/147 of the I.T. Act, 1961 is invalid on the basis of the notice u/s. 148 of the Act which is invalid and has been issued without applying his mind only on the basis of the information received from the ADIT(Inv.), Unit-1(3), Ahmedabad through CD wherein, it was informed that assessee company has claimed fictitious losses and profits by misusing the CCM facility in F&O segment amounting to Rs. 2,18,73,416/-. He submitted that AO has blindly relied upon the Investigation Wing which itself is not based on any material against the assessee. The mere recording of reasons on the basis of information from Investigation Wing and issuing notice for initiation of reassessment proceedings does not constitute application of mind much less independent application of mind. Therefore, the proceeding is without jurisdiction. In this regard, he relied upon the decision of the Hon’ble Bombay High Court in the case of M/s Coronation Industries Ltd. vs. DCIT (2017) 82 taxmann.com 75 (Bombay) wherein it has been held that mere client code modification by broker does not mean that any income has escaped assessment. Ld. Counsel for the assessee stated that the AO has not investigated the matter himself and has not made any enquiry to corroborate the information of the Investigation Wing on which basis the case of the assessee has been reopened, meaning thereby the AO has not applied his mind and only issued notice u/s. 148 of the Act on the basis of the information received from the ADIT(Inv.), Unit1(3), Ahmedabad. To support the aforesaid contention, he draw our attention towards the order of the Hon’ble Supreme Court of India in the case of ACIT vs. Dhariya Construction Co. (2011) 197 Taxman 202 (SC); Hon’ble Delhi High Court decisions in the case of Pr. CIT vs. RMG Polyvinyls (I) Ltd. (2017) 83 taxmann.com 348 (Delhi); Pr. CIT vs. Meenakshi Overseas P Ltd. vs. ITO 395 ITR 677 (Del.) and Pr. CIT vs. G&G Pharma India Ltd. 384 ITR 147 (Del.).
3.1 Ld. Counsel for the assessee placed the copy of reasons recorded by the AO and approval granted by the Pr. CIT, Delhi-1, New Delhi wherein, he has granted the approval by only mentioning that “I am satisfied”, which shows that Ld. Pr. CIT, Delhi-1, New Delhi has not recorded proper satisfaction and without application of mind gave the approval in a mechanical manner. He further stated that this issue is squarely covered by the decision of the Hon’ble Delhi High Court in the case of United Electrical Company (P) Ltd. Vs. CIT & Ors. 258 ITR 317 (Del.). Therefore, he requested that the same ratio may be followed in the present case and appeal of the assessee may be allowed accordingly by quashing the reassessment proceedings.
3.2 Thirdly, on the merits of the case, Ld. Counsel for the assessee stated that the orders of the authorities below cannot be accepted since the AO has not pointed out any basis or material or evidence to support his findings that the assessee has received entry of fictitious losses. The AO has 4 not spelt out in the reasons recorded as well as the assessment order as to on which scrips the assessee has taken loss entries. He submitted that the addition has been made by the AO despite assertions by the assessee that the asseseee has no knowledge and have no role in modification in code as the assessee is doing business through share broker and has no right/ authority in execution of trade. In view of above, he requested to delete the addition in dispute.
Ld. DR on the other hand, heavily relied upon the order of the Ld. CIT(A). As regards jurisdiction of the assessee is concerned, he submitted that the Ld. CIT(A) has already decided the issue against the assessee which is self-explanatory and, therefore, the ground raised by the assessee on this issue should be dismissed. So far as the merit of the case is concerned, he submitted that here also the Ld. CIT(A) has given a clear cut finding that assessee has misused the facility of client code modification for creating artificial loss which came to light on the basis report of the Investigation Wing. Therefore, he requested to upheld the order of the Ld. CIT(A) on jurisdiction as well as on merits.
We have heard both the parties and carefully considered the rival submissions and perused the orders of the authorities below alongwith Paper Book filed by the assessee of the case laws relied upon. We note that in this case the AO while recording the reasons for the belief that income has escaped assessment has recorded the reasons as under:- 5 5.1 After perusing the aforesaid reasons recorded, we find that it is a case where action for reopening is taken mechanically on the information from the Asstt. Director of Income Tax (Investigation), (Unit)1(3), Ahmedabad through CD wherein it was informed that some companies have indulged in tax evasion practices by claiming fictitious profit / losses by using Client Code Modification (CCM) facility in F&O segment on NSE. On the basis of this information, the reassessment proceedings were initiated u/s. 147 of the Act after taking approval of the Pr. CIT, Delhi-1, New Delhi and notice u/s. 148 of the Act was issued upon the assessee on 28.3.2017. In response to the same, the AR of the Assessee filed a letter dated 15.6.2017 stating therein that the return filed vide acknowledgement no. 164874331300910 dated 30.9.2010 should be considered as original in response to notice u/s. 148 of the Income Tax Act, 1961 also requested to provide copy of reasons recorded for issuing the notice u/s. 148 of the Act, which was provided by the AO to him. AO has blindly relied upon the Investigation Wing which itself is not based on any material against the assessee. The mere recording of reasons on the basis of information from Investigation Wing and issuing notice for initiation of reassessment proceedings does not constitute application of mind much less independent application of mind. Therefore, the proceeding is without jurisdiction. It is noted that AO has not investigated the matter himself and has not made any enquiry to corroborate the Information of the Investigation Wing on which basis the case of the assessee has been reopened, meaning thereby the AO has not applied his mind and only issued notice u/s. 148 of the Act. Thus, the AO has acted mechanically and without any independent application of mind. It is further noted that initiation of proceedings is based on non application of mind much less independent application of mind but is a case of borrowed satisfaction. Nothing is independently examined or considered by the AO which can demonstrate application of mind by him. To support our aforesaid view, we draw support from the following decisions:-
i)ACIT vs. Dhariya Construction Co. (2011) 198 taxman 202 (SC) wherein the Hon’ble Court has held that :
“Section 147 of the Income Tax Act, 1961 – Income escaping assessment – Non-disclosure of primary facts – Whether opinion of District Valuation Officer (DVO) per se is not an information for purposes of reopening of an assessment under section 147; Assessing Officer has to apply his mind to information, if any, collected and must form a belief thereon – Held, yes.” ii) Pr CIT v. RMG Plyvinyl (I) Ltd. (2017) 83 taxmann.com 348 (Hon’ble Delhi High Court has observed as under:- 11. There can be no manner of doubt that in the instant there was a failure of application of mind by the AO to the facts. In fact he proceeded on two wrong premises - one regarding alleged non-filing of the return and the other regarding the extent of the so-called accommodation entries.
Recently, in its decision dated 26th May, 2017 in (Principal Commissioner of Income Tax-6 v. Meenakshi Overseas Pvt. Ltd.), this Court discussed the legal position regarding reopening of assessments where the return filed at the initial stage was processed under Section 143(1) of the Act not under Section 143(3) of the Act. The reasons for the reopening of the assessment in that case were more or less similar to the reasons in the present case, viz., information was received from the Investigation Wing regarding accommodation entries provided by a 'known' accommodation entry provider. There, on facts, the Court came to the conclusion that the reasons were, in fact, in the form of conclusions "one after the other" and that the satisfaction arrived at by the AO was a "borrowed satisfaction" and at best "a reproduction of the conclusion in the investigation report."
As in the above case, even in the present case, the Court is unable to discern the link between the tangible material and the formation of the reasons to believe that income had escaped assessment. In the present case too, the information received from the Investigation Wing cannot be said to be tangible material per se without a further inquiry being undertaken by the AO. In the present case the AO deprived himself of that opportunity by proceeding on the erroneous premise that Assessee had not filed a return when in fact it had.
To compound matters further the in the assessment order the AO has, instead of adding a sum of 78 lakh, even going by the reasons for reopening of the assessment, added a sum of Rs.1.13 crore. On what basis such an addition was made has not been explained.
For the aforementioned reasons, the Court is satisfied that no error was committed by the ITAT in holding that reopening of the assessment under Section 147 of the Act was bad in law.” iii) 395 ITR 677 (Del) Pr. CIT v. Meenakshi Overseas (P) Ltd. “36. In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a ‘borrowed satisfaction'. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment. 37. For the aforementioned reasons, the Court is satisfied that in the facts and circumstances of the case, no error has been committed by the ITAT in the impugned order in concluding that the initiation of the proceedings under Section 147/148 of the Act to reopen the assessments for the AYs in question does not satisfy the requirement of law. 38. The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue. The appeal is, accordingly, dismissed but with no orders as to costs. 5.1.1 We further find that the Hon’ble Bombay High Court in the case of Coronation Agro Industries Ltd. (Supra) has held that mere client code modification by broker does not mean that any income has escaped assessment.
5.2 We have heard rival contentions and perused the orders of the revenue authorities, case laws relied by the ld. Counsel for the assessee, we are of the considered view that the jurisdictional issue has already been adjudicated and decided in favour of the Assessee by the various decisions of the Hon’ble Supreme Court and the Hon’ble High Courts, in the cases discussed above, which have been respectfully followed by the Tribunal. Therefore, we have no other alternative except to respectfully follow the same case laws, because no contrary decision has been brought to my knowledge by the Ld. DR under the similar facts and circumstances of the case.
5.3 Keeping in view of the facts and circumstances of the case as explained above and respectfully following the precedents, as aforesaid, the proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction and needs to be quashed.
5.4 Further, after perusing the aforesaid reasons recorded and its approval, as reproduced above, wherein the ITO has recorded the reasons undated and Ld. Pr. CIT, Delhi-1 has granted the approval by mentioning that “I am satisfied”, which shows that Ld. Pr. CIT-1, New Delhi has not recorded proper satisfaction and without application of mind gave the approval in a mechanical manner. Keeping in view of the facts and circumstances of the present case and the case laws applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. year in dispute is bad in law and deserves to be quashed. Our aforesaid view is fortified by following decisions having similar facts and circumstances of the case.
A) United Electrical Company (P) Ltd. Vs. CIT & Ors. 258 ITR 317 (Del.) In this case, approval by the Addl. CIT u/s. 151 was given in the following terms:- 14
“Yes, I am satisfied that it is a fit case for issue of notice u/s. 148 of the Income Tax Act.” Analyzing, the above satisfaction/approval, it has been held that the CIT is required to apply his mind to the proposal put up to him for approval in the light to eh material relied upon by the AO. The said power cannot be exercised casually and in a routine manner. We are constrained to observe that in the present case, there has been no application of mind by the Addl. CIT before granting the approval. (Para 19).
(B) Hon’ble Supreme Court of India in the case of CIT vs. S. Goyanka Lime & Chemical Ltd. reported in (2015) 64 taxmann.com 313 (SC) arising out of order of Hon’ble High Court of Madhya Pradesh in CIT vs. S. Goyanka Lime & Chemicals Ltd. (2015) 56 taxmann.com 390 (MP).
“Section 151, read with section 148 of Income Tax Act, 1961 – Income escaping assessment – Sanction for issue of notice (Recording of satisfaction) – High Court by impugned order held that where Joint Commissioner recorded satisfaction in mechanical manner and without application of mind to accord sanction for issuing notice under section 148, reopening of assessment was invalid – Whether Special Leave Petition filed against impugned order was to be dismissed – Held, Yes (in favour of the Assessee).”
5.5 In the background of the aforesaid discussions and respectfully following the precedents, as aforesaid, we are of the considered view that the proceedings initiated by invoking the provisions of section 147 of the Act by the AO and upheld by the Ld. CIT(A) are nonest in law and without jurisdiction and also the approval granted by the Pr. CIT, Delhi-1, New Delhi is a mechanical and without application of mind, which is not valid for initiating the reassessment proceedings issue of notice u/s. 148 of the I.T. Act, 1961 and is not in accordance with section 151 of the I.T. Act, 1961, thus, the notice issued u/s. 148 of the Act is invalid and accordingly the reopening in this case is bad in law and therefore, the same is hereby quashed. Accordingly, the legal ground on both counts, raised by the assessee’s counsel, as aforesaid, is allowed. Since we have quashed the reassessment, hence, other grounds have become academic and therefore, are not being adjudicated.
In the result, the Appeal filed by the Assessee stands allowed.
Order pronounced on 27-02-2020.