EXCEL FINANCIAL CONSULTANTS PVT. LTD.,HOWRAH vs. I.T.O.,WARD-13(1), KOLKATA

Aggrieved the assessee preferred an appeal before the Ld. CIT(A) who has confirmed the action of the A.O. Against the impugned decision of the Ld. CIT(A), the assessee is before us.

However, I note that the assessee has raised a legal issue in respect of validly reopening the assessment. In other words, according to Ld. AR, the AO has restored to re-opening of the assessment without satisfying the condition precedent as prescribed u/s 147 of the Act. According to Ld. AR, as per section 147 of the Act, the AO can validly re-open an assessment, only if he has reason to believe escapement of income. According to Ld. AR, “reason to believe” postulates a foundation based on Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 information and belief based on reason. According to him, even after a foundation based on information is made, there still must be some reason warrant holding of a belief that income chargeable to tax has escaped assessment. Further according to Ld. AR, information adverse may trigger “reason to suspect”, then the AO to make reasonable enquiry and collect material which could make him believe that there is in fact an escapement of income. According to Ld. AR, the Hon’ble Supreme Court in M/s. Gana Saran & Sons (P) Ltd. vs ITO (130 ITR 1) SC has held that the expression “Reason to believe” as is occurring in section 147 of the Act ‘is stronger” than the expression “is satisfied” and such requirement has to be met in the reasons recorded by the AO before re-opening an assessment. However according to Ld. AR, the reasons recorded in the instant case does not satisfy the requisite condition precedent, so the legal issue is being raised which will go to the root of the impugned AO’s action. Since it is a legal issue even though it has not been preferred before the Ld. CIT(A), this Tribunal has to adjudicate this issue first; And even though the Ld DR objected to this issue being raised for the first time without being raised before the First Appellate Forum, it is noted that a legal issue can be raised even for the first time before this Tribunal as held by the Hon’ble Supreme Court in National Thermal Power Corporation Ltd (NTPC) V/s. CIT (1998) 229 ITR 383 (SC). In order to examine the legal validity and the reasons recorded after reopening the assessment, let us have a look at the reasons recorded by the A.O for reopening the assessment u/s 147 of the Act which is given at Page 2 of the paper-book as under:

Having perused the reasons recorded by the AO before reopening and when the validity of the order u/s. 147 of the Act depends upon the AO rightly assuming jurisdiction as contemplated by law to make an order of assessment u/s. 147 of the Act, let us understand the settled position of law on the legal issue at hand. We note that before the AO assumes jurisdiction to re-open it is necessary that the conditions laid down in the said section 147 has to be satisfied viz., AO should record "reason to believe" that the income chargeable to tax for that assessment year has escaped assessment. If this condition is not satisfied at the first place, then it cannot be said the AO has validly assumed jurisdiction u/s. 147 of the Act. Therefore, the question Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 for consideration is whether on the basis of the reasons recorded by the AO, he could have validly reopened the assessment. For that it has to be seen as to whether the AO on the basis of whatever material before him, [which he had indicated in his "reasons recorded"] had reasons warrant holding a belief that income chargeable to tax has escaped assessment. It is important to remember that the reasons recorded by AO to reopen has to be evaluated on a stand-alone basis and no addition/extrapolation can be made or assumed, while adjudicating the legal issue of AO's usurpation of jurisdiction u/s. 147 of the Act. Moreover, the Parliament has given power to AO to reopen the assessment, if the condition precedent as discussed above are satisfied, and not otherwise. It should be kept in mind that the concept of assessment is governed by the time-barring rule and the assessee acquires a right as to the finality of proceedings. Quietus of the completed assessment is the Fundamental Rule and exception to this rule is Re-opening of assessment by AO under section 147 or exercise of Revisional jurisdiction by CIT under section 263 of the Act. Therefore, the Parliament in its wisdom has provided safeguards for exercise of the reopening of assessment jurisdiction to AO; and revisional jurisdiction of CIT by providing condition precedent which is sine qua non for assumption/usurpation of jurisdiction. In the case of reopening of assessment, the reason to believe escapement of income is the jurisdictional fact and law (mixed question of fact and law) and for revisional jurisdiction the order of the AO should be erroneous as well as prejudicial to the revenue. Unless the condition precedent is not satisfied, the AO or the CIT can exercise their reopening jurisdiction or revisional jurisdiction respectively. The legislative history is that in respect to the reopening u/s. 147 of the Act, the Parliament by Direct Tax Laws (Amendment) Act 1987 w.e.f. 01.04.1989 had substituted "for reason to believe escapement of income" to 'for reasons to be recorded by him in writing, is of the opinion'' which gave unbridled subjective satisfaction to the AO was later reversed to 'reason to believe escapement of income'', by the Direct Tax Laws (Amendment) Act, 1989. The Hon'ble Apex Court as well as the Hon'ble jurisdictional High Court as well as other Hon'ble High Courts have already held in plethora of cases the test of a prudent person instructed in law in Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 understanding jurisdictional fact and law (mixed question of fact and law) the reason to believe escapement of income (supra).

The AO, who is a quasi judicial authority is empowered to reopen the completed assessment only in a given case wherein there is reason to believe escapement of chargeable income to tax which is the jurisdictional fact & law and sine qua non to assume jurisdiction to reopen a completed assessment. It must be kept in mind that 'reasons to believe' postulates foundation based on information and belief based on reason. Even if there is foundation based on information there must be some reason warrant holding the belief that income chargeable to tax has escaped assessment. It has to be kept in mind that the Hon'ble Supreme Court in Ganga Saran & Sons P. Ltd. Vs. ITO (1981) 130 ITR 1 (SC) held that the expression "reason to believe" occurring in sec. 147 "is stronger" than the expression "if satisfied" and such requirement has to be met by the AO in the reasons recorded before usurping the jurisdiction u/s. 147 of the Act. It must also be kept in mind that information adverse against the assessee may trigger "reason to suspect" then the AO is duty bound to make reasonable enquiry to collect material which would make him belief that there is in fact an escapement of income.

So the condition precedent as discussed above is the jurisdictional fact & law, which is sine qua non for the AO to successfully usurp the jurisdiction u/s. 147 of the Act and it has to be also kept in mind that the jurisdictional fact (mixed question of fact and law) referred to in section 147 of the Act i.e Reason to believe escapement of income should be that of AO and not that of any other authority, or else it will in- derogation of one of the basic feature of the Constitution of India ie, the Rule of Law, wherein the Parliament has empowered this reopening jurisdiction only to that of Assessing Officer and that is why if the reason to believe escapement of income is not that of AO, the assumption of jurisdiction to re-open, has been held to be vitiated and resultantly bad in law, since it will be on the basis of borrowed satisfaction, which is not permissible.

From the gist of the reasons recorded by the A.O, I discern that the A.O was informed by the Investigation Wing that two companies namely M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd. are controlled by well- known entry operators of Kolkata (who are the entry operators ? AO didn’t specify) for the purpose of providing accommodation entry in the form of bogus share capital/share premium, pre-arrange bogus LTCG/STCL and unsecured loans etc., which are paper/shell companies having dummy directors (who are the dummy directors not specified by AO) and these companies does not have any business activities. According to the A.O, on examination of the bank statements of these two companies, he noted that these accounts have been frequently used for depositing of unaccounted cash which were layered through the several bank accounts for jamakharchi/shell concerns ultimately to the bank accounts of the beneficiary. According to the A.O, the assessee company is one of the beneficiaries and has received a fund of Rs.25,00,000/- from the two companies (M/s. DRS Enterprises Pvt. Ltd. and Hanuman Traders Pvt. Ltd.). Thereafter, the A.O noted that the assessee company has no real business activities since there are no purchase and sales found during the relevant F.Y and the assessee company has shown interest income of Rs.20,93,972/- and there is no logic of receiving of Rs. 25,00,000/- from the aforesaid two shell companies (M/s. DRS Enterprises Pvt. Ltd. and Hanuman Traders Pvt. Ltd.). By this modus operandi, the assessee’s unaccounted money has been brought back to the books of the assessee. After recording these reason the AO issued notice u/s 148 for re-opening the assessment of AY 2011-12. It is noted that after receiving reasons recorded by the Assessing Officer for reassessing the assessment, the assessee filed its objection and also filed an affidavit dated 10.11.2018 (page 8 of paper-book) wherein it has been clearly asserted that it has not received Rs.25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman 8 Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 Traders Pvt. Ltd. The Assessing Officer pursuant to the objection raised by the assessee against reopening, changed his factual allegation stated therein the reasons recorded that the assessee had received Rs.25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd. The Assessing Officer proceeded to pass the assessment order wherein according to him, he found from the cash trail of Sri Usheswar Singh which revealed that funds were transferred from M/s. DRS Enterprise (Layer 1) [Dhana Laxmi Bank A/c No.008808000000022)] to M/s. Kokila Trading Co. (Layer 2) and to M/s. Radharani Vyapaar (P) Ltd. (Layer 3). And according to the A.O, these companies have maintained their account with same bank and the funds were transferred from their account to assessee i.e M/s. Excel Financial Consultants Pvt. Ltd. which also maintained their account with Dhanalaxmi Bank. Thus, I note that the Assessing Officer in the reasons recorded had specifically stated that the assessee had received Rs.25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd. which according to him was nothing but the unaccounted money of the assessee company which prompted him to believe that there is escapement of income, and therefore, he resorted to reopening u/s 147 of the Act by issuing notice u/s 148 of the Act. So it should be noted that this was the factual basis/foundation based on information from Investigation Wing, which was the basis and reason for him to form a belief that income of assessee which is chargeable to tax has escaped assessment. However, when the assessee brought to the notice of the A.O that the assessee company did not receive Rs.25,00,000/- from M/s. DRS Enterprises Pvt. Ltd. and M/s. Hanuman Traders Pvt. Ltd., the A.O finds that the assessee company has received money from M/s Radharani Vyapaar (P) Ltd. According to the A.O, M/s Radharani Vyapaar (P) Ltd. has received the money directly from M/s Kokila Trading Co. and M/s Kokila Trading Co. has received money from M/s. DRS Enterprise. Thus, it is noted that the factual foundation on which the AO based his reason for reopening does not exist. This is where it has to be remembered that information adverse may trigger “reason to suspect” and not “reason to believe”. So the AO should have conducted reasonable enquiry and collected material which could make him believe, that in fact there is escapement of income, which in this case AO did not do, so the reopening 9 Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 based on the reasons recorded by him to re-open is bad in law. In this context, it has to be noted that the assessment year under consideration A.Y 2011-12 and as per the law in force, when there is a credit entry in the books of the assessee, as per section 68 of the Act, the assessee is duty bound when called upon by the Assessing Officer to explain the nature and source of the credit. In A.Y 2011-12, the assessee is not required as per law to find out the ‘source of source’ when it receives credit in its books. So, when the law applicable for A.Y 2011-12 obliges the assessee to only bring to the notice of the A.O the source of its credit in this case, M/s Radharani Vyapaar (P) Ltd., it is not obliged to find out from where M/s Radharani Vyapaar (P) Ltd. had received the money for investing in the assessee company i.e. in respect of M/s. Kokila Trading Co. and even M/s. DRS Enterprise. Therefore, the reasons recorded by the A.O to legally reopen the assessment by firstly alleging that the assessee has received Rs.25,00,000/- from M/s. DRS Enterprise and M/s Hanuman Traders Pvt. Ltd., is not factually correct and when objected the A.O has himself acknowledged that the assessee has not received money from M/s. DRS Enterprise and M/s. Hanuman Traders Pvt. Ltd. So the reasons on which the reopening of assessment was made is per-se erroneous and, therefore, the reasons recorded by AO does not meet the requirement of law to validly reopen the assessment. And it is well-settled that reasons, as recorded for reopening the reassessment need to be examined on a standalone basis. Nothing can be added to the reasons so recorded nor anything can be deleted from the reasons so recorded, as held in the Hon’ble Bombay High Court in the case of Hindustan Lever Ltd. V/s ACIT [(2004) 268 ITR 332 (Bom)] Their Lordship has inter alia observed that “.........it is needless to mention that the reasons are required to be read as they were recorded by the A.O. No substitution or deletion is permissible. No addition can be made to those reasons. No inference can be allowed to be drawn on the basis of reasons not recorded by the A.O. He has to speak through the reasons”. Their lordships added that “the reasons shall be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and evidence.........” Therefore, reasons are to be examined only on the basis of reasons as recorded. Here, in this case, I note that the A.O on mistaken facts resorted to reopening which is an admitted fact on a 10 Excel Financial Consultants Pvt. Ltd. Assessment Year:2011-12 perusal of re-assessment order (supra). Therefore, the condition precedent for reopening the assessment u/s 147 of the Act is found to be absent and, therefore, the reopening itself is bad in law and therefore, the impugned notice u/s 148 of the Act is quashed and therefore, the consequent action of making addition of Rs.9,80,494/- is null in the eyes of law.

In the result, the appeal of the assessee is allowed. Order is pronounced in the open court on 9th April, 2021.