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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri A. T. Varkey, Hon’ble & Dr. M. L. Meena, Hon’ble]
ORDER Per Shri A.T. Varkey:
This is an appeal preferred by the assessee against the order of Ld. CIT(A)-4, Kolkata dated 29.11.2019 for assessment years 2011-12.
At the outset the Ld. A.R. of the assessee Shri Ajoy Kr. Gupta drawing our attention to the grounds of appeal preferred by it submitted that the assessee has challenged the action of AO to have invoked the reopening jurisdiction u/s 147 of the Act without satisfying the essential condition precedent i.e. the AO recording reason to believe escapement of income as per well settled law on the same. According to Ld. A.R. from a perusal of reasons recorded by the AO to reopen the assessment which is placed at page 4 of the PB it would reveal that the AO has reopened the assessment on the basis of certain information from the Investigation Wing that the assessee is a beneficiary of accommodation entry from Shri Gautam Jain (Surat Based Diamond Concern) to the tune of Rs. 12,33,210/- and therefore he reopened it whereas while framing the assessment the AO has changed the facts in contra-distinction with the facts stated in the reasons recorded to reopen i.e. in the assessment framed pursuant to reopening the AO has made a new allegation that the assessee has taken accommodation entry from M/s Rajat Gems (Rs. 6,16,605/-) and M/s Ranjan Gems (Rs. 6,16,605/-); and thereafter taking note that the M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 assessee has purchased gold and diamond jewellery of Rs. 6,16,605/-, M/s Ranjan Gems has made an addition of Rs. 6,16,605/- (in place of his allegation in the reasons recorded of Rs.12,33,220/-). From the aforesaid facts narrated, according to Ld. A.R., it is quite clear that the basis of reopening has undergone changes from the name of accommodation entry operator (i.e. Gautam Jain to Ranjan Gems and the escaped income changed from Rs.12,33,330/- to Rs.6,16,605/-). Therefore, according to Ld. A.R. when the jurisdictional fact on the basis of which the reopening was carried out by the AO was on incorrect assumption of facts, the very basis/foundation on which the AO recorded the reasons on the basis of which he formed his believe is not existing and therefore, on changed facts he could not have proceeded to reassess the assessee. So, according to Ld. AR., the AO could not have invoked the jurisdiction to reopen in the facts discussed (supra) and therefore, the impugned order of AO needs to be quashed.
3. Per contra, the Ld. D.R Shri Supriyo Pal supporting the action of AO and Ld. CIT(A) and contended that the AO has clearly mentioned in his order that the assessee is a beneficiary of accommodation entry from Ranjan Gems and in the assessment proceedings the assessee has accepted to have transaction with them to the tune of Rs. 6,16,605/-; and since the AO had information that Ranjan Gems are indulging in providing accommodation entries, therefore, AO formed the belief that there was escapement of income and thereafter he taxed it. Therefore he does not want us to interfere with the order of the Ld. CIT(A) who has dismissed the legal issue raised by the assessee.
We have heard both the parties and perused the records. Before we advert to the legal issue raised by the assessee let us examine the settled legal precedents on the reopening of assessment as well as refresh our mind as to the concept of assessment of an income of an assessee. First of all, we have to keep in mind that the concept of assessment is governed by the time barring rule and assessee acquires a right as to the finality of proceedings. Quietus of the completed assessments can be disturbed only when there is information or evidence regarding undisclosed income or AO has information in his possession showing escapement of income. Even if the AO has information in his possession that there is escapement of income of an assessee, then also the AO cannot legally/validly reopen the assessment u/s. 147 of the Act unless the jurisdictional fact and M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 law which is required to reopen an assessment exist i.e. the AO should have “reasons to believe escapement of income”. Reasons to believe postulates a foundation based on information and belief based on reasons. Even after a foundation based on information is made, there still must be some reason which should warrant holding of a belief that income chargeable to tax has escaped assessment. This condition precedent is sine-qua- non for validity reopening an assessment. And the AO has to record the reasons thus formed and thereafter only he can successfully reopen and issue notice u/s 148 of the Act. And if an assessee challenges the jurisdiction of an AO to reopen the assessment, then the appellate authorities can examine whether the reasons recorded by the AO to reopen the assessment, satisfies the legal requirement for validly reopen the assessment. While doing so, the appellate forum cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the AO in coming to the belief (escapement of income), but the Appellate Forum can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which he is required to entertain the belief before he can issue notice u/s. 148 of the Act. If there is no intelligible nexus between the reasons and the belief, so that on such reason, no one properly instructed on facts and law could reasonably entertain the belief, then the conclusion would be fragile and resultantly the inescapable conclusion would that the AO could not have had entertained the requisite reason to believe that any part of assessee’s income had escaped assessment. Consequently the reopening made by AO would be held invalid and the reassessment would be nixed. In this context let us look at some well settled judicial precedents on the issue in hand. It is well settled in law that reasons, as recorded by the AO for reopening the reassessment, are to be examined on a stand alone basis. Nothing can be added to the reasons so recorded, nor any thing can be deleted from the reasons so recorded. The Hon’ble Bombay High Court in the case of Hindustan Lever [2004] 267 ITR 332 has interalia, observed that “………….. it is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn on the basis of reason not recorded by him. He has to speak through the reasons.” Their Lordship added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion & the M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 evidence………”. Therefore it has to be kept in mind that reasons are to be examined only on the basis of the reasons as recorded by the AO. Another important point is that even though reasons, as recorded, may not necessarily prove escapement of income at the stage of recording the reasons, such reasons must point out to an income escaping assessment and not merely need of an inquiry which may result in detection of an income escaping assessment. Undoubtedly at the stage of recording the reasons for reopening the assessment; all that is necessary is the formation of prima facie belief that an income has escaped the assessment; and it is not necessary that the fact of income having escaped is proved to the hilt. What is however, necessary is that there must be something which indicates even if not establishes the escapement of income from assessment. It is only on this basis that the AO can form the belief that an income has escaped assessment. And merely because some further investigation have not been carried out, which if made, could have led to detection to an income escaping assessment, cannot be reason enough to hold the view that income has escaped. It is also important to bear in mind the subtle but important distinction between factor which indicate an income escaping the assessment and the factors which indicates a legitimate suspicion ‘about income escaping the assessment’. The former category consists of the facts which, if established to be correct, will have a cause & effect relationship with the income escaping assessment. The later category consists of facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of cause & effect between reasons recorded and the income escaping assessment. While dealing with this subject it is useful to bear in mind the following observation of Hon’ble Supreme Court in ITO vs. Lakhmani Mewal Das [1976] 103 ITR 437 wherein was held as follows:
The reasons for the formation of the belief must have a rational connection with or relevant bearing of the formation of the belief . Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of his belief that there has been escapement of income of the assessee from the assessment in the particular year because of his failure to disclose fully & truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material & substitute its own opinion for that of the ITO on the point as to whether actions should be initiated for reopening assessment. At the same time we have to bear in mind that it is not that any or every material, howsoever vague and indefinite or M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee.
Keeping the aforesaid legal principles in mind in order to adjudicate the legal issue raised by the assessee that the AO did not had the jurisdiction to reopen the assessment u/s 147 of the Act let us look into the reasons recorded by the AO for reopening which is found placed at page 4 of PB. The reasons recorded reads as under:
“The return of income for the AY 2011-12 filed on 30.09.2011, at Rs. 21815815/-, the assessment u/s 143(3) was completed on 05.02.2014 at a total income of Rs. 65997920/-. Subsequently, information received from DGIT(Inv.) that the assessee M/s Reliance Chemotex Industries Ltd. has taken accommodation entries from Shri Gautam Jain & Ors (Surat Based diamond concern) Group for Rs. 1233210/- during the FY 2010-11, on which it had earned undisclosed income. Therefore, I have reason to believe that the return filed by the assessee has not a true reflection of income and the assessee did not disclose his true and correct income during the assessment proceedings also. Hence, income of the assessee to the extent of Rs. 1233210/- has escaped assessment.” From a perusal of the reasons recorded it is discerned that in the case of the assessee the original assessment u/s 143(3) was framed on 05.02.2014 and subsequently the AO based on information received from DGIT(Inv.) that the assessee has taken accommodation entry from Shri Gautam Jain & Ors (Surat Based Diamond Concern) for Rs. 12,33,210/- alleged that the assessee had earned undisclosed income and thereby has not disclosed true and correct income during the assessment proceedings. So according to AO an income of Rs. 12,33,210/- has escaped assessment. Pursuant to the receipt of the reasons recorded for reopening, the assessee filed objection before the AO contending that the assessee did not had any transaction with the purported accommodation provider Shri Gautam Jain & Ors. Thereafter, it is noted that the AO while framing the re-assessment has come out with two different accommodation entry providers i.e. M/s Ranjan Gems for Rs. 6,16,605/- and M/s Rajat Gems for Rs. 6,16,605/- and alleged that the assessee had made undisclosed income from these two accommodation entry providers and when the assessee pointed out that it did not had any business dealing with M/s Rajat Gems, the AO did not take any adverse action against the assessee in respect of M/s Rajat Gems. However, since the assessee had made purchases of gold and diamond jewellery worth Rs. 6,16,605/- from M/s Ranjan Gems which fact though supported by bills/vouchers and payments have been made through cheque, the AO ignored the same and made addition of Rs. 6,16,605/-. On appeal M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 the Ld. CIT(A) has dismissed the grounds raised on legal issue as well as on merits. Now when we are examining the legal issue raised by the assessee we note that the AO had reopened the original assessment framed u/s. 143(3) of the Act dated 05.02.2014, by recording the reasons that the assessee is the beneficiary of taking accommodation entry from entry provider Shri Gautam Jain & Ors (Surat Based Diamond Concern) for Rs. 12,33,210/- whereas from a perusal of the re-assessment order framed, we find that there is no whisper about Shri Gautam Jain & Ors. And when the reassessment was framed, it is noted that the amount supposed to have escaped assessment while recording of reason has tapered down from Rs. 12,33,210/- to Rs. 6,16,605/-. It is settled law that the reasons recorded for reopening an assessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor anything can be deleted from the reasons recorded. And no inference can be allowed to be drawn on the basis of the reasons not recorded by the AO. The AO has to speak through the reasons recorded and it should be self-explanatory and should not keep the assessee guessing for reason. Reasons recorded by the AO should speak for itself. [Refer Hon’ble Bombay High Court decision in the case of Hindusthan lever (supra). Since the essential condition precedent for reopening the assessment was that AO should have reason to believe escapement of income we find in the fact of this case as discussed (supra), we find that jurisdictional fact on the basis of reopening/reason to believe escapement of income is not existing i.e. Shri Gautam Jain as well as escapement of income of Rs.12,33,210/- is not existing in the reassessment order passed pursuant to reopening after recording reason, and totally new facts have emerged, so in the absence of the foundational facts, the reasons to believe formed by the AO falls and the AO in such an event ought to have dropped the proceedings and initiated reopening by recording reason to believe escapement of income subject to limitation and in accordance to law. At this juncture we would like to point out an important legal principle that information adverse may trigger ‘reason to suspect”; then the AO to make reasonable enquiry and collect material which would make him believe that there is in fact an escapement of income. And the “reason to believe occurring in Section 147 of the Act” is stronger than the expression “is satisfied” (Refer M/s Ganga Saran vs. ITO, 130 ITR 1). Here in this case, the AO if had made some preliminary enquiry after receipt of information then this kind of goof up could have been avoided. Thus in this case the AO M/s. Reliance Chemotex Ind. Ltd., AY 2011-12 has erroneously assumed the existence of jurisdictional fact/incorrect fact, so the reasons recorded to form the believe fails to stand the scrutiny of law, and the same was on an erroneous assumption of facts since the AO’s reason to believe escapement of income was that the assessee is a beneficiary of accommodation entry provider Shri Gautam Jain & Ors. Whereas in the assessment framed there is no whisper about Shri Gautam Jain and the figure of Rs. 12,33,210/- has come down to Rs 6,16,605/-. Therefore, reason to believe escapement of income was on erroneous facts and therefore the AO did not enjoy the jurisdiction to reopen the assessment and therefore the assessee succeeds on the legal issue raised and we quash the re-assessment order. And we are not inclined to decide the other grounds raised challenging the merits of the addition, since it is now academic in nature.
In the result, the appeal of the assessee is allowed. Order is pronounced in the open court on 25th August, 2021.
Sd/- Sd/- (Dr. M. L. Meena) (A. T. Varkey) Accountant Member Judicial Member Dated: 25th August, 2021 SB, Sr. PS Copy of the order forwarded to:
1. 1. Appellant- M/s. Reliance Chemotex Ind. Ltd., 14/1B, Ezra Street, 6th Floor, Kolkata – 700 001.
2. Respondent – DCIT, Circle – 10(2), Kolkata 3. The CIT(A)- Kolkata (sent through e-mail) 4. CIT- Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail)