M/S. RAGHVI FINANCE LTD.,NEW DELHI vs. ITO, NEW DELHI

“That notice issued u/s 148, subsequent order passed u/s 147 and impugned order passed by Ld CIT-Appeals all are bad in law, because of non fulfillment of mandatory jurisdictional conditions specified under the Act” 3.0 The Ld. Authorised Representative (AR), at the outset, drew our attention to the reasons recorded u/s 148 of the Act. Elaborating his case, the Ld AR further drew our attention to a letter dated 04/12/2012 addressed to the DCIT, Central Circle – 9, New Delhi and issued by the Income Tax Officer, Ward 15 (1), New Delhi and referring to the said letter, it was argued by the Ld. AR that when the reasons were recorded by AO, the basic information and material which was required to reopen the case was itself not available with the AO at that relevant time. It was submitted that in the said letter it is clearly stated that the AO had made the impugned reopening merely and solely on the basis of a letter of the CIT-Central without anything more. It was submitted by the Ld. AR that in this very same letter it is mentioned that everything which was required to be available at the time of recording of reasons was asked for first time namely: i) Copy of statements recorded during the course of search/survey/assessment proceedings of the person who has/have admitted that he/she/it was/were engaged in providing accommodation entry ii) Copies of all bank accounts for FY 2004-2005 showing the transaction iii) Copies of all documents which indicate that the person searched/surveyed were engaged in business of providing accommodation entries iv) Copies of affidavit/return of income/balance sheet of entry operator for the relevant period v) Any other document which can prove that the assessee assessed in this ward has either given entry or taken accommodation entry vi) Any other document which could be considered that the same will be helpful in framing the assessment so that the order stand legally justified in the eyes of law 3.1 It was argued by the Ld. AR that in view of the aforesaid letter, the reopening was based on the borrowed satisfaction of CIT Central II, New Delhi and was without an independent application of mind. Various case laws were relied upon by the Ld. AR in this regard.

3.2 It was further argued by the Ld AR that firstly the reasons in the present case do not state as to what was the exact information received from the investigation wing/CIT-Central vis a vis assessee’s subject transaction of Rs. 600,000/- so as to prima facie treat the same as an accommodation entry. It was submitted that reasons recorded merely stated general and vague facts of one search u/s 132 of the Act on one Shri Aseem Gupta without bringing out anything specific to correlate the said search operation on Shri Aseem Gupta with the assessee so as to implicate the assessee. It was submitted by the Ld. AR that the reasons recorded did not divulge certain crucial facts viz: i)existence of statement, if any, recorded of Shri Aseem Gupta during said search operation u/s 132 of the Act; ii) whether the said statement (if any) mentioned and correlated the assessee’s impugned transaction; iii) existence of incriminating material (if any) unearthed from said search operation u/s 132 of the Act; iv) correlation of the said incriminating material to assessee’s subject transaction; v) inquiry, if any, made by the AO on the subject matter with respect to the information received by the AO from another wing prior to the reopening of case u/s 148 of the Act; vi) any specific and particular tangible material to form valid belief to implicate the assessee’s transaction as accommodation entry; and vii) live nexus between the search on Shri Aseem Gupta and the inference to hold the assessee’s transaction as accommodation entry. It was submitted that these crucial facts were missing vis a vis the reasons recorded.

3.3 The Ld. AR pleaded for quashing of the reopening being based on invalid and unlawful reasons based on borrowed satisfaction and were grossly lacking independent application of mind.

3.4 Various case laws were also relied upon by the Ld. AR which were namely: i) Delhi ITAT G bench decision in SBS realtors case order dated 01/04/2019; ii) Hon’ble Delhi High court decision in case of G&G Pharma Limited 384 ITR 147 iii) Hon’ble Delhi high court decision in case of Sabh Infrastruture Limited 398 ITR 198 6 iv) Hon’ble Delhi high court decision in case of Meenakshi overseas 395 ITR 677 v) Kolkata Bench ITAT decision in case of Rozelle Sales & Services Pvt. Ltd. order dated 30/08/2019 4.0 The Ld. Senior Departmental Representative (Sr. DR) vehemently supported the reasons recorded in the present case and countered the arguments of the Ld. AR. It was argued that merely some kind of correspondence of the AO with the DCIT, Central Circle 9, New Delhi, subsequent to the reopening cannot be the basis to infer absence of required material at the stage of issuance of notice u/s 148 of the Act.

4.1 The Ld. Sr. DR also stated, relying on the Hon’ble Delhi High Court’s judgment in the case of Sonia Gandhi (order dated 10/09/2018), that in Para 70 it is held that:

“70. The entire premise of the reassessment notices in this case is that the nondisclosure of the taxing event, i.e. allotment of shares (and the absence of any declaration as to value) deprived the AO of the opportunity to look into the records. In the case of Mr. Rahul Gandhi, no doubt, the assessment originally completed, was under Section 143 (3). Had he disclosed in his returns or any related documents about the event (share acquisition) the primary fact would have been on the record; the AO’s subsequent action in pursuing that aspect or letting go of it, after inquiry might well 7 have justified the charge of a second and impermissible opinion on the same subject. However, that is not the case. The TEP and investigation reports – of subsequent vintage (after completion of Mr. Gandhi’s assessment), therefore, constituted tangible material which in terms of the ruling in Commissioner of Income Tax vs. Kelvinator of India Ltd 320 ITR 561 (SC) justified reassessment. In the case of the other two assessees (Ms. Sonia Gandhi and Mr. Oscar Fernandes) the returns filed by them were processed under Section 143 (1). Such instances are not treated as “assessments”. Zuari Estate Development & Investment Co Ltd (supra) is an authority on the subject.” 4.2 Heavily relying on aforesaid observations of the Hon’ble Delhi High Court it was sought to be argued by the Ld. Sr. DR that no interference need be made in perfectly valid and justified reopening made in the present case. The Ld. Sr. DR prayed for the rejection of arguments of the Ld AR of assessee.

5.0 In the rejoinder, the Ld AR submitted that the assessee’s case is not adversely affected by the aforesaid judgment in Sonia Gandhi’s case (supra). It was argued by the Ld AR that the aforesaid judgment did not firstly deal with the aspect of lack of independent application of mind. Secondly, on the aspect of absence of tangible material and live nexus in the impugned reasons, it was submitted that there was no similarity 8 to the reasons in the case of Sonia Gandhi (supra) which were based on nondisclosure of the taxing event, i.e. allotment of shares. Thirdly, it was submitted that non existence of requisite material in possession of the AO at the time of recording of reasons was manifest from the letter dated 4th December, 2012 and clearly distinguished the assessee’s case from Sonia Gandhi’s case (supra).

6.0 We have heard the rival submissions and have also perused the material on record. There is no doubt that for validity of any action u/s 147 of the Act, it is sine qua non that the reasons recorded itself give rise to an honest belief that income of the assessee concerned has escaped assessment and without this valid jurisdiction u/s 147 cannot be assumed. Further, we are of the considered opinion that to adjudicate on the validity of the reopening proceedings u/s 147, the only reference that can be made is to the reasons recorded and as provided to the assessee without anything more. It goes without saying that reopening u/s 148 of the Act is an extra ordinary jurisdiction and cannot be equated with normal and regular scrutiny proceedings u/s 143(2) of the Act. It is well settled in law that reasons, as recorded for reopening the assessment, are to be examined on a standalone basis. Nothing can be added to the reasons recorded, nor can anything be deleted from the reasons recorded. The Hon'ble Bombay High Court, in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [(2004) 268 ITR 332], has, inter alia, 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 reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons."Their Lordships added that "The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence....". Therefore, the reasons are to be examined only as they were recorded by the competent officer before the issuance of the notice.

6.1 The next 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. The reasons should not merely disclose need for 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 which is necessary is the formation of a prima facie belief that an income has escaped the assessment and it is not necessary that the fact of the income having escaped assessment is proved to the hilt. What is, however, necessary is that there must be something tangible which indicates, even if not establishes, the escapement of income from assessment. It is only on this basis that the Assessing Officer can form the belief that income has escaped assessment. Merely because detailed investigation was not carried out, and if so, could have led to detection of income escaping assessment, cannot be the reason enough to hold the view that income has escaped assessment.

6.2 It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping assessment and the factors which indicate a legitimate suspicion about income escaping assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping assessment. The latter category consists of the 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. Therefore, there has to be some kind of a cause and effect relationship between the reasons recorded and the income escaping assessment. While dealing with this aspect of the matter, it is useful to bear in mind the observations made by the Hon'ble Supreme Court in the case of ITO Vs Lakhmani Mewal Das [(1976) 103 ITR 437] that, "......the reasons for the formation of the belief must have rational connection with or relevant bearing on 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 this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment."

6.3 While determining the validity of re-assessment proceedings, it is necessary to examine as to whether there was any "reason to believe" to have had assumed the jurisdiction for re-assessment proceedings. The term "reason to believe" cannot be considered or evaluated in a water tight compartment and the scope and applicability may vary from case to case, depending upon the facts and circumstances. The power under sections 147 / 148 comes into existence if the AO had reason to believe that income has escaped assessment. Formation of reason to believe that income escaped assessment has to be that of a prudent person. The reasons for such belief have to be recorded in writing on the basis of material in the possession of AO. While the phrase "reason to believe" is wide in its import, it cannot include a mere suspicion or ipse dixit of the AO. The belief of the AO should lead him to form an honest and reasonable opinion based on reasonable grounds. This proposition has been laid down by the Hon'ble Supreme Court in the judgments of ITO vs. Lakhmani Mewal Das (supra) and Navinchandra Mohanlal Parik vs. WTO (124 ITR 68). The reasonability of the grounds which lead to the formation of belief warranting reopening is tested from the point of view of whether or not they are germane to the formation of belief that income escaped assessment and after four years, an additional condition that escapement of income was due to fault of the assessee in not fully and truly disclosing the material facts at the time of original assessment is also to be fulfilled.

6.4 The Hon'ble Supreme Court, endorsing the Full Bench decision of the Hon'ble Delhi High Court in CIT vs. Kelvinator of India Ltd., held in its order reported in 320 ITR 561, ".....that Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have link with the formation of belief." Therefore, if the fresh tangible material which the AO has in his possession is relevant to have nexus to the formation of belief then, of course, the AO would have the necessary jurisdiction to take action under the Act. What is required to be examined is not the adequacy or sufficiency of the grounds but the existence of belief. In our view, all that requires examination is as to whether there was some material which gave rise to prima facie view that income has escaped assessment and the belief was formed in good faith or was it mere a pretence for initiating action u/s 147/148 of the Act.

6.5 In the instant appeal before us, the reasons recorded are required to be examined in light of the settled judicial precedents. The impugned reasons are being reproduced here in under for a ready reference:

“Return of income declaring income of Rs 72,222 was filed on 31- 10-2005 and processed u/s 143(1). Search & survey operation were undertaken at various residential and business premises of Shri Aseem Kumar Gupta CA & group and other beneficiary group of cases on 26.03.2010. When confronted with the evidences gathered Shri Aseem Kumar Gupta admitted to have provided accommodation entries to several beneficiaries with help of several bank accounts opened in the name of several proprietary concerns and companies in which either he himself or his employees were director or proprietor. The general modus operandi of Shri Aseem Kumar Gupta was to accept cash from the beneficiaries. The cash was deposited in the bank accounts and cheques were then issued to the beneficiaries. In order to disguise his transactions as genuine, Shri Aseem Kumar Gupta has been following layering of accounts whereby cash was introduced by him in various bank accounts in name of proprietary concerns of his employees and beneficiaries and cheques were issued from his intermediary companies after routing the funds from several intermediaries. Shri Aseem Kumar Gupta has stated on oath (at the time of search as well as during assessment proceedings) that cash and other unexplained deposits made in various bank accounts of entities controlled by him belonging to the beneficiaries should be taxed in the hands of respective beneficiaries. The evidences gathered at the time of search further corroborates the assertion made by Shri Aseem Kumar Gupta that he was merely providing accommodation entries. Accordingly cash and other unexplained deposits appearing in the bank accounts of entities controlled by Shri Aseem Kumar Gupta were taxed in hands of Shri Aseem Kumar Gupta, his companies and proprietorship concerns on protective basis. It is appropriate that the cash and other deposits belonging to beneficiaries should be substantively taxed in the hands of beneficiaries themselves. As per information received from the office of CIT-Central II New Delhi the assessee M/s Raghvi Finance P Ltd has taken following accommodation entries from following person (beneficiary) as per details hereunder: Name of Amount Cheque/DD Date Bank Name of the beneficiary (Rs) No detail company used for providing accommodation entry Raghvi 600,000 584196 17.06.2004 Corp Moderate Finance Bank Credit Corp Limited Pitampura Limited N.D In view of the report recd from o/o CIT (Central) II New Delhi and in view of facts narrated above it is clear that the assessee has not disclosed fully and truly all material facts necessary for assessment for that assessment year. I have therefore reason to believe that the sum of Rs 6lacs chargeable to tax has escaped assessment. Thus the same is to be brought to tax u/s 147/148 of the I.T. Act, 1961 Notice u/s 148 may be issued if approved I.P.Madan Income Tax officer Ward 15(1) New Delhi” 6.6 As it is very clear that even though at the stage of recording of reasons, the AO is not supposed to make final conclusion but nevertheless whatever is stated in reasons that itself on its own without reference to any other extraneous material must lead to honest and genuine belief vis a vis income escaping assessment from a reasonable man point of view.

6.7 In our considered view, the Ld AR has correctly argued that the reasons in present case are based on borrowed satisfaction of CIT (Central)/income tax investigation wing which is loosely referred to as “Aseem Gupta search operation u/s 132 of the Act”. Here it is important to highlight the striking features of the reasons recorded case which show that the reasons are based on borrowed satisfaction only: firstly reasons start with some search operation conducted on one Shri Aseem Gupta on 26.03.2010. What are the important findings of said search operations qua the assessee’s subject transaction herein namely: i)existence of statement, if any, recorded of Shri Aseem Gupta during said search operation u/s 132 of the Act; ii) whether the said statement (if any) mentioned and correlated the assessee’s impugned transaction; iii) existence of incriminating material (if any) unearthed from said search operation u/s 132 of the Act; iv) correlation of the said incriminating material to assessee’s subject transaction; v) inquiry, if any, made by the AO on the subject matter with respect to the information received by the AO from another wing prior to the reopening of case u/s 148 of the Act; vi) any specific and particular tangible material to form valid belief to implicate the assessee’s transaction as accommodation entry; and vii) live nexus between the search on Shri Aseem Gupta and the inference to hold the assessee’s transaction as accommodation entry are left to guess work and nothing is divulged from the reasons recorded on the above said aspects which make the reasons-recording exercise as invalid on well- settled parameters of section 148 of the Act. Second aspect which is notable in the reasons recorded is that there is no intelligible and rational connection in the reasons recorded and a mere conclusion is drawn from un-narrated information which does not fulfil the legal requirement u/s 148 of the Act. What we notice is that the reasons recorded mention conclusions drawn by the CIT-Central/investigation wing only which is taken as good enough to draw reasons recorded u/s 148 of the Act. We are fully conscious of the fact that the investigation wing of the Income Tax department is very important organ and arm collecting lot of significant information/s under the Act. However, the requirement of recording the reasons u/s 148 of the Act is vested in the AO only and nobody else. In the present case, the AO should have given relevant details in the reasons recorded vis a vis the crucial aspects of information shared by the CIT Central/ investigation wing (if any) which in his own independent opinion led him to formulate the belief for assuming jurisdiction for re-assessment and sans which we cannot approve the present reasons as valid and correct.

6.8 Further, notably, nowhere in the reasons (supra) the AO has shed any light on as to whether any specific statement of Shri Aseem Gupta or any other person was there to warrant assumption of jurisdiction in assessee’s case except some general allegations. Moreover, not a single document is mentioned and referred to in the reasons recorded wherefrom the stated allegation, as levelled in the reasons, can be supported. These are fatal errors which strike at the very foundation of the validity of the re-assessment proceedings. The Ld CIT (A), in his adjudication on the validity of the reasons recorded, has simply stated that since the AO has taken care of the procedure to be followed as dictated by the Hon’ble Supreme Court in the case of GKN Driveshaft (259 ITR 19) nothing more was required to be seen and looked into. This observation, to our mind, is a very casual way of dealing with the detailed arguments of assessee made before him.

6.9 Taking a holistic view on the facts of this case, we are of the considered view that reopening in the present case cannot be approved on the basis of the reasons recorded and the same is held to be without authority of law. From the aforesaid reasons it is apparent that other than the information given by the CIT(Central)/DIT (inv) there is no other material the AO collected after preliminary enquiry which could have enabled him at the time of recording of reasons to come to a conscious and independent conclusion that “income of the assessee has escaped assessment”. The information given by CIT(Central)/DIT(Inv) can only be a basis to ignite/trigger “reason to suspect” for which reopening cannot be resorted to for the purpose of further examination to be carried out by him in order to strengthen the suspicion to an extent which can form the belief in his mind that income chargeable to tax has escaped assessment. It has to be kept in mind that the allegations levelled by the CIT(Central)/DIT (Inv.) can only raise suspicion in the mind of the AO and the same does not meet the requirement of law for reopening of the assessment. The term ‘reasons to believe’ is not synonymous to ‘reason to suspect’. ‘Reason to suspect’, based on an information can trigger an enquiry to find out whether there is any substance or material to substantiate that there is merit in the information adduced by the CIT(Central)/DIT(Inv.) and, thereafter, the AO has to take an independent decision to re-open or not. The AO should not act on the dictates of any other authority like in the present case the AO has acted on the mere information from the CIT (Central)/DIT(Inv.) because then it would be borrowed satisfaction.

6.10 ITAT Delhi ‘G’ Bench had an occasion to consider an identical issue in the case of SBS Realtors (P) Ltd in for Assessment Year 2009-10. Vide order dated 01.04.2019, the co-ordinate Bench held as under:

“ 6. From a perusal of the above reasons, it is seen that the Investigation Wing has supplied certain information to the Assessing Officer with regard to receipt of cheques by the assessee from various companies who are considered to be S.K. Jain group companies by the Investigation Wing. As per the Investigation Wing, the above cheques paid by S.K. Jain group companies were accommodation entries to M/s SBS Realtors Pvt. Ltd. i.e., the assessee. However, what is the material found during the course of search of S.K. Jain group cases which had led to form the belief that all those companies are providing accommodation entries is not mentioned in the reasons recorded. It is also not mentioned whether any of the directors of the above companies have provided accommodation entries to M/s SBS Realtors Pvt.Ltd. It is also not mentioned whether any document was found which led to the belief of giving of accommodation entries by those twelve companies to the assessee. On receipt of above information, the Assessing Officer compared the figures in the balance sheet of the assessee filed for assessment year 2009-10 and he found that the share capital has increased by Rs. 2,35,00,000/-. After recording the above factual finding, the Assessing Officer has concluded “The same has escaped assessment on account of failure on the part of the assessee to truly and fully disclose all material facts necessary for assessment for the AY 2009-10. In order to verify the genuineness, identification and creditworthiness of the aforesaid transaction the case needs to be reopened u/s 147 of the I.T. Act 1961.” The conclusion of the Assessing

Officer at the end of the reasons recorded as noted above is contradictory. In the first two lines, the Assessing Officer has recorded the finding that the sum of Rs. 2,35,00,000/- has escaped assessment but in the last two lines, he has recorded that the case is being reopened to verify the genuineness, identification and creditworthiness of the aforesaid transactions. If the case is being reopened for the purpose of verification of the genuineness, how can there by satisfaction of escapement of income. Any satisfaction with regard to escapement of income or otherwise can be recorded only after the verification of genuineness, identification and creditworthiness of the transaction and not earlier. Thus, we are of the opinion that the Assessing Officer has reopened the case under Section 147 for the purpose of verification of genuineness, identification and creditworthiness of the transactions mentioned in the information supplied by the DIT (Investigation) and this is what the Assessing Officer has concluded at the end of the reasons recorded for issue of notice under Section 148. Now, the question remains whether an assessment can be reopened under Section 147 for the purpose of verification of genuineness, identification and creditworthiness of any transaction. In our opinion, the reply is clearly NO.

of the assessee are almost identical to the facts in the case of RMG Polyvinyl (I) Ltd. (supra) and Meenakshi Overseas Pvt. Ltd. (supra). Therefore, they would be squarely applicable to the case of the assessee. Consequently, we hold the notice issued under Section 148 of the Act to be invalid for two reasons:- (i) the notice is issued for the purpose of verification of genuineness, identification and creditworthiness of the transaction, which is not permissible; (ii) the Assessing Officer has recorded his satisfaction on the basis of mere report from the Investigation Wing. There is no crucial link between the information made available to the Assessing Officer and the formation of belief of escapement of income. There is no basis for coming to the conclusion that the assessee received accommodation entries. The Investigation Wing alleged that the companies which issued cheques to the assessee company are companies of Shri S.K.Jain group and they are entry providers. However, the basis for such conclusion is missing. There is no mention that any document was seized from Shri S.K. Jain group or any director of the 12 companies which have given cheques to the assessee has given the statement that they have provided accommodation entries to the assessee. The Assessing Officer has simply reopened the case on the basis of information provided by the Investigation Wing without any independent application of mind. There is no tangible material which formed the basis for the belief that income has escaped assessment.

6.11 On another identical case, the Hon’ble Delhi High Court in the case of Meenakshi overseas case (supra) has held as under:

“18. It must be noted at the outset that by an order dated 4th November, 2016, this Court had directed that “the file by which reasons to believe for the escapement of income was recorded by the AO for the purpose of reassessment shall be produced for consideration by the Court.” The said file has been produced today by Mr. Chaudhary, learned counsel for the Revenue. It is seen that the reasons recorded by the AO for re-opening the assessment has been extracted verbatim by the ITAT in para 2 of the impugned order.

********************* 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.” 6.12 Therefore, in view of the facts of the case, we find that the AO has simply relied on the information from the CIT(Central)/DIT(Inv) to form a conclusion about escapement of income, which itself is flawed and cannot pass the test of 'reason to believe' as laid by the judicial precedents as discussed above. We, therefore, hold that since there was no rationale nexus between the information received by the AO with formation of his belief, the initiation of reassessment proceedings stood vitiated and consequently the order passed also was bad in law. The Revenue’s reliance in the case of Sonia Gandhi (supra) also does not come to its rescue in as much as there is a complete absence of tangible material and live nexus in the impugned reasons whereas the reasons in the case of Sonia Gandhi (supra) were based on nondisclosure of the taxing event, i.e. allotment of shares. Therefore, in view of our observations and the judicial precedents as aforesaid, we set aside the order of the Ld. CIT (A) and quash the re-assessment proceedings. Since, the re- assessment proceedings have been quashed no other grounds survive for adjudication.

7.0 In the final result, the appeal of the assessee stands allowed.

Order pronounced in open court on 27th September, 2019.