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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy, AM & Shri A. T. Varkey, JM]
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 आयकर अपील�य अधीकरण, �यायपीठ –“B” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA [Before Shri J. Sudhakar Reddy, AM and Shri A. T. Varkey, JM] I.T.A. No. 2399/Kol/2019 Assessment Year: 2011-12
PKC Securities Vs. ITO, Ward-35(1), Kolkata (PAN: AALFP 2666 C) Appellant Respondent
Date of Hearing (Virtual) 28.01.2021 Date of Pronouncement 10.02.2021 For the Appellant Shri Miraj D Shah, A.R For the Respondent Smt. Ranu Biswas, Addl. CIT
ORDER Per Shri A. T. Varkey, JM: This appeal preferred by the assessee is against the order of Ld. CIT(A)-10, Kolkata dated 20.09.2019 for Assessment year 2011-12.
The assessee has challenged the legal issue of jurisdiction of AO to reopen the assessment by raising various grounds inter-alia ground no. 9 to 15 which are reproduced as under: 9. For that the facts and circumstances of the case the notice u/s 148 of the IT Act, 1961 was without jurisdiction and bad in law and hence the entire assessment order is bad in law and the same should be quashed.
For that the reopening of assessment u/s 148 of the IT Act 1961 was bad in law arid hence the reopening be declared to be bad in law and the reassessment order be quashed.
For that the reasons recorded before reopening of assessment u/s 148 of the IT Act 1961 did not meet the test of law laid down by various courts and hence the reopening be declared to be bad in law and the reassessment order be quashed.
For that the reopening of assessment u/s 148 of the IT Act 1961 was on borrowed satisfaction and not on any independent application of mind by the
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 assessing officer and hence the reopening be declared to be bad in law and the reassessment order be quashed.
For that the reopening of assessment u/s 148 of the IT Act 1961 was without any relevant material having link to escapement of income and hence the reopening be declared to be bad in law and the reassessment order be quashed.
For that the sanction u/s 151 of the IT Act 1961 before the reopening of assessment u/s 148 of the IT Act 1961 was mechanical and without application of proper mind and the sanction was bad in law and hence the reopening be held to be bad in law.
For that the facts and circumstances of the case the notice u/s 143(2) of the IT Act 1961 was without jurisdiction and bad in law and hence the entire assessment order is bad in law and the same should be quashed.
For adjudicating the legal issue of jurisdiction of AO to reopen the assessment we need to examine the reasons recorded by AO before initiating reopening of assessment, which is reproduced as it is as under:
“Information was received from FMC regarding evasion of Tax by misuse of National Multi Commodity Exchange (NMCE) platform. The process involved use of Blank Client Codes. Creation of artificial members and rampant use of wash trades to inflate the trade volume on NMCE. From the said report it was evident that bogus clients existed on the NMCE platform and subsequently those bogus clients were used to aritificially increase the volume as well as clients, who used to book contrived loses / profis through pre meditated synchronized trades. Further analysis of the trade pattern revealed that those contrived loses were used to set off other genuine profits booked on other well regulated exchanges thereby evading taxes and causing loss to the exchequer. 3. Based on the Forward Market Commisison (FMC) report that “clients / members of NMCE were found to be involved in creating artificial volume and suspected evasion of Income Tax by misuse of NMCE platform a focused survey action u/s 133A of the Act was conducted by Pr. Director of Income Tax (Investigation) , Ahmedabad at the premise of NMCE and backup of the NMCE trade was taken. Aftter analysis of this data, 85 entites was identified was identified who had booked contrived losses in excess of Rs. 10 crores and information was shared with concerned Director General of Income Tax (Inv). In this ocntext, the list of 50 clients was forwarded to the DGIT (Inv), Kolkata jurisdiction to verify whether the contrived losses booked on NMCE were used to set off any income / profit available in the bookes. 4. On the basis of the above information, investigation were carried out by DDIT (INV) unit-3(1), Kolkata on these 50 dummy entities and during investigation it has been noticed that assessee as mentioned above, is one of the real beneficiaries to whom bogus loss and profit were facilitated by these dummy entities, the Data pertianing to the above mentioned assessee is as mentioned below:
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12
Name Broker FY Total Buy Total Sell Difference P/L. Counter Booked party broker PKC PKC 2010- 39,81,680 40,82,320 1,00,640 Profit Siddheswari Securities Commodities 11 Projects 1,67,60,100 1,72,62,600 5,02,500 Profit Ltd. Pvt. Ltd.
Total 6,03,140
It is therefore apparent that the assessee has booked profit of Rs. 6,03,140/- through bogus entities.
However, as discussed above the said transaction is not verifiable from the return of income furnished by the assessee. The AO also had no such information before receiving the said report along with the data as mentioned above .
Considering the facts and circumstances of the case, I have reason to believe the income of Rs. 6,03,140/- have escaped income needs to be assessed followed by recovery of tax arrears.
In this case return of income was filed for the year under ocnsideration but no assessment as stipulated u/s 2(40) of the Act was made and the return of income was only processed u/s 143(1) of the Act. In view of the above, provision of clause (b) of explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.
In this case more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s 148 is required to be obtained separately from Pr. CIT as per the provisions of Section 151 of the Act.
When the legal issue of jurisdiction of AO to re-open the assessment is challenged, first of all let us look at section 147 of the Income Tax Act 1961 (hereinafter referred to as the Act), which was applicable for the relevant AY 2011- 12 reads as under ;- Section 147 - Income escaping assessment.— If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year):
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
Explanation 1.—Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:—
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income- tax; (b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
Explanation 3.—For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.
From a plain reading of Section 147 of the Act it can be seen that the basic requirement of reassessment u/s 147 of the Act is that the AO of the assessee must have “reason to believe” that any income chargeable to tax has escaped assessment. The Hon’ble Supreme Court in ITO vs. Lakhmani Mewal Das [1976] 103 ITR 437 held that such belief must be the belief of the jurisdictional AO and made the following observations:
“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 ……..; It is not that any or every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee. “
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 6. The importance of “reasons” and “recording of reasons” u/s 147 of the Act was discussed in the case of Hindustan Lever Ltd. by the Hon’ble Bombay High Court reported in (267 ITR 332) [2004] 137 Taxman 479 (Bom) as follows: “It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the assessing officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the assessing officer to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the assessing officer. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide link between conclusion and evidence. The reasons recorded must be based on evidence. The assessing officer, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the assessing officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.” 7. The importance and relevancy of the material to the information was discussed in the case of CIT vs. SFIL Stock Broking Ltd. by Hon’ble Delhi High Court reported in (2010) 325 ITR 285 (Delhi), wherein it was held that mere information is not a material and that even existence of material would not be sufficient to invoke reopening proceedings u/s 147 of the Act : “After having heard the counsel for the parties, we are inclined to agree with the submissions made by the respondent / assessee. We find that the Supreme Court in Rajesh Jhaveri (supra) made it absolutely clear that before an Assessing Officer issues a notice under Section 148, thereby re- opening the assessment under Section 147 of the said Act, he must have formed a belief that income had escaped assessment and that there must be some basis for forming such a belief. The Supreme Court made it clear that the basis of such belief could be discerned from the material on record which was available with the Assessing Officer. However, the Supreme Court in Rajesh Jhaveri (supra) did not say that it was not necessary for the Assessing Officer to form a ‘’belief‟ and that the mere fact that there was some material on record was sufficient.”
The Hon’ble Apex Court in case of Union of India vs. Mohan Lal Kapoor reported in (1973) 2 SCC 836 defined the meaning of ‘reasons’: “Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind was applied to the subject matter for a 5 | P a g e
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 decision whether it was purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way could opinions or decisions recorded be shown to be manifestly just and reasonable.”
Apart from the above it has been settled by the judicial precedence that the AO must possess the materials on the basis of which the Investigation Wing of the Department had passed on the information to the AO about escapement of income. Recently in the case of Sabh Infrastructure Ltd. the Hon’ble Delhi High Court [W.P.(C) 1357/2016, dated 25.09.2017] had even held that AO is bound to supply the “materials” (not only the “reasons”) and in the event of failure to do so will make the reassessment proceedings invalid by observing as under: “19. (i) while communicating the reasons for reopening the assessment, the copy of the standard form used by the AO for obtaining the approval of the Superior Officer should itself be provided to the Assessee. This would contain the comment or endorsement of the Superior Officer with his name, designation and date. In other words, merely stating the reasons in a letter addressed by the AO to the Assessee is to be avoided; (ii) the reasons to believe ought to spell out all the reasons and grounds available with the AO for re-opening the assessment - especially in those cases where the first proviso to Section 147 is attracted. The reasons to believe ought to also paraphrase any investigation report which may form the basis of the reasons and any enquiry conducted by the AO on the same and if so, the conclusions thereof; (iii) where the reasons make a reference to another document, whether as a letter or report, such document and/ or relevant portions of such report should be enclosed along with the reasons; (iv) the exercise of considering the Assessee’s objections to the reopening of assessment is not a mechanical ritual. It is a quasi judicial function. The order disposing of the objections should deal with each objection and give proper reasons for the conclusion. No attempt should be made to add to the reasons for reopening of the assessment beyond what has already been disclosed.”
In the light of the aforesaid judicial precedents in respect of re-opening u/s 147 of the Act we have to analyse the reasons recorded by the AO to see whether the condition precedent to re-open u/s 147 of the Act has been complied or not. As noted (supra) it is settled position of law that reasons, as recorded for reopening the reassessment, are to be examined on a standalone basis. Nothing can be added to the reasons so recorded, nor can anything be deleted from the reasons so recorded. Hon’ble Bombay High Court in the case of Hindustan Lever (surpa) has inter-alia, observed that “………….. it is needless to mention that the reasons are required to
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 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 further added that “The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion & the evidence………” Therefore, reasons are to be examined only on the basis of the reasons as recorded by the AO before re-opening the assessment.
Further it should be borne in mind that the AO should have “reason to believe, escapement of income”. ‘Reason to believe’ postulates, a foundation based on information and a belief based on reason. It has to be borne in mind that even if there is a foundation based on information exists, still there must be some reasons which should warrant holding a belief that income chargeable to tax has escaped assessment.
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 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 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 assesses income has escaped. 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 assessment and the factors which indicates a legitimate suspicion ‘about income escaping the assessment’. The former category consists of the facts which, if 7 | P a g e
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 established to be correct, will have a cause & effect relationship with the income escaping assessment. The latter 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 relationship taken note by AO while recording reason about the escapement of income. While dealing with this matter it is useful to bear in mind the following observation of Hon’ble Supreme Court in ITO vs. Lakhmani Mewal Das (supra) 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 distant, remote and far-fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee.”
And also it has to be kept in mind that information adverse may trigger “reason to suspect”, then AO to make reasonable enquiry and collect material which would make him believe that there is in fact an escapement of income.
Keeping the afore-said principles in mind in order to examine the legal issue of jurisdiction of AO to re-open the assessment, let us analyse the 1st para of reasons recorded by AO which is reproduced “Information was received from FMC regarding evasion of Tax by misuse of National Multi Commodity Exchange (NMCE) platform. The process involved use of Blank Client Codes. Creation of artificial members and rampant use of wash trades to inflate the trade volume on NMCE. From the said report it was evident that bogus clients existed on the NMCE platform and subsequently those bogus clients were used to aritificially increase the volume as well as clients, who used to book contrived loses / profis through pre meditated synchronized trades. Further analysis of the trade pattern revealed that those contrived loses were used to set off other genuine profits booked on other well regulated exchanges thereby evading taxes and causing loss to the exchequer. A perusal of 1st paragraph(supra) it is discerned that the
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 1st & 2nd line contains receipt of information from Forward Market Commission (FMC) for misuse of client code. And creation of artificial members to inflate the trade volume on NMCE. According to AO from the report it was evident that bogus clients existed on the NMCE and used to contrive loss/profit through synchronized trade. However, these are general observations/modus-operandi by some unknown persons/entities. Nothing is said about the assessee’s action/omission in the said activity. It can be seen that the AO did not specify about abnormality of the trade pattern in respect of assessee or how the loss or profit was shifted. The reason did not allege anything about client code modification by assessee. So no specific facts/information is found in the first paragraph of the reason for reopening the assessee’s case and it can be discerned that it only states the general/vague allegations/wrong doings of certain person and not about the assessee.
Next let us analyse the 3rd para of reasons recorded (it should have been 2nd, 15. but as stated in reasons recorded) which is reproduced : “Based on the Forward Market Commisison (FMC) report that “clients / members of NMCE were found to be involved in creating artificial volume and suspected evasion of Income Tax by misuse of NMCE platform a focused survey action u/s 133A of the Act was conducted by Pr. Director of Income Tax (Investigation) , Ahmedabad at the premise of NMCE and backup of the NMCE trade was taken. Aftter analysis of this data, 85 entites was identified was identified who had booked contrived losses in excess of Rs. 10 crores and information was shared with concerned Director General of Income Tax (Inv). In this context, the list of 50 clients was forwarded to the DGIT (Inv), Kolkata jurisdiction to verify whether the contrived losses booked on NMCE were used to set off any income / profit available in the books.” From a reading of 3rd para it is discerned that this paragraph talks about carrying out of survey proceedings u/s 133A of the Act, by the Pr. DIT (Inv), Ahmedabad at NMCE where 85 entries were identified which all booked/contrived losses in excess of Rs. 10 crores of which 50 cases were forwarded to DGIT(Inv) Kolkata for verification. Thus, it is noted that this para contained a general statement of certain official action under taken by the department with some statistical figure which does not spell out any wrong doing on the part of the assessee. Other than mere information/allegation of misuse of NMCE by same unscrupulous elements, nothing against the assessee is discernible from this paragraph.
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12
Next let us analyse the 4th Para of reasons recorded which is reproduced: On 16. the basis of the above information, investigation were carried out by DDIT (INV) unit-3(1), Kolkata on these 50 dummy entities and during investigation it has been noticed that assessee as mentioned above, is one of the real beneficiaries to whom bogus loss and profit were facilitated by these dummy entities, the Data pertianing to the above mentioned assessee is as mentioned below: Name Broker FY Total Buy Total Sell Difference P/L. Counter Booked party broker PKC PKC 2010- 39,81,680 40,82,320 1,00,640 Profit Siddheswari Securities Commodities 11 1,67,60,100 1,72,62,600 5,02,500 Profit Projects Ltd. Pvt. Ltd. Total 6,03,140
It is therefore apparent that the assessee has booked profit of Rs. 6,03,140/- through bogus entities.
From a reading of 4th Para(supra) it is discerned that investigation was made 17. by the Investigation Wing of the Department at Kolkata from which it is noticed that the assessee is one of the beneficiaries of bogus profit / loss and booked a profit of Rs. 6,03,140/-. From a perusal of this statement of AO it can be discerned that AO has concluded that assessee is the real beneficiary to whom bogus loss /profit were facilitated. How or what was basis for the AO to have arrived at such a conclusion is not revealed by him. After stating that investigation wings investigation revealed that assessee is one of the beneficiary has been taken the same as gospel truth and AO has formed his belief of escapement of income of assessee, which action of AO cannot be countenanced for the following reasons: i) The belief of AO is based on the investigation wings observation and not his own, which is sine-qua-non for usurpation of jurisdiction to re-open as held by the Hon’ble Supreme Court in Lakhmani Mewal Das (Supra) The information given by the investigation wing at best can trigger “reason to ii) suspect” and not ‘reason to belief’ which is the requirement of law for re-opening u/s 147 of the Act. In such a case i.e. reason to suspect, then AO is bound to conduct preliminary inquiry and collected some material which would make him believe that there is in fact an escapement of income. Unfortunately from a reading of the reason’s recorded (supra) does not reveal as to what investigation he under took 10 | P a g e
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 when he got the information from the investigation wing. viz what inquiry was conducted, on whom such inquiry was conducted, what were the evidences or material or admission found in such inquiries and how that material was linked with the case of the assessee. In absence of all such facts being mentioned in the reasons, the reasons-recorded by the AO do not provide any link between the information from DDIT(Inv) and reason warrant holding escapement of income chargeable to tax. Since this link is missing, the reasons recorded does not satisfy the jurisdictional condition precedent in terms of section 147 of the Act. Thus, it is discernible that in this case the AO has simply noted the contents of the letter from DDIT(Inv) which is general & vague and the contents has been taken as gospel truth to conclude that he (AO) has reason to believe escapement of income. As noted earlier this action of AO is based on the borrowed satisfaction of DDIT(Inv) and at best the information supplied to AO could have triggered “Reason to suspect” and not the reason to believe. So recording of reasons by the AO before re-opening the assessment is bad for non-application of mind to the information he received; and the AO failed to independently arrive at a belief that there is escapement of income. It is trite law that the reason to believe has to be that of the Assessing Officer and no one else. As noted this information can at best be termed as reason to suspect and not reason to believe. So preliminary enquiry should have been conducted by the AO. Moreover it has been brought to our notice that no report of the investigation wing which was the basis for re-opening were furnished to the assessee which omission also vitiates the action of re-opening as held the Hon’ble Delhi High Court in Sabh Infrastructure Ltd. (supra). However, the assertion by the AO “it is therefore apparent that assessee has booked profit of Rs. 6.03.140/- through bogus entities” shows that he did not make any enquiry from the broker or buyer / counter party etc. or even not spelled out which was the bogus entity and how it was classified so before issuing the notice u/s 148 of the Act. So, it is discerned that while recording the reason, the AO after referring the reports of FMC and Investigation Wing of the Department had mechanically issued notice u/s 148 of the Act and proposed re-opening when the satisfaction is not formed by himself (AO) but on the borrowed satisfaction of DDIT(Inv), which action of AO is legally un-sustainable as held by Hon’ble Patna 11 | P a g e
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 High Court in the case of Sheo Narain Jaiswal vs. ITO [1989] 176 ITR 352, wherein their Lordship taking note of section 147 of the Act which clearly stipulates that reason to believe escapement of income should be that of the AO. The opening words of section 147 of the Act reads: “If the assessing officer has reasons to believe that any income chargeable to tax has escaped assessment…………”. Taking note of this requirement of law, the Hon’ble High Court held that: “where the Assessing Officer does not himself exercise his jurisdiction under section 147, but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non-satisfaction of the condition precedent.”
In this context, it should be appreciated that Sec. 116 of the Act defines the Income Tax Authorities which can be seen to be as different and distinct authorities. It is trite law that such different and distinct authorities have to exercise their powers given to them in the specified circumstances as stipulated by law or they can’t. It has been observed by the Apex Court that if power is conferred on a particular authority are arrogated by other authority without mandate of law, it will create chaos in the administration of law and hierarchy of administration will mean nothing. Satisfaction of one authority cannot be substituted by the satisfaction of the other authority. It is trite that when a statute requires a thing to be done in a certain manner, it shall be done in that manner alone and the court would not expect it being done in some other manner. [Refer State of Bihar vs . J.A.C. Saldanha & Ors. Reported in 1980 AIR 326(SC)]. Satisfaction recorded should be ‘independent’ and not borrowed or dictated satisfaction. (1995) 5 SCC 302 it has been held that if a statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion. If discretion is exercised under the direction or compliance with some higher authorities instruction, then it will be a cases of failure to exercise discretion altogether.
For completeness let us have a look at para 7 of the recorded reason, wherein it was stated: “In this case return of income was filed for the year under consideration but no assessment as stipulated u/s 2(40) of the Act was made and the 12 | P a g e
ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 return of income was only processed u/s 143(1) of the Act. In view of the above, provision of clause (b) of explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment.” Since the AO had referred to the provisions of clause (b) of Explanation under Section 147 of the Act, let us examine the applicability thereof in the given set of facts. The Explanation (b) reads as under: “Explanation 2. For the purpose of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely: (a) …………………………… (b) Where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;”
From a plain reading of clause (b) of Explanation-2 u/s 147 of the Act which is noted to be a deeming provision and which states that where no assessment was made and the AO noticed that the assessee has understated the income or has claimed excessive loss, deduction allowance or relief in the return, then it can be deemed that in such cases income chargeable to tax has escaped assessment. It is trite law that deeming provision should be construed strictly. This deeming provision will apply where (i) the assessee had furnished the return (ii) But no assessment has been made by AO (iii) AO notices that assessee has understated the income or (iv) has claimed excessive loss, deduction, allowance or relief in the return. In such cases only AO can apply this deeming provision to assume that income has escaped assessment. In the present case, the assessee had earned profit from the disputed F & O trading in the commodity segment and offered the same to tax as can be seen from the working (copy of audited accounts enclosed at page (21-24) which was furnished before the AO during assessment and the AO did not raise any dispute in respect of the same:
Details of Income Particulars Rs. 1 Profit: F & O trading PKC Commodities Ltd. 23,89,890 (NMEC)
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 AN Commodity Broking(P) Ltd. 20,01,112 Rajeshwari Commodity Sales (P) (-) 1,85,568 Ltd. SMC Securities Ltd. 4,835 2 Profit: F & O trading (NSE) (-) 38,60,816 Sub-Total 3,49,453 3 Profit: F & O trading 2,85,941 (Premium) 4 Brokerage 5,83,352 5 Trading in shares 14,02,662 6 Dividend received 4,500 7 Interest on FD 3,47,339 8 Gross Revenue 29,73,249
Moreover it has been brought to our notice that there is factual errors in the reasons recorded by the AO (supra). According to Ld. A.R in the reasons recorded it is stated that the assessee had made profit in NMCE through one broker i.e. M/s PKC Commodities Ltd for a sum of Rs. 6,03,140. This is not factually correct. Firstly, from M/s PKC Commodities, the assessee earned Rs. 23,89,890. Secondly, the assessee had used service form other two brokers in NMCE trading: it made commodity profit of Rs. 20,01,112 through broker M/s AN Commodity Broking (P) Ltd & also a loss of Rs. 1,85,568 through broker M/s Rajeshwari Commodity Sales (P) Ltd. It was brought to our notice that while objecting to the proposed reopening, the AR made a written submission on 26/06/2018 stating the following fact: “You have stated that we have only earned a profit of Rs. 6,03,140/- by trading through PKC Commodities Ltd. on NMCE platform whereas our records show that we received a net profit of Rs. 23,89,890.34 through them after paying for the brokerage and charges debited by them as per details given hereunder:
Total Credit on Less Brokerage Less service Net Profit NMCE by broker Tax and others received 24,00,355.01 9,487.44 977.23 23,89,890.34
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 It has again been mentioned that the profit and loss has been obtained from dummy entities as mentioned by you but the fact remains that we have done trading in the NMCE exchange and not have done any transaction with any of the dummy parties mentioned by you as we have done transaction through a registered broker of the exchange. All payments have received from the broker against proper contract note as per details mentioned on the contract note.”
Thus we note that the “reason” for reopening contained factual errors, as afore-stated which fact could not be controverted by the AO while objecting to the re-opening. When these factual inaccuracies were pointed out the Ld. D.R also could not controvert the same. Thus, it is apparent that the ‘reason recorded’ is not based on correct information from DDIT(Inv) which were riddled with factual inaccuracies and thus cannot be the material on which the AO could have acted upon unless he had made some enquiries to form the requisite jurisdictional belief of escapement of income. This shows lack of application of mind. In this case the AO on the strength of unverified information as afore-stated has issued notice u/s 148 of the Act without satisfying the jurisdictional condition precedent as required u/s 147 of the Act. Thus, the “reason” failed to meet the test of law and so the notice issued u/s 148 of the Act is without jurisdiction and so consequently all proceedings undertaken thereafter are null in the eyes of law.
Since the assessee succeeds on the legal issue, the merits of the addition made by the AO has become academic and therefore not dealt with.
In the result, the appeal of the assessee is allowed.
Order is pronounced in the open court on 10th February, 2021.
Sd/- Sd/- (J.S. Reddy) (A. T. Varkey) Accountant Member Judicial Member
Dated: 10.02.2021
SB, Sr. PS
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ITA No.2399/Kol/2019 PKC Securities A.Y. 2011-12 Copy of the order forwarded to: 1. Appellant- PKC Securities, Turner Morison Building, 6, Lyons Range, 4th Floor, Unit No.7, Kolkata-700001
Respondent – ITO, Ward-35(1), Kolkata 3. The CIT(A)- 10, Kolkata (sent through e-mail) 4. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail)