M/S. DWARKADHIS BUILDWELL PVT. LTD.,BHIWANI vs. CIT, HISAR

The Assessing Officer completed the re-assessment proceedings u/s. 143 (3)/147 on 13.12.2011 at the returned income without making any addition. While doing so he accepted the plea of the assessee on the basis of various decisions including the decision of Hon’ble Supreme Court in the case of CIT Vs. Lovely Exports (P) Ltd reported in 216 CTR 195 that if the identity of the investors is established, the assessment in the case of the investors can be re-opened as per law but no addition can be made in the hands of the company who has received the share Page | 5 application money. He accordingly dropped the proceedings initiated u/s. 147 of the IT Act, 1961 and accepted the returned income.

The Ld. CIT called for the record and examined the same and noted that assessee, during the course of assessment proceedings, had stated that these investor companies were incorporated under the companies Act and have been maintaining bank accounts and the statements of bank accounts alongwith copies of PAN were furnished as evidence of identity of the investors. The assessee company had argued that it received share application money through banking channel and hence the transactions were claimed to be genuine. The assessee company relied upon the judgment of Hon’ble Supreme Court in the case of Lovely Exports Ltd. (2008) 216 CTR 195 6DTR (SC) 308 in support of its claim. Assessee further stated that if identity of the investor is established, the assessment in the case of investors can be reopened as per law, but no addition can be made in the hands of the company who has received the share application money. 5. According to Ld. CIT the Assessing officer did not make any investigation/ verification with regard to the genuineness of the identity of the investor companies inspite of the fact that the record had sufficient material which necessitated further enquiries. According to the Ld. CIT, the ratio of the decision of Hon’ble Supreme Court was examined subsequently by various courts including, the Hon’ble Delhi High Court in the case of CIT Vs. Nova Promoters & Finlease (P) Ltd reported in 342 ITR 169. Page | 6 Although in normal course, addition can be made only in the hands of the investors, however, in this case, these share holders/ investors are not doing any real business but are being used as a vehicle to launder black money. He, therefore, issued a show cause notice u/s 263 (1) asking the assessee to explain as to why the order passed by the Assessing Officer should not be set aside since the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue.

Rejecting the various explanation given by the assessee and observing that the Assessing Officer failed to conduct further enquiries which were necessary to gather relevant material, the ld. CIT set aside the assessment and directed the AO to make fresh assessment after gathering relevant material by making proper/ necessary enquiries/ investigations. The relevant observation of the CIT at para 12.1 and 12.2 of his order reads as under :- “12.1 In view of discussion made in above paras, I am of the considered opinion that the A.O. ought to have appreciated the evidence gathered by the investigation wing and followed a course to confront these evidences to the assessee, including conducting further enquiries which were necessary to gather relevant material which AO failed to do. There has been non-application of mind on the part of the A.O. in not appreciating the material on record as well as in not following course of further inquiry to gather relevant material. Also, there is failure on part of the A.O. to apply provisions of the law, correctly. Therefore, assessment order passed by the A.O. is held as erroneous and prejudicial to the interest of revenue in respect of aforesaid issues. Had the consequent additions been made, there would have been substantial tax effect and thus the cause of the revenue has suffered. Further, the impugned order of the Assessing Officer is erroneous and prejudicial to the interest of the revenue in respect of aforesaid issues. Had the consequent additions been made, Page | 7 there would have been substantial tax effect and thus the cause of the revenue has suffered. Further, the impugned order of the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue as it is in clear violation of the legal provisions contained in the Income Tax Act, 1961. Thus, the validity / sanctity of the legal provisions of the Act, has been eroded and it may serve as a bad precedent. The revenue loss also arises as the consequent additions could have given rise to the occasion of initiation of penalty proceedings under section 271(1) (c) of the Income Tax Act, 1961, for furnishing of inaccurate particulars of its income and concealment of income in respect of above stated issues.”

Aggrieved with such order of the CIT, the assessee is in appeal before the Tribunal by raising following grounds :- 1. That the order of ACIT, Circle Bhiwani U/s 143(3)/147 dated 13.12.2011 itself is void ab initio, illegal and without jurisdiction being contrary to provisions of law, based on surmises and conjectures. As such action of Ld CIT —Hisar for setting aside order which is void ab initio or non est order by initiating the proceedings U/s 263 is without jurisdiction and liable to be undone.

That the appellant craves right to amend, add, delete or withdraw any of the grounds of appeal either before or at the time of hearing of this appeal.

The Ld. Counsel for the assessee strongly challenged the order of the CIT. Referring para 12.1 of the order of the CIT he submitted that the Ld. CIT is not in doubt that the Assessing Officer has not conducted any enquiry. According to him the Assessing Officer should have made some further enquiries. Referring to the copy of the notice issued us/. 263 (1) dated 29.11.2012, copy of which is placed at page No.117-118 of the paper book, he submitted that it is the allegation of the ld. CIT that the assessee company has beneficially accepted the share application money from the companies controlled by Sh. Tarun Goyal who has admitted to have used these entities for providing accommodation entries. According to the Ld. CIT there are circumstances which necessitated further enquiries regarding the genuineness of these investor companies. According to him, the Assessing Officer should have made further enquiries in this regard which he failed to carry out. 8.1 Referring to page 17 to page 26 of the paper book, he drew the attention of the bench to the copy of the order passed u/s. 143 (3) on 31.12.2008. He submitted that the return was filed u/s. 139 on 11.10.2006 and the notice u/s. 143 (2) was issued on 10.09.2007. A search in the case of Tarun Goyal took place on 15.09.2008. In the original assessment order, the Assessing Officer after thorough discussion has accepted the share premium of Rs.12,43,35,000/- and the share holders capital Rs.1,41,15,000/-. He submitted that there is no dispute about the share capital amount of Rs.6,71,500/- and share premium of Rs.6,74,50,000/- and the dispute is only regarding share application money of Rs.7,10,00,000/-. Referring to various pages of the paper book he submitted that on three occasions the department had accepted the valuation of shares after making thorough enquiry. Even the AO who passed the order u/s. 147 / 143 (3) on 13.12.2011 did not find any mistake in the valuation for which he did not make any addition and accepted the Page | 12 returned income by dropping the proceedings. Referring to the office note of the Assessing Officer he submitted that the Assessing Officer has forwarded the names of the various investor companies who have applied in the shares of the assessee company to the respective Assessing Officers for taking necessary action. 8.2 The Ld. Counsel for the assessee referring to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Limited reported in 189 taxman 436 submitted that the Hon’ble High Court in the said decision has held that if while making assessment, the AO has made inadequate enquiry, that could not, by itself give occasion to the commissioner to pass an order u/s. 263, merely because he has a different opinion in the matter. It is only in cases of “lack of enquiry” that such a course of action would be open. It has been held that when facts clearly showed that AO had undertaken exercise of examining as to whether expenditure incurred by assessee in replacement of dies and tools was to be treated as revenue expenditure or not and on being satisfied with assessee’s explanation, he accepted the same, it could not be said to be a case of lack of enquiry. Accordingly the order of the Tribunal setting aside the order of the CIT passed u/s. 263 was upheld.

The ld. Counsel for the assessee referring to para 8.2.2. of the order of Ld. CIT submitted that the AO has followed the decision of Hon’ble Supreme Court in the case of Lovely Exports (P) Limited (supra). Where as it is the allegation of the Ld. CIT that the Assessing Officer should have followed the decision of Page | 13 Hon’ble Delhi High Court in the case of CIT Vs. Nova Promoters and Finlease Private Limited reported in 342 ITR 0169. He submitted that the assessment order in the instant case u/s. 143(3) / 147 was passed on 13.02.2011 where as the decision of Hon’ble High Court in the case of Nova Promoters (supra) was pronounced on 15.02.2012. Therefore, the Assessing Officer could not have visualized the decision of Hon’ble Delhi High Court in the case of Nova Promoters (supra).

Referring to various other decisions he submitted that as per provisions of section 263 the CIT can call for and examine the record of any proceeding under the Act only on the basis of his being satisfied that the Assessing Officer was erroneous in passing the orders and (2) that the decision of the Assessing Officer was prejudicial to the interest of the revenue. Further, the satisfaction must be one which is objectively justifiable and cannot be the mere ipse dixit of the commissioner.

Referring to the decision of Hon’ble Delhi High Court in the case of Delhi Airport Metro Express (P.) Ltd. 184 TTJ 32 (Del) (Confirmed by Delhi High Court at 99 Taxmann.com 82 (Del) he submitted that where commissioner could not successfully establish through his enquiry that order passed by AO was unsustainable in law and moreover view taken by Assessing Officer was a plausible view, which was supported by various judicial precedents, assessment order passed could not be called to be erroneous though may be prejudicial to interest of revenue 12. Referring to the decision in the case of Dharam Pal [2017] 82 taxman.com 83 (Amritsar – Trib) he submitted that the Tribunal in the said decision has held that where the Assessing Page | 15 Officer has examined a particular issue and has completed the assessment after taking a possible view, the commissioner is not permitted to assume powers u/s. 263 simply because he does not agree with the view taken by the Assessing Officer.

Referring to the decision of Hon’ble Delhi High Court in the case of Director of Income Tax Vs. Jyoti Foundation (2013) 38 Taxmann.com 180 he submitted that the Hon’ble High court in the said decision has held that where revisionary authority opined that further enquiry was required, such enquiry should have been conducted by revisionary authority himself to record finding that assessment order passed by the AO was erroneous and prejudicial to the interest of the revenue.

Referring to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Anil Kumar Sharma reported 194 taxman 504 he submitted that the Hon’ble High Court in the said decision has held where it was discernible from record that Assessing Officer had applied his mind to issue in question, commissioner could not invoke section 263 merely because he has different opinion.

Referring to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Hindustan Marketing and Advertising Company Limited reported in 341 ITR 180 he submitted that the Hon’ble Delhi High Court in the said decision has held that where the ITO had made reasonable detailed enquiries, had collected relevant material and discussed various facts of case with assessee, order of CIT to direct fresh assessment by going deeper into the matter would not form a valid or legal basis to exercise jurisdiction u/s.

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Referring to various other decisions he submitted that when the view taken by the AO was one of the plausible view then the Ld.CIT cannot invoke jurisdiction u/s. 263. He submitted that for invoking the justification under section 263 of the IT Act 1961 the twin conditions namely the order is erroneous and the order is prejudicial to the interest of the revenue must be satisfied. In the instant case although the order may be prejudicial to the interest of the revenue as per the Ld. CIT, however, it cannot be said that the order is erroneous since the AO has taken a plausible view in the light of the decision of Hon’ble Supreme Court in the case of Lovely Exports (P) Ltd. (supra) prevailing at that time. Therefore, the Ld. CIT could not have invoked jurisdiction u/s 263 of the IT Act. He accordingly submitted that the order of the CIT be set aside and the grounds raised by the assessee be allowed.

The Ld. DR on the other hand heavily relied on the order of the Ld. CIT. He submitted that the very basis on which the reopening was made was not addressed by the AO. No deeper enquiry was conducted by the Assessing Officer to tax the bogus share capital and share premium in the hands of the assessee. He submitted that the order passed by the AO of Delhi in the case of the investor companies was very much available with the AO at the time of passing of the Assessment Order but he chose not to consider the same.

Referring to the decision of Hon’ble Supreme Court in the case of Deniel Merchants Private Limited and another Vs. ITO Page | 17 vide order dated 29.11.2017 he submitted that Hon’ble Supreme Court in the said decision has held that if no proper enquiry was conducted by the Assessing Officer while making the assessment and he accepts the explanation of the assessee in so far as receipt of share application money is concerned, the order of the CIT setting aside the order of the Assessing Officer with a direction to carry out a thorough and detailed enquiry is justified. The order of the Hon’ble High Court was accordingly upheld. He accordingly submitted that since the AO in the instant case has not made any proper enquiry while making the assessment and accepted the explanation of the assessee on account of receipt of share application money, therefore, the Ld. CIT is justified in invoking the jurisdiction u/s. 263 of the IT Act. He also relied on the following decisions :-

Malabar Industrial Co. Ltd. Vs. Commissioner of Income Tax 243 ITR 83 (SC) 2. Bharat Overseas Bank Ltd. Vs. Commissioner of Income Tax 152 TTJ 546 (Chennai) 3. Pratap Footwear Vs. ACIT 1 SOT 638 (Jabalpur) 4. Gee Vee Enterprises Vs. Additional Commissioner of Income Tax 99 ITR 375 5. CIT Vs. Nagesh Knitwear order dated 01.06.2012.

The Ld. Counsel for the assessee in his rejoinder submitted that in the case of Deniel Merchants Private Limited (supra) no Page | 18 enquiry was conducted by the AO whereas in the instant case enequiries were conducted twice i.e. once during the original assessment proceedings passed u/s. 143 (3) and subsequently during the reassessment proceedings where order was passed u/s. 143 (3)/ 147. Therefore, it cannot be said that in the instant case no proper enquiry was conducted. He accordingly submitted that the order of Hon’ble Supreme Court in the case of Daniel Merchants (P) Ltd. (supra) is not applicable to the facts of the present case.

We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us by both the sides. We find the original assessment in the instant case was completed by the Assessing Officer u/s. 143 (3) on 31.12.2008 accepting the returned income at Nil. We find the case of the assessee was reopened by issue of notice u/s. 148 after recording reasons and subsequently the Assessing Officer completed the assessment u/s. 143 (3)/147 on 13/12/2011 accepting the returned income and thereby dropping the proceedings initiated u/s.147 of the IT Act. We find the Ld. CIT held the order passed by Assessing Officer u/s 143 (3)/147 as erroneous and prejudicial to the interest of the revenue on the ground that the Assessing Officer simply accepted the case decision relied on by the assessee in the case of Lovely Exports (P) Limited (supra) and the AO had not made any further enquiry regarding such share applicants. Page | 19 According to the Ld. CIT after the decision of Hon’ble Supreme Court various other courts had occasion to consider the said decision and one such decision was decision of Hon’ble Delhi High Court in the case of CIT Vs. Nova Promoters Finlease Private Limited reported in 342 ITR 169. He was also of the opinion that the AO should have appreciated the evidence gathered by the investigation wing where in certain incriminating material were gathered and the Assessing Officer should have conducted further enquiry which were necessary to gather relevant material which the AO failed to do. According to the Ld. CIT there was complete non application of mind on the part of the AO in not appreciating the material available on record as well as in not following course of further enquiry to gather relevant material. Since there was failure on the part of the AO to apply the provision of law correctly, therefore, he held that the order passed by the AO is both erroneous as well as pre-judicial to the interest of the revenue. 20.1 It is the submission of the ld. Counsel for the assessee that the AO had followed the correct proposition of law available at the time of passing of the order. As per decision of Hon’ble Supreme Court in the case of Lovely Exports (P) Ltd. (supra) even if the share holders are bogus, addition cannot be made in the hands of the assesee and addition can be made only in the hands of such bogus share holders if their identity is known to the department. It is the submission of the Ld. Counsel for the assessee that for invoking jurisdiction u/s. 263 the order must be both erroneous as well as prejudicial to the interest of the revenue. The twin Page | 20 conditions must be satisfied and absence of any one cannot empower the CIT to invoke jurisdiction u/s. 263. It is also his submission that the Assessing Officer in the instant case had conducted thorough enquiry twice and it is not the case of no enquiry or lack of enquiry.

We find some force in the above arguments of the Ld. Counsel for the assessee. We find the AO in the order passed u/s. 143(3) /147 has followed the decision of Hon’ble Supreme Court in the case of Lovely exports (P) Limited (supra) in letter and spirit. In the office note, copy of which is available in the paper book, it is seen that the Assessing officer had forwarded information to the concerned AO of the investor companies for taking further necessary action against them. The relevant portion of the office note reads as under :- “Office Note”

Thus when the AO passed the order u/s. 147 / 143 (3), we find he has followed the decision of Hon’ble Supreme Court in the case of Lovely Exports (P) Limited (supra) in letter and Page | 23 spirit. So far as the allegations of the Ld. CIT that subsequent decision had come for which he referred to the decision of Hon’ble Delhi High Court in the case of Nova Promoters Finlease (supra) is concerned we find the Hon’ble Delhi High Court pronounced the said decision on 15.02.2012 whereas the AO in the instant case has passed the order u/s. 143(3)/147 on 13.12.2011. Therefore, we do not find any merit in the allegation of the Ld. CIT of non consideration of the above decision since the same was not available at the time of passing of the assessment order.

The Hon’ble Supreme Court in the case of G. M. Mittal Stainless Steel Private Limited (supra) at para 5 of the order has observed as under :-

So far as the allegation of the Ld. CIT that the AO should have conducted further enquiry which were necessary to gather relevant material which the AO failed to do and there was non application of mind on the part of the AO is concerned, we find in the instant case thorough enquiries were conducted by the AO both at the time of original assessment and at the time of reassessment proceedings. Full details giving the names, addresses, number of shares of nominal value and share premium amount of all the share holders alongwith their bank statements, copy of IT returns, PAN etc. were filed before the AO. Even if the share holders were bogus as per allegation of the revenue in view of the reasons recorded for reopening, however, as per prevailing law at that time in view of decision of Hon’ble Supreme Court in the case of Lovely Exports (P) Limited (surpa) addition could not have been made in the hands of the assessee and addition, if any, could have been made only in the hands of such bogus share holders. Since AO has taken a plausible view, therefore, it cannot be said that the order of the AO is erroneous.

We find the Hon’ble Delhi High Court in the case of PCIT Vs. Delhi Airport Metro Express Private Limited vide order dated 05.09.2017 has held that for the purpose of exercising jurisdiction u./s. 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interest of the revenue has to be preceded by some minimal enquiry. If the PCIT is of the view that the AO did not undertake any enquiry, it becomes incumbent on the PCIT to conduct such enquiry. If the PCIT does not conduct such basic exercise then the CIT is not justified in setting aside the order u/s. 263 of the IT Act.

We find the Hon’ble Delhi High Court in the case of Jyoti Foundation (supra) has held that where revisionary authority opined that further enquiry was required, such enquiry should have been conducted by revisionary authority himself to record finding that assessment order passed by the AO was erroneous and pre judicial to the interest of the revenue. We find Hon’ble Delhi High court in the case of Sunbeam Auto Limited (supra) has held that if the AO, while making an assessment, has made inadequate enquiry that would not by itself give occasion to the CIT to pass order u/s.263 merely because he has different opinion of the matter. Only in the case of “lack of enquiry” that such a course of action would be open. It has further been held in the said decision that where the view taken by AO was one of the possible views, therefore, the assessment order passed by the AO cannot be held to be prejudicial to the interest of the revenue. The Hon’ble Delhi High court in the case of Anil Kumar Sharma (supra) has held that where it was discernible from record that the AO had applied his mind to an issue in question, Commissioner could not invoke section 263 merely because he Page | 26 has different opinion.

So far as the decision relied on by Ld. DR in the case of Deniel Merchants (P) Ltd. (supra) is concerned, the Ld. DR could not controvert the submission of the Ld. Counsel for the assessee that no enquiry was conducted in the said case whereas in the case of the assessee enquiries were conducted twice i.e. during the original assessment proceedings and secondly during the reassessment proceedings. Therefore, the decision relied on by Ld. DR is not applicable to the facts of the present case. We find from a perusal of the paper book that the assessee during the course of original assessment proceedings as well as during reassessment proceedings had filed the requisite details as called for by the AO and the Assessing Officer after considering the same and following the decision of Hon’ble Supreme Court in the case of Lovely Export (supra) which was prevailing at the time of passing of the order completed the assessment and he has informed the AO of the investor companies to pass appropriate order. Therefore, in view of our discussion in the preceding paragraphs the order of the AO in the instant case cannot be held as erroneous. Since for invoking jurisdiction u/s. 263 the twin conditions i.e. order must be erroneous and the order must be prejudicial to the interest of revenue must be fulfilled and since, we have held that the order is not erroneous, therefore, the twin conditions are not satisfied. Therefore, the Ld. CIT in our opinion could not have invoked jurisdiction u/s. 263 of the IT Act. We, therefore, Page | 27 set aside the order of the CIT passed u/s. 263 of the IT Act and the grounds raised by the assessee are allowed.

In the result, the appeal filed by the assessee is allowed.