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Income Tax Appellate Tribunal, DELHI BENCH “D”, NEW DELHI
Before: SH. G.D. AGRAWAL & SH. SUDHANSHU SRIVASTAVA
order dated 23.11.2011 passed by the Ld. CIT (Appeals) – VII, New Delhi for assessment year 2003-04 wherein the Ld. CIT (A) has deleted an addition of Rs. 1,62,80,585/- made by the Assessing Officer u/s 68 of the Income Tax Act, 1961 (herein after referred to as the ‘Act’). is the assessee’s appeal for the same year and challenges the action of the Ld. CIT (A) in holding that the re-assessment proceedings initiated for the year u/s 147/148 of the Act were valid.
The brief facts of the case are that the original assessment in the case of the assessee for assessment year 2003-04 was completed u/s 143(3) of the Act vide order dated 29.03.2006 at a total loss of Rs. 1,29,550/-as against the declared returned loss of Rs. 1,53,053/-. Subsequently, information was received from the Investigation Wing of the Income Tax Department that the assessee company had allegedly received accommodation entries. The AO recorded reason to believe that assessee’s income to the tune of Rs. 82,90,360/- chargeable to tax had escaped assessment due to the 252/Del/2012 (JRD Stock Brokers (P) Ltd.) failure on the part of the assessee to disclose fully and truly all the material facts necessary for the assessment. The notice of re- assessment u/s 148 was issued on 30.03.2010. During the course of re-assessment proceedings, the assessee was asked to explain the nature and sources of credit entries in the assessee’s bank account with State Bank of Patiala (A/c. No. 50086), Dariya Ganj, New Delhi.
As per the AO, the assessee was not able to fully explain the nature and sources of the credit entries along with supporting evidences.
The AO added the amount of credit entries at Rs. 1,62,80,585/- to the income of the assessee as unexplained credit u/s 68 of the Act and completed the assessment at Rs. 1,61,51,035/-.
2.1 Aggrieved, the assessee carried the matter to the Ld. First Appellate Authority and challenged the initiation of re-assessment proceedings. The assessee also challenged the addition on merits.
The Ld. CIT (A) dismissed the assessee’s legal challenge by holding that the re-assessment proceedings were valid. However, the Ld. CIT (A) give partial relief to the assessee on merits by following his predecessor’s order for assessment year 2002-03 and restricted the addition to only Rs. 12,21,044/- being 7.5% of Rs. 1,62,80,585/-
252/Del/2012 (JRD Stock Brokers (P) Ltd.) being the rate of commission on the impugned amount of Rs.
1,62,80,585/-.
2.2 Now the department is in appeal before the ITAT and its challenging the action of Ld. CIT (A) in restricting the addition to Rs. 12,21,044/- whereas the assessee is in appeal challenging the sustenance of addition to the extent of Rs. 12,21,044/- on merits and is also challenging the upholding of validity of re-assessment proceedings. The respective grounds raised by both the parties are as under:
ITA 252/Del/2012 (Department’s Appeal):
“1. The order of the learned CIT (Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting addition amounting to Rs. 1,62,80,585/- despite the fact that the assessee was not able to explain the nature and source of cash deposits aggregating to the above amount in its bank account.
3. The CIT(A) erred in not appreciating the fact that the assessee did not disclose its bank account maintained with State Bank of Patiala in its balance sheet and had not disclosed the same even during the course of assessment proceedings.
252/Del/2012 (JRD Stock Brokers (P) Ltd.) 4. The CIT (A) without any cogent reason deleted the addition on account of the above and instead held that the assessee held that the assessee had commission/brokerage of 7.5% of the total cash deposit appearing in it undisclosed bank statement.”
ITA 1002/Del/2012 (Assessee’s Appeal): l(i). That on the facts and circumstances of the case, the CIT(A) was not justified in confirming the action u/s. 147 even though the Assessing Officer has no jurisdiction in accordance with relevant provisions. That the finding and observation of the Assessing Officer that (ii) the proviso to sec. 147 is not applicable is without appreciation of facts as there is no omission or failure on the part of the assessee in disclosing relevant particulars of income supported by audited accounts and as such action of the Assessing Officer is not in confirmity with proviso to sec. 147 and whole basis of reassessment is illegal, invalid and without jurisdiction. That there has been no proper and valid service of notice as (iii) required under the law and initiation of proceedings being barred by limitation, Assessing Officer has not legal basis to assume jurisdiction. 2(i) That on the facts and circumstances of the case, the CIT(A) is not justified in confirming 252/Del/2012 (JRD Stock Brokers (P) Ltd.) action of the Assessing Officer u/s. 69A/68 of the Income Tax Act, 1961 and in confirming addition to the extent of Rs. 12,21,044/- being on account of commission @ 7.5% in respect of entries in the bank account of the assessee to the extent of Rs. 1,62,80,585/-. That there is no factual or legal basis for any addition and same (ii) is not sustainable under the law. That there is no factual or legal basis for considering credit (iii) entries in the bank account at Rs. 1,62,80,585/-. That in the alternative, estimation of commission @ 7.5% is (iv) highly arbitrary and excessive.
3. That on the facts and circumstances of the case, orders of the lower authorities regarding charge of interest u/s. 234B are without any legal basis as this is a case of re-assessment u/s. 147.”
At the outset, the Ld. Authorised Representative appearing on behalf of the assessee submitted that assessee’s appeal should be heard first as it challenges the very validity of the re-assessment proceedings initiated by the Assessing Officer and further that if the legal ground being raised by the assessee is allowed in assessee’s favour then the arguments on merits of the addition will not be required.
252/Del/2012 (JRD Stock Brokers (P) Ltd.) 4. The Ld. Sr. Departmental Representative had no objection to this request of the Ld. Authorised Representative.
5. The Ld. Authorised Representative, arguing on the validity of the re-assessment proceedings, drew our attention to the copy of reasons recorded and placed at page 3 of the paper book. The Ld. Authorised Representative submitted that a perusal of the reasons would show that there is no discussion by the AO as to whether he has examined the original return and other material on record while he was issuing notice u/s 148 of the Act. The Ld. Authorised Representative highlighted the fact that the AO has only relied on the information received by the Investigation Wing of the department and further that the AO had failed to specify in the reasons recorded as to what material facts were not declared by the assessee which led to income escaping assessment. The Ld. Authorised Representative emphasized that the reasons were recorded without application of mind and without bringing on record or examining any adverse material. It was submitted that information received from the investigation wing was simply relied upon and completed assessment of the assessee was re-opened which was illegal and not tenable in law. The Ld. Authorised
252/Del/2012 (JRD Stock Brokers (P) Ltd.) Representative also submitted that the case of the assessee was re- opened after four years from the end of the relevant assessment year and, therefore, it was incumbent on the part of the AO to demonstrate that any income chargeable to tax had escaped assessment by reason of failure on part of the assessee. It was submitted that during the course of original assessment proceedings, which culminated in the assessment order being passed u/s 143(3) of the Act, the AO had examined the books of accounts of the assessee along with supporting vouchers. The Ld. Authorised Representative also submitted that the impugned bank account of State Bank of Patiala was closed on 24.08.2002 i.e. before the close of assessment year on 31.03.2003 and, therefore, its closing balance did not appear in the balance sheet. The Ld. Authorised Representative re-emphasized that there was no failure on the part of the assessee to disclose any material fact during the course of original assessment proceedings. The Ld. Authorised Representative also placed reliance on a number of judicial precedents to support the assessee’s case that the assumption of jurisdiction for re-assessment after four years was not legally sustainable.
252/Del/2012 (JRD Stock Brokers (P) Ltd.) 6. In response, the Ld. Sr. Departmental Representative placed reliance on the findings of concurrent findings of the AO and the Ld. CIT (A) and vehemently argued that this was a fit case for initiation of re-assessment proceedings as there were huge deposits in the assessee’s impugned bank account with State Bank of Patiala which the assessee had failed to substantiate and fully explain even during the course of re-assessment proceedings. The Ld. Sr. DR further submitted that it was very much evident that there was a lapse on the part of the assessee to fully disclose all the material facts in respect of the impugned bank account and, therefore, the AO had adequate reason to initiate the re-assessment proceedings.
The Ld. Sr. DR submitted that the assessee’s challenge to the validity of re-assessment proceedings deserved to be dismissed and further submitted that the assessee should advance its arguments on the merits of the addition.
We have heard the rival submissions and have also perused the material on record. The reasons recorded by the Assessing Officer on 18.03.2010 for the assessment year under consideration are being reproduced herein under for a ready reference:-
252/Del/2012 (JRD Stock Brokers (P) Ltd.) “REASONS RECORDED IN WRITING FOR REOPENING THE CASE U/S.148 M/s. JRD Stock Brokers Pvt. Ltd. 4852/24,1st Floor, Ansari Road, Darya Ganj, N. Delhi A.Y. 2003-04 Information has been received from the Investigation Wing of Income-tax Department, New Delhi regarding beneficiaries and operators of accommodation entries in Delhi. In the said information, it has been inter alia reported as under:- “Entries are broadly taken for two purposes 1. To plough back unaccounted black money for the purpose of business or for personal needs such as purchase of assets etc. in the form of gifts, share application money, loans etc.
2. To inflate expenses in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes. The specific information provided by the Investigation Wing of Income-tax Department, New Delhi is enclosed as per Annexure. In view of the specific information received as above from Investigation Wing of Income-Tax Department, New Delhi, I have sufficient reason to believe that the assessee Company M/s. JRD Stock Brokers Pvt. Ltd. has indulged in The activity of accommodation entries and the total amount of transaction by the assessee company amounting to Rs.82,90,360/- which is bogus
252/Del/2012 (JRD Stock Brokers (P) Ltd.) and represents the undisclosed income/income from other sources of the assessee company, which has not been offered to tax by the assessee in the return filed. Accordingly, I have reason to believe that on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. Therefore, the income of Rs.82,90,360/- chargeable to tax has escaped assessment for the assessment year 2003-04.”
7.1 Along with the reasons there is also one Annexure running in 5 pages in which the name of the assessee appears at pages 3 and
However, apart from the AO making a reference to the information received by the department from the Investigation Wing, there is no mention by the AO, as to how he has arrived at a conclusion that he had reason to believe that income has escaped assessment in the case of the assessee. After perusing the reasons recorded, we find that a mere reference is made to the information received from the investigation wing. The AO has mechanically issued notice u/s 148 of the Income Tax Act 1961 on the basis of information received by him from the investigation wing of the Income Tax Department. Therefore, we are of the considered view that the AO has not applied his mind so as to reach an independent
252/Del/2012 (JRD Stock Brokers (P) Ltd.) conclusion that he had reason to believe that income had escaped assessment during the year under consideration. We draw our support from the judgment of the Hon’ble High Court of Delhi in dated 8.10.2015 in the case of Pr. Commissioner of Income Tax -4 vs. G&G Pharma India Ltd. in which the Hon’ble Jurisdictional High Court has recapitulated the jurisdictional requirement for reopening of the assessment u/s 147/148 of the Act as under:-
“9. The Court at the outset proposes to recapitulate the jurisdictional requirement for reopening of the assessment under Section 147/148 of the Act by referring to two decisions of the Supreme Court. In Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, the Supreme Court was dealing with a case where the AO had received certain communications from the Commissioner of Income Tax showing that the alleged creditors of the Assessee were “name-lenders and the transactions are bogus.” The AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment. The Supreme Court disagreed and observed that the AO “had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be '“bogus transactions'." It was further explained by the Supreme
252/Del/2012 (JRD Stock Brokers (P) Ltd.) Court that: “Before issuing a notice under S. 148, the ITO must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under S. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of cl. (a) or cl. (b) of S. 147 are satisfied, the ITO has no jurisdiction to issue a notice under S. 148.” The Supreme Court concluded that it was not satisfied that the ITO had any material before him which could satisfy the requirements under Section 147 and therefore could not have issued notice under Section 148.
In ACIT v. Dhariya Construction Co.(2010)328 ITR 515 the Supreme Court in a short order held as under: “Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the DVO. Opinion of the DVO per se is not an information for the purposes of reopening assessment under s. 147 of the IT Act, 1961. The AO has to apply his mind to the information, if any, collected and must form a belief thereon.
252/Del/2012 (JRD Stock Brokers (P) Ltd.) In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment.”
The above basic requirement of Sections 147/148 has been reiterated in numerous decisions of the Supreme Court and this Court. Recently, this Court rendered a decision dated 22nd September 2015 in of 2013 (Commissioner of Income Tax I I v. Multiplex Trading and Industrial Co. Ltd.) where the assessment was sought to be reopened beyond the period of four years. This Court considered the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-tax Officer ( s u p r a ) as well as the decision of this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. v. CIT 308 ITR 38 (Del). The Court noted that a material change had been brought about to Section 147 of the Act with effect from 1st April 1989 and observed: “29. It is at once seen that the Amendment in Section 147 of the Act brought about a material change in law w.e.f. 1st April, 1989. Section 147(a) as it stood prior to 1st April 1989 required the AO to have a reason to believe that (a) the income of the Assessee has escaped assessment and (b) that such escapement is by reason of omission or failure on the part of the Assessee to file a return or to disclose fully and truly all material facts necessary for his assessment for that year. After the Amendment, only one singular requirement is to be fulfilled under Section 147(a) and that is, that the AO has reason to believe that income of an Assessee has escaped assessment. However, the proviso to Section 147 of the Act provides a complete bar
252/Del/2012 (JRD Stock Brokers (P) Ltd.) for reopening an assessment, which has been made under Section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return or to disclose fully and truly all material facts necessary for his assessment. Thus, in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty. It is in the aforesaid context that this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) explained that the ratio of the decision in Phool Chand Bajrang Lai (supra) may not be entirely applicable since the same was in respect of Section 147(a) as it existed prior to the amendment.”
In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated : “I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money it its bank account by way of above accommodation entries.” The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which 252/Del/2012 (JRD Stock Brokers (P) Ltd.) the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the assessee, which must have been tendered along with the return, which was filed on 14th November, 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: “it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries”. In the considered view of the Court, in light of the law explained with sufficient clarity by Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment is missing in the present case.
Mr. Sawhney took the Court through the order of the CIT (A) to show how the CIT (A) discussed the materials produced during the hearing of the appeal. The Court would like to observe that this is in the nature of a post mortem exercise after the event of reopening of the assessment has taken place. While the CIT may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement
252/Del/2012 (JRD Stock Brokers (P) Ltd.) of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied, a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity.”
7.2 In the present case also, it is seen that the AO has merely relied on the report of the investigation wing but it is apparent that he has not applied his mind to the materials which were before him.
In our view, without forming a prima facie opinion only on the basis of the report of the Investigation Wing of the Income Tax Department, it was not legal for the AO to have simply concluded that he has reason to believe that income chargeable to tax has escaped assessment. Unless the basic jurisdictional requirement is satisfied, a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity. In the circumstances and respectfully following the judgment of the Hon’ble High Court of Delhi in the case of Pr. Commissioner of Income Tax-4 vs. G&G
252/Del/2012 (JRD Stock Brokers (P) Ltd.) Pharma India Ltd. (supra) we hold that the reopening of the case of the assessee for the assessment year is bad in law. In the circumstances, we quash the reassessment proceedings.
7.3 Since, we have already quashed the re-assessment proceedings, the assessee’s challenge to the addition sustained becomes academic in nature and the same is not being adjudicated upon.
In view of our quashing the re-assessment proceedings and allowing the assessee’s appeal, the department’s appeal becomes in fructuous and the same is dismissed.
In the result, the appeal of the assessee stand allowed whereas the department’s appeal stands dismissed.
(Order pronounced in the open court on 23rd July, 2018).