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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: SHRI H.S. SIDHU, & SHRI N.K. BILLAIYA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the Revenue and cross objection by the assessee are preferred against the order of the Commissioner of Income Tax
2 (Appeals) – 8, New Delhi dated 22.01.2015 pertaining to assessment year 2010-11.
The Revenue has raised the following grounds of appeal:
“1. On the facts and circumstances of the case, the CIT(A) erred in law and on facts in holding that the AO has wrongly assumed jurisdiction u/s 147 of the Act and thereby cancelling the assessment order.
2. The CIT(A) erred in law and on facts in holding that the estimation of receipt made by the AO at Rs. 1.65 crores wrong and thereby deleting the addition of Rs. 1,15,70,188/-.
3. The CIT(A) erred in law and on facts in deleting the addition of Rs. 11,88,866/- made by the AO on account of unexplained unsecured loan u/s 68 of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'].
The cross objections of the assessee are in support of the order of the CIT(A).
The representatives of both the sides were heard at length. The case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. Judicial decisions relied upon were carefully perused.
Briefly stated, the facts of the case are that return of income was filed on 09.10.2010 declaring income of Rs. 1,39,190/- which was processed u/s 143(1) of the Act. Assessment was reopened by issue of notice u/s 148 of the Act. The reasons recorded for reopening the assessment read as under:
“Return in this case was e-filed on 09-10-2010 declaring income of s. 1,39,190/-. It was not picked up for scrutiny either through CASS or was not taken up for scrutiny with the approval of the CCIT, Delhi-Ill, New Delhi. However, a complaint has been received from the PMO reference against the assessee alleging that the assessee company is having income much above the figure which is declared to the Income-tax Department. The minimum charges for decoration and arrangement for Marriage and other parties per day is Rs. 6,00,000/- as per the complaint. However, the receipts are in cash and are not declared to the Department. I have, therefore, reasons to believe that income in this case has escaped assessment which needs scrutiny and investigation for the A.Y 2010-11. Issue notice under section 148 of the I.T. Act, 1961 asking the assessee to file at return within 30 days. Sd/- [S.S. Rawat] Income-tax Officer Ward 7(1), New Delhi R.K. – Notice u/s 148 is put for signature. Sd/- Income-tax Officer Ward 7(1), New Delhi
A perusal of the aforesaid reasons show that nothing is coming out which prompted the Assessing Officer to form a belief that income has escaped assessment. There is a reference of a complaint received from the PMO but what was the nature of the complaint is not known. Further, it is mentioned that minimum charges for decoration and arrangement for marriage and other parties per day is Rs. 6 lakhs as per the complainant, whereas facts on record show that the assessee is in the business of providing catering services for various functions at different locations.
It appears that without verifying the contents of the said information, the Assessing Officer has reopened the assessment. In our considered opinion, reason to believe forms the foundation for assuming jurisdiction u/s 147 of the Act. The information on the basis of which the Assessing Officer forms a belief must be in the form of some tangible material which can be used against the assessee. In the case in hand, we find that there was no such tangible material for reopening the assessment. In our considered opinion, reason to suspect is different from reason to believe. The information received by the Assessing Officer may raise suspicion against the assessee but without any basis and without any tangible material, reason to suspect cannot become reason to believe.
In our understanding of the law, power to reopen is not an unfettered power and recording of reason is not just an idle formality. There must be cause and effect relationship between material in possession and formation of belief and reasons recorded must bring out the nexus and relationship. All these ingredients are missing in the case in hand. In the case of Ganga Saran & Sons Pvt. Ltd Vs. ITO 130 ITR 1, the Hon'ble Supreme Court has held as under:
6 "Information" means the communication or reception of knowledge or intelligence. It includes knowledge obtained from investigation, study or instruction. "To inform" means to impart knowledge. A detail available in the papers filed before the Income Tax Officer does not by its mere presence or availability become an item of information. It is transmuted into an item of information only if and when its existence is realized and its implications are recognized. Whether a particular fact or material constitutes information in a particular case has to be decided with reference to the facts of that case and there cannot be a definite rule of universal application as to when a particular material will be taken to be an information. Information must be something more than a rumour or gossip or hunch. There must be some material which can be regarded as information, on the basis of which the Assessing Officer can have reason to believe that action under section 147 is called for. Jurisdiction of the court to interfere is very limited, as the court does not act as an appellate authority. No meticulous examination of the information by the court is permissible to decide for itself as to whether action under section 147 is called for. The "reason to believe" must be tenable in law. Only if the information or the reason has no nexus with the belief or there is no material or tangible information for forming of requisite belief, can the court interfere, otherwise not.”
Further, we find that the reason was recorded on the basis of tax evasion petition in which petitioner has complained that Ms. Radhika was supplying hostesses around 50 to 60 in number per day and was charging Rs. 1,500/- per hostess per day. It was also mentioned that Ms. Radhika was supplying hostesses to M/s Invitation Banquet Hall and S.K. Caterers Pvt. Ltd [the assessee]. Ironically, the Assessing Officer has not brought anything on record which could prove any relationship between Invitation Banquet Hall and the assessee. Moreover, no enquiry was made from Ms Radhika. Thus, it can be safely concluded that there is no nexus between reasons recorded and information available with the Assessing Officer. The Assessing Officer has mechanically recorded reasons for issuing notice u/s 148 of the Act.
It would be pertinent to refer to the judgment of the Hon'ble High Court of Delhi in the case of Meenakshi Overseas Pvt. Ltd 395 ITR 677, the relevant part of which reads as under:
A perusal of the reasons as recorded by the AO reveals that there are three parts to it. In the first part, the AO has reproduced the precise information he has received from the Investigation Wing of the Revenue. This information is in the form of details of the amount of credit received, the payer, the payee, their respective banks, and the cheque number. This information by itself cannot be said to be tangible material.
Coming to the second part, this tells us what the AO did with the information so received. He says: "The information so received has been gone through." One would have expected him to point out what he found when he went through the information. In other words, what in such information led him to form the belief that income escaped assessment. But this is absent. He straightaway records the conclusion that "the abovesaid instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given (sic giver)". The AO adds that the said accommodation was "a known entry operator" the source being "the report of the Investigation Wing".
The third and last part contains the conclusion drawn by the AO that in view of these facts, "the alleged transaction is not the bonafide one. Therefore, I have reason to be believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004-05 due to the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment... "
As rightly pointed out by the ITAT, the 'reasons to believe' are not in fact reasons but only conclusions, one after the other. The expression 'accommodation entry' is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the Assessee on his paying "unaccounted cash" is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be "a known entry operator" is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.
Thus, the crucial link between the information made available to the AO and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.
The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of Section 147 (1) of the Act.
At this stage it requires to be noted that since the original assessment was processed under Section 143 (1) of the Act, and not Section 143 (3) of the Act, the proviso to Section 147 will not apply. In other words, even though the reopening in the present case was after the expiry of four years from the end of the relevant AY, it was not necessary for the AO to show that there was any failure to disclose fully or truly all material facts necessary for the assessment.
The first part of Section 147 (1) of the Act requires the AO to have "reasons to believe" that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre- condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment. 27. Each case obviously turns on its own facts and no two cases are identical. However, there have been a large number of cases explaining the legal requirement that requires to be satisfied by the AO for a valid assumption of jurisdiction under Section 147 of the Act to reopen a past assessment. 28.1 In Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra), the reasons for reopening as recorded by the AO in a proforma and placed before the CIT for approval read thus: "11. Reasons for the belief that income has escaped assessment.- Information is received from the DIT (Inv.-1), New Delhi that the assessee has introduced money amounting to Rs. 5 lakh during the F.Y. 2002-03 relating to A.Y. 2003-04. Details are contained in Annexure. As per information amount received is nothing but accommodation entry and assessee is a beneficiary." 28.2 The Annexure to the said proforma gave the Name of the Beneficiary, the value of entry taken, the number of the instrument by which entry was taken, the date on which the entry was taken, Name of the account holder of the bank from which the cheque was issued, the account number and so on. 28.3 Analysing the above reasons together with the annexure, the Court observed: "14. The first sentence of the reasons states that information had been received from Director of Income-Tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lacs during financial year 2002- 03 as per the details given in Annexure. The said Annexure, reproduced above, relates to a cheque received by the petitioner on 9th October, 2002 from Swetu Stone PV from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary.
15. The aforesaid reasons do not satisfy the requirements of Section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except Annexure, which has been quoted above. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The Commissioner also acted on the same basis by mechanically giving his approval. The reasons recorded reflect that the Assessing Officer did not independently apply his mind to the information received from the Director of Income-Tax (Investigation) and arrive at a belief whether or not any income had escaped assessment." 28.4 The Court in Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra) quashed the proceedings under Section 148 of the Act. The facts in the present case are more or less similar. The present case is therefore covered against the Revenue by the aforementioned decision. 29.1 The above decision can be contrasted with the decision in AGR Investment v. Additional Commissioner of Income Tax (supra), where the 'reasons to believe' read as under:
"Certain investigations were carried out by the Directorate of Investigation, Jhandewalan, New Delhi in respect of the bogus/accommodation entries provided by certain individuals/companies. The name of the assessee figures as one of the beneficiaries of these alleged bogus transactions given by the Directorate after making the necessary enquiries. In the said information, it has been inter-alia reported as under: "Entries are broadly taken for two purposes:
1. 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 expense in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes. It has been revealed that the following entries have been received by the assessee:...." 29.2 The details of six entries were then set out in the above 'reasons'. These included name of the beneficiary, the beneficiary's bank, value of the entry taken, instrument number, date, name of the account in which entry was taken and the account from where the entry was given the details of those banks. The reasons then recorded: "The transactions involving Rs. 27,00,000/-, mentioned in the manner above, constitutes fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income/income from other sources of the assessee company, which has not been offered to tax by the assessee till its return filed. On the basis of this new information, I have reason to believe that the income of Rs. 27,00,000/- has escaped assessment as defined by section 147 of the Income Tax Act. Therefore, this is a fit case for the issuance of the notice under section 148." 29.3 The Court was not inclined to interfere in the above circumstances in exercise of its writ jurisdiction to quash the proceedings. A careful perusal of the above reasons reveals that the AO does not merely reproduce the information but takes the effort of revealing what is contained in the investigation report specific to the Assessee. Importantly he notes that the information obtained was 'fresh' and had not been offered by the Assessee till its return pursuant to the notice issued to it was filed. This is a crucial factor that went into the formation of the belief. In the present case, however, the AO has made no effort to set out the portion of the investigation report which contains the information specific to the Assessee. He does not also examine the return already filed to ascertain if the entry has been disclosed therein. 30.1 In Commissioner of Income Tax, New Delhi v. Highgain Finvest (P) Limited (2007) 164 Taxman 142 (Del) relied upon by Mr. Chaudhary, the reasons to believe read as under: "It has been informed by the Additional Director of Income Tax (Investigation), Unit VII, New Delhi vide letter No. 138 dated 8 th April 2003 that this company was involved in the giving and taking bogus entries/ transactions during the financial year 1996-97, as per the deposition made before them by Shri Sanjay Rastogi, CA during a survey operation conducted at his office premises by the Investigation Wing. The particulars of some of the transaction of this nature are as under: Date Particulars of cheque Debit Amt. Credit Amt 18.11.96 305002 5,00,000 Through the Bank Account No. CA 4266 of M/s. Mehram Exports Pvt. Ltd. in the PNB, New Rohtak Road, New Delhi. Note: It is noted that there might be more such entries apart from the above. The return of income for the assessment year 1997-98 was filed by the Assessee on 4th March 1998 which was accepted under Section 143 (1) at the declared income of Rs. 4,200. In view of these facts, I have reason to believe that the amount of such transactions particularly that of Rs. 5,00,000 (as mentioned above) has escaped the assessment within the meaning of the proviso to Section 147 and clause (b) to the Explanation 2 of this section. Submitted to the Additional CIT, Range -12, New Delhi for approval to issue notice under Section 148 for the assessment year 1997-98, if approved." 30.2 The AO was not merely reproducing the information received from the investigation but took the effort of referring to the deposition made during the survey by the Chartered Accountant that the Assessee company was involved in the giving and taking of bogus entries. The AO thus indicated what the tangible material was which enabled him to form the reasons to believe that income has escaped assessment. It was in those circumstances that in the case, the Court came to the conclusion that there was prima facie material for the AO to come to the conclusion that the Assessee had not made a full and true disclosure of all the material facts relevant for the assessment.
In Commissioner of Income Tax v. G&G Pharma (supra) there was a similar instance of reopening of assessment by the AO based on the information received from the DIT (I). There again the details of the entry provided were set out in the 'reasons to believe'. However, the Court found that the AO had not made any effort to discuss the material on the basis of which he formed prima facie view that income had escaped assessment. The Court held that the basic requirement of Section 147 of the Act that the AO should apply his mind in order to form reasons to believe that income had escaped assessment had not been fulfilled. Likewise in CIT-4 v. Independent Media P. Limited (supra) the Court in similar circumstances invalidated the initiation of the proceedings to reopen the assessment under Section 147 of the Act.
In Oriental Insurance Company Limited v. Commissioner of Income Tax 378 ITR 421 (Del) it was held that "therefore, even if it is assumed that, in fact, the Assessee‟s income has escaped assessment, the AO would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. In absence of the jurisdictional pre-condition being met to reopen the assessment, the question of assessing or reassessing income under Section 147 of the Act would not arise."
In Rustagi Engineering Udyog (P) Limited (supra), it was held that "...the impugned notices must also be set aside as the AO had no reason to believe that the income of the Assessee for the relevant assessment years had escaped assessment. Concededly, the AO had no tangible material in regard to any of the transactions pertaining to the relevant assessment years. Although the AO may have entertained a suspicion that the Assessee‟s income has escaped assessment, such suspicion could not form the basis of initiating proceedings under Section 147 of the Act. A reason to believe - not reason to suspect - is the precondition for exercise of jurisdiction under Section 147 of the Act. "
Recently in Agya Ram v. CIT (supra), it was emphasized that the reasons to believe "should have a link with an objective fact in the form of information or materials on record..." It was further emphasized that "mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments."
In the decision of this Court dated 16th March 2016 in W.P. (C) No. 9659 of 2015 (Rajiv Agarwal v. CIT) it was emphasized that "even in cases where the AO comes across certain unverified information, it is necessary for him to take further steps, make inquiries and garner further material and if such material indicates that income of an Assessee has escaped assessment, form a belief that income of the Assessee has escaped assessment."
The Hon'ble High Court finally concluded as under:
“36. In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a 'borrowed satisfaction'. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.
For the aforementioned reasons, the Court is satisfied that in the facts and circumstances of the case, no error has been committed by the ITAT in the impugned order in concluding that the initiation of the proceedings under Section 147/148 of the Act to reopen the assessments for the AYs in question does not satisfy the requirement of law.
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.”
In another case of RMG Polyvinyl India Ltd the Hon'ble Jurisdictional High Court in 396 ITR 5 has held as under:
“Information received from Investigation Wing could not be said to be tangible material per se without a further inquiry being undertaken by the Assessing Officer to establish link between tangible material and formation of reason to believe that income had escaped assessment and consequently, re assessment was unjustified.”
Considering the facts of the case in totality in the light of the decisions of the Hon'ble Jurisdictional High Court of Delhi, we do not find any error or infirmity in the findings of the ld. CIT(A). Accordingly, Ground No. 1 is dismissed.
As the quashing of the assessment order has been upheld by us, we do not find it necessary to dwell into the other issues.
In the result, the appeal of the revenue is dismissed.
Before closing, the ld. DR in his written submission has relied upon several judicial decisions. Each case obviously turns on its own facts and no two cases are identical. Therefore, judicial decisions relied upon by the ld. DR do not fit into the facts of the case in hand.
In the result, the appeal of the revenue in is dismissed whereas the cross objection of the assessee is allowed.
The order is pronounced in the open court on 27.06.2018.