ACIT, CIRCLE-5(2), KOLKATA, KOLKATA vs. M/S NAVKAR NIVESH PVT. LTD., KOLKATA

- This Revenue’s appeal for assessment year 2007-08 arises against Commissioner of Income Tax (Appeals)-2, Kolkata’s order dated 30.01.2017 passed in case No.2412/CIT(A)-2/2015-16, involving proceedings u/s 144 r.w.s. 147 r.w.s.143(3) of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file perused.

Learned CIT-DR vehemently contends during the course of hearing that CIT(A) has erred in law and on facts both in annulling the impugned assessment / re-assessment dated 31.03.2015 framed on u/s 144/147/143(3) as well as in deleting the unexplained share application / premium addition amounting to ₹54,72,75,000/- made in assessment order on merits. His argument is that the Assessing Officer had rightly taken recourse to impugned ACIT Cir-5(2), Kol. Vs. M/s Navkar Nivesh Pvt. Ltd. Page 2 re-opening thereby treating the above sum in issue as unexplained cash credits liable to be added sec. 68 of the Act. He further pleads that CIT(A)’s finding under challenge are totally non-speaking on both validity as well as on merits.

We have given our thoughtful consideration to rival contentions. Case file suggests that we are dealing with assessment year 2007-08 wherein the Assessing Officer had framed his regular assessment in assessee’s case (formerly known M/s Pingle Suppliers Pvt. Ltd.) on 16.04.2009. A perusal of said regular assessment makes it clear that the Assessing Officer had duly discussed the issue of assessee’s share application / premium received which was accepted as correct in the said first round.

Case file indicates that the Assessing Officer thereafter issued sec. 148 notice dated 31.03.2014 after forming reasons to believe that assessee’s taxable icome liable to be assessed had escaped assessment. His reasons of re-opening recorded to this effect read as under:- “As per letter of the ITO, Ward-5(4), Kolkata along with photocopies of relevant details and that of some impugned documents, as received by him from the ACIT,CC-1(3), Ahmedabad on 26.03.2012 and subsequently forwarded to this end on 27.03.2012, it is learned that a survey operation u/s. 133A of the IT Act, 1961 was conducted by the ADIT(Inv), Unite-I(3), Kolkata on 27.08.2009 in the group cases in Kolkata relating to M/s Austral Group in which a search was made at Ahmedabad. In the course of survey, some paper and documents marked as SKH-1 to SKH-4 were impounded, which, as per the letter no. ACIT/CC-1(3)/Spoxy & Others/2011-122 dated 16.03.2012, are learnt to be relating to the case of M/s Pingle (Supra)-pliers Pvt. Ltd. PAN-AABCP4879L, assessed under this jurisdiction. On perusal of the initial impounding order vide dated 27.08.2009, it reveals that the instant assessee company is allegedly involved in the circle of operation while investing in share capital with so high premium in low potential unquoted share. During the financial year 2006-07 relevant to AYr. 2007-08, the instant assessee company had a total investment of Rs.65,09,46,000/-. On further scrutiny of bank book of the assessee company for the financial period of 2006-07, it is observed that the instant assessee company had huge transactions through Union Bank of India and ABN ABMRO Bank which requires thorough verification. Under the above factual circumstances, it is imperative on the part of the undersigned to verify the source of the said huge investment which remained unexplained and may lead to a case of income escaping ACIT Cir-5(2), Kol. Vs. M/s Navkar Nivesh Pvt. Ltd. Page 3 assessment in the hands of the assessee company during the FYr. 2006-08 relevant to A.Yr. 2007-08.”

Mr. Surana refers to the above extracted re-opening reasons. He submits that Assessing Officer’s reason recorded merely sought to verify the source of assessee’s huge investment in issue which remained unexplained and might lead to a case of income escaping assessment. Learned counsel’s case is that the Assessing Officer’s reasonable belief of the assessee’s taxable income having escaped assessment is totally missing in the above extracted reasons. We find merit in assessee’s instant arguments. Learned CIT-DR fails to rebut the clinching re-opening reasons extracted in preceding paragraph that the Assessing Officer sought to verify source of assessee huge investments in the nature of share application / premium after expiry of more than four years from the end of the relevant assessment year 2007-08 which might lead to a case income escaped assessment. Hon'ble Bombay high court in Hindustan Leaver Ltd. vs. B. Swadekar (2004) 268 ITR 339 (Bom) made it clear that re-opening reasons recorded by the Assessing Officer have to be read as it is without any addition or substitution. Applying the said settled preposition, we notice that the Assessing Officer’s instant case has nowhere made out a case of the assessee’s taxable income having escaped assessment as he merely sought to verify the source of the share capital / premium which might lead to a case of taxable income escaped assessment. This co-ordinate bench’s decision in Bir Bahadur Singh Sijwali vs. ITO in decided on 20.01.2015 holds a similar re-opening re- assessment not forming any belief of taxable income having escaped assessment as not substainable as follows:- “5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

A plain look at the reasons for reopening the assessment, as produced before us, show that these reasons were recorded after the notice was served on 14th September 2009 as a mention about the fact of service of notice is set out in the recorded reasons itself. It is only elementary that the reasons are to be recorded before issuance of notice, and in the absence of any reasons for reopening having been re~ prior to reopening of assessment, the ACIT Cir-5(2), Kol. Vs. M/s Navkar Nivesh Pvt. Ltd. Page 4 reassessment proceedings fail for this short reason alone. Hon'ble Bombay High Court, in the case of Prashant S. Joshi vs. ITO [2010) 230 CTR (Bom) 232.] has observed: "The AO must have reasons to believe that such is the case (i.e. any income chargeable to tax has escaped assessment for a particular year) before he proceeds to issue notice under s. 147". In other words, when no reasons are recorded for reopening the assessment prior to issuance of notice, the reassessment proceedings must fail for that reason alone. However, for the reasons we will set out now, the conclusions will be no different even if it is presumed that this communication, extracts from which are reproduced before, only conveys the reasons already recorded prior to issuance of notice.

It is well settled in 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 anything can be deleted from the reasons so recorded. Hon'ble Bombay High Court, in the case of Hindustan Lever Ltd. vs. R.B. Wadkar [(2004) 268 ITR 332], has, inter alia, observed that " .It is needless to mention that the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn the basis of reasons not recorded. It is for the AO to disclose and open his mind through the reasons recorded by him. He has to speak through the reasons." Their Lordships added that "The reasons recorded should be self- explanatory and should not keep the assessee guessing for reasons. Reasons provide link between conclusion and the evidence .... ". Therefore, the reasons are to be examined only on the basis of the reasons as recorded. 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 stag 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 that the fact of income having escaped assessment 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 Assessing Officer can form the belief that an income has escaped assessment. Merely because some further investigations 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 assessment. It is also important to bear in mind the subtle but important distinction between factors which indicate an income escaping the assessments and the factors which indicate a legitimate suspicion about income escaping the assessment. The former category consists of the facts which, if established to be correct, will have a cause and effect relationship with the income escaping the assessment. The latter category consists of the facts, which, if established to be correct, could legitimately lead to further inquiries which may lead to detection of an income which has escaped assessment. There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. While ACIT Cir-5(2), Kol. Vs. M/s Navkar Nivesh Pvt. Ltd. Page 5 dealing with this aspect of the matter, it is useful to bear in mind the following observations made by Hori'ble Supreme Court in the case of ITO Vs Lakhmani Mewal Das [(1976) 103 ITR 437], “the reasons for the formation of the belief must have rational connection with or relevant bearing & on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the ITO and the formation of this belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the Court cannot go into sufficiency or adequacy of the material and substitute its own opinion for that of the ITO on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment.

Let us, in the light of this legal position, revert to the facts of the case before us. All that the reasons recorded for reopening indicate is that cash deposits aggregating to Rs.10,24,100 have been made in the bank account of the assessee, but the mere fact that these deposits have been made in a bank account does not indicate that these deposits constitute an income which has escaped assessment. The reasons recorded for reopening the assessment do not make out a case that the assessee was engaged in some business and the income from such a business has not been returned by the assessee. As we do not have the liberty to examine these reasons on the basis of any other material or fact, other than the facts set out in the reasons so recorded, it is not open to us to deal with the question as to whether the assessee could be said to be engaged in any business; all that is to .be examined is whether the fact of the deposits, per se, in the bank account of the assessee could be basis of holding the view that the income has escaped assessment. The answer, in our humble understanding, is in negative. The Assessing Officer has opined that an income of Rs.10,24,100 has escaped assessment of income because the assessee has Rs.10,24,100 in his bank account but then such an opinion proceeds on the fallacious assumption that the bank deposits constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escaped assessment.”