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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
1 ITA No. 1602/Kol/2016 & CO No. 55 of 2016 Dotex Merchandise Pvt. Ltd., AY 2010-11
आयकर अपील�य अधीकरण, �यायपीठ – “B” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA (सम�) �ी ऐ. ट�. वक�, �यायीक सद�य एवं डॉ. अजु�न लाल सैनी, लेखा सद�य) [Before Shri A. T. Varkey, JM & Dr. A. L. Saini, AM]
I.T.A. No. 1602/Kol/2016 Assessment Year: 2010-11
Deputy Commissioner of Income-tax, Vs. M/s. Dotex Merchandise Pvt. Ltd. Circle-12(1), Kolkata. (PAN: AAACD9470A) Appellant Respondent & C.O. No. 55/Kol/2016 In I.T.A. No. 1602/Kol/2016 Assessment Year: 2010-11
M/s. Dotex Merchandise Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-12(1), Kolkata. Cross Objector Respondent
Date of Hearing 04.03.2019 Date of Pronouncement 03.05.2019 For the Revenue Shri A. K. Singh, CIT, DR For the Assessee/Cross Objector Shri D. S. Damle, AR
ORDER Per Shri A.T.Varkey, JM
Both these appeal and Cross Objection preferred by the revenue and assessee respectively are against the order of the Ld. CIT(A)-4, Kolkata dated 30.05.2016 for AY 2010-11.
In ITA No.1602/Kol/2016 the Revenue has challenged the Ld. CIT(A)’s action of quashing the reassessment order passed u/s 147/143(3) of the Act. In the Cross Objection the assessee has challenged the order of the Ld. CIT(A) for not deciding the grounds of appeal in which the assessee had objected to the merits of the additions made u/s 68. Later,
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the assessee filed additional grounds of cross objections challenging validity of the reassessment proceedings on further grounds. Since the additional grounds raised were purely legal in nature and went to the root of the matter, these were admitted.
Briefly stated facts of the case are that the assessee is a company, which was incorporated in the year 1994. In the FY 2009-10 the assessee issued 12,08,000 equity shares at a premium and thereby raised capital of Rs.30.20 crores. For the relevant AY 2010-11 the assessee filed its return of income on 11.09.2010 declaring total income of Rs.8,851/-. The case was originally assessed u/s 143(1) of the Act and thereafter reopened u/s 148 by the ITO, Ward 8(2), Kolkata. In the first round of reassessment proceedings the AO after conducting enquiries u/s 133(6) with regards to the genuineness of the share capital raised during the year, completed the assessment u/s 147/143(3) on 30.03.2012 assessing total income at Rs.42,449/-. Thereafter on 09.02.2015 the AO issued another notice u/s 148, which was served on the assessee on 19.02.2015. On assessee’s request, reasons recorded for reopening the assessment were furnished to the assessee vide AO’s letter dated 03.06.2015. After examining the assessee’s replies in response to notices u/s 142(1) of the Act, the AO issued a show cause dated 22.03.2016 requiring the assessee to explain as to why share capital along with share premium of Rs.34 crores raised during FY 2009-10 should not be assessed as it’s income u/s 68 of the Act for the AY 2010-11. In response the assessee furnished its rebuttal, which is placed at Pages 17 to 22 of the paper book. The AO ultimately completed the assessment u/s 147/143(3) on 30.03.2016 assesssing Rs.30.20 crores as unexplained cash credit u/s 68 being the amount received as share subscription for shares issued during the relevant year. Aggrieved by the order the assessee preferred appeal before the Ld. CIT(A) challenging the legal validity of the assessment completed u/s 147/143(3) as also the merits of the addition u/s 68 of the Act. The Ld. CIT(A) found merit in the assessee’s initial plea that when the AO reopened the assessment after recording specific reasons but in assessment order no addition was ultimately made with reference to the specific issue for which the assessment was reopened, then the consequent assessment order was legally unsustainable. The relevant findings of the Ld. CIT(A) were as follows:
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“4.5 From bare perusal of the reasons recorded it is apparent that based on the information provided by the Investigation wing of the Income-tax Department the AO had formed a belief that the assessee’s investments worth Rs.34 crores in paper companies were sold to other paper companies of Shri Mahawar and the sale proceeds were credited to the bank account of the assessee. According to AO the source of alleged sale proceeds was the cash provided by the purchaser of appellant company to Shri Mahawar who had routed it through different layers of paper companies and cheques finally went from the companies of Shri Mahawar to the appellant. For these reasons the AO formed reason to believe that assessee’s income amounting to Rs.34 crores had escaped assessment in AY 2010-11. Plain reading of these reasons therefore leaves no one in any doubt that the AO was of the opinion that the investments which were appearing in the balance sheet of the assessee did not represent true investments. According to AO by ostensibly showing sale of these investments, the unaccounted cash was allegedly introduced by Shri Mahawar in the form of sale proceeds and the amounts were deposited in the assessee’s bank account. Based on such premise recorded in clear terms, the AO reopened the assessment of the appellant for A.Y. 2010-11. The recorded reasons therefore clearly indicated that the AO never reopened the assessment for examining the source of the amount credited in the assessee’s books in the form of subscription to its share capital and share premium. In fact I find that the recorded reasons do not even whisper anything about AO’s apprehension that the assessee had not established identity, creditworthiness and genuineness of the share capital introduced during the relevant year. The recorded reasons do not in any manner deal with the issue of the subscription amounts which the appellant had received from its shareholders and with regard to which enquiry was conducted in the course of first reassessment. Even from the information passed on by the Investigation Wing of the IT Department which was the sole basis for reopening of assessment, there was any information which in any manner adversely commented on the capital introduced in the assessee’s books. The entire tone & tenor of the recorded reasons indicate that the AO had formed his reason to believe based on his hypothesis that the investment in shares of other bodies corporate reflected in the assessee’s balance sheet were utilized to launder the unaccounted cash by Shri Mahawar. In AO’s opinion such deposit of money in the assessee’s bank account in the form of proceeds of sale of shares represented assessee’s income which had escaped assessment in AY 2010-11.
4.6 On scrutiny of the impugned order u/s 143(3)/147, I however find that in the course of reassessment proceedings the AO conducted enquiry only with regard to shares which the assessee issued at premium during FY 2009-10 to 22 bodies corporate from whom it received Rs.30.20 crores. Although in the impugned order the AO has extensively extracted the statements which the Investigation Officers of the Department had recorded in the course of survey u/s 133A and thereafter u/s131 from Shri Mahawar and his associates yet ultimately the AO confined his enquiry and his findings with regard to the issue of taxability of share subscription amounts received from 22 bodies corporate. After setting out extensively the statements of Shri Mahawar and others the AO claimed that in view of the findings made during
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the course of reassessment and findings made during the course of survey the assessee had failed to prove the identity, genuineness and creditworthiness of the shareholders from which share capital along with premium amounting to Rs.30.20 crores was received during the FY 2012-13 even after granting many opportunities. According to AO it was clear that the funds received in the guise of capital & premium amounting to Rs.30.20 crores was nothing but unexplained cash credit brought in the garb of capital & premium. The AO stated that the assessee could not satisfactorily explain nor the director of the assessee knew the former shareholders or from where the funds were coming. The AO therefore ultimately treated the share capital & premium received as unexplained cash credit.
4.7 From the foregoing facts therefore I find that the reasons for which the assessment of the appellant was reopened were totally divorced from the findings which were ultimately recorded in the assessment order. The subject matter of recorded reasons and the subject matter on which the addition was ultimately made were totally distinct and had no relation with each other whatsoever. In accounting terms one can say that for the purpose of reopening the assessment the AO disbelieved the genuineness of the investments appearing on the asset side of the assessee’s balance sheet but in the assessment framed, the addition was ultimately made by doubting the genuineness of the equity capital and share premium received which appeared on the “liability” side on the said balance sheet. These facts show that the reasons for which the AO initiated reassessment proceedings were completely abandoned by the AO while completing the assessment u/s 147/143(3)of the Act. The subject matter of addition in the impugned order was the subscription amounts received to the assessee’s equity capital from 22 companies whereas the subject matter for AO’s forming reason to believe that income had escaped assessment was the alleged bogus sale of the investments which the appellant held in other bodies corporate. In my considered opinion these two reasons had no commonality of any kind and both were independent and different reasons. In the circumstances if the reopening was made on one issue then the addition made with reference to altogether another issue was not permissible in the order u/s 147/143(3), unless the addition was also made on the ground for which the assessment was reopened in the first instance.
4.13 Applying the ratio emanating from the foregoing judgments of different judicial authorities to the facts of the appellant’s case I find that it has been unanimously held that an AO can proceed to make additions in the order u/s 147 to the earlier assessed income if and only if the addition is first made by the AO with reference to the grounds or issue for which reason is recorded u/s 148(2) of the Act. Where however no addition is made in the order u/s 147 with reference to the reason recorded u/s 148 or where the addition made with reference to the reasons recorded is deleted by the appellate authority then the only course open to the appellate authority is to cancel the entire re-assessment since the very rationale for initiation of the reassessment proceedings stands invalidated once no addition in respect of recorded reason survives. The unanimity of the view in all these decisions is that the AO cannot travel beyond the recorded reasons and make additions with regard to other issues if no addition is made or no addition is found sustainable with reference to the recorded reasons before initiation of
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reassessment proceedings. Such action is permissible if any only if the AO in the first instance justifies the addition to the last assessed income with reference to reasons recorded u/s 148(2)of the Act. In the present case as noted in the foregoing paragraphs, it was abundantly clear that the earlier concluded assessment was reopened by the AO on the premise that income of Rs.34 crores escaped assessment because in his opinion the investments appearing in the assessee’s accounts were ostensibly sold by Shri Mahawar and the unaccounted cash received from RPG Group was allegedly introduced and deposited in the assessee’s bank account in the garb of sale proceeds. The grounds spelt out in the recorded reasons were categorical and clear and there was no uncertainty or ambiguity about the same. The quantum of income which in AO’s opinion had escaped assessment was Rs.34 crores. However in the impugned assessment order the addition made to the last assessed income was Rs.30.20 crores and the same represented subscription amounts received by the assessee to its share capital and share premium from 22 bodies corporate. The addition was made on the ground that the assessee had failed to establish the identity & creditworthiness of the shareholders and the genuineness of the transaction involving receipt of share application monies was not proved by the assessee. In the entire assessment order the AO did not even whisper anything about the reasons for which the assessment was first reopened. No adverse inference is recorded nor any addition have been made in the impugned order with regard to the alleged sale of investments. In the circumstances I find full force in AR’s submissions that the grounds for reopening of concluded assessments and the grounds on which the addition was ultimately made were totally different. The subject matter as well as quantum of income alleged to have escaped assessment specified in the reasons recorded was totally different from grounds on which the addition was finally made in the impugned order. The reasons recorded had no connection with the addition ultimately made in the impugned order. Moreover with regard to reasons recorded the AO did not make any addition while completing the assessment for AY 2010-11. For the reasons and the facts set out in the foregoing therefore, I have no hesitation in holding that the ratio laid down in the judicial decisions discussed herein before applies on all force. In terms of the said decisions, the only course open for the appellate authority in such circumstances is to quash the reassessment. I order accordingly. Ground Nos. 1 & 2 are therefore allowed.”
Since the Ld. CIT(A) upheld the assessee’s preliminary challenge to the validity of the order passed u/s 147/143(3), he did not adjudicate the assessee’s grounds involving merits of the addition made by the AO. Being aggrieved by the order of the Ld. CIT(A), the Revenue is now in appeal raising the following grounds :-
That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in fact and in law in accepting assessee’s contention that addition was not made on the basis of which the case was reopened.
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That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that no addition can be made on any ground other than those on the basis of which the case was re-opened.
We have heard the rival submissions and considered factual matrix involved in the present case. Assailing the action of the Ld. CIT(A) quashing the reassessment order, the Ld. DR appearing on behalf of the Revenue submitted that in his recorded reasons the AO had made reference to the material fact that during the relevant previous year the assessee had raised share capital through accommodation entries provided by the companies controlled by Uday Mahawar and in that view of the matter the Ld. CIT(A) was not correct in holding that the specific issue on which the assessment was reopened was not considered by the AO in assessing the escaped income. The Ld. DR further argued that the Ld. CIT(A) having co-terminus powers with the AO ought to have himself investigated the case when he noted that the specific issue on which the assessment was reopened was not added back by the AO. The Ld. DR submitted that the Ld. CIT(A) was unjustified in dealing only with the technical ground raised by the assessee without addressing the issue on merits of the case. He therefore urged that it is a fit case where the matter needs to be restored back the file of the Ld. CIT(A) for decision afresh on the merits of the additions which were justifiably made by the AO in the order u/s 147 of the Act.
Per contra the Ld. AR fully relied on the order of the Ld. CIT(A). The Ld. AR in the first instance drew our attention to the reasons recorded by the AO prior to issuing notice for reopening of the assessment u/s 148 which read as follows:
“Information has been received from the Director of Income Tax (Investigation), Kolkata that a survey operation u/s 133A of the Income Tax Act, 1961 was conducted in the case of Dotex Merchandise Pvt Ltd, and Uday Shankar Mahawar on 22/08/2014 at 12, Ho Chi Minh Sarani, Kolkata-71. It has been gathered through statements and findings of the survey proceedings and post survey investigation that Shri U. S. Mahawar is a bogus entry operator, who provides entry accommodation in the form of bogus billing, bogus unsecured loan, bogus share capital in lieu of commission. He
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also used to form shell companies and used to sell them after raising huge bogus share capital in them. For doing all these activities he earns cash commission from clients. In his statement recorded during the course of survey, Shri U. S. Mahawar stated that the Dotex Merchandise Pvt. Ltd. Was registered in 1994 as paper/shell company by an entry operator named Shri Binod Kumar Jaiswal. Initial capital was only Rs. 5 Lakh with 4,95,200 shares of face value Rs. 1 issue at par. In 2005 this company was purchased by one Shri Uday Shankar Mahawar, another entry operator. In 2005, further 3,56,000 shares of face value Rs. 10/- were issued at a premium of Rs. 90/- per share and on paper Rs. 3.56 crore was raised. This was again only on paper as the subscribers were only other paper companies of Shri Mahawar and the subscription was through circular transactions. In March, 2010 again 12,08,000 shares of FV Rs. 10 were issued at a premium of Rs. 240/- per share and nearly Rs. 31 Crore was raised by the same modus operandi. After this issue the net worth of the company became Rs. 34.52 Crores. Thereafter, in March, 2010 Shri Mahawar sold this company to the RPG group and Shri Rajendra Jha and Shri Sunil Bhandari who are the employee of the RPG Group become the directors of M/s. Dotex Merchandise Pvt Ltd. It is also found that from 12/10/2011 to 28/03/2013 Shri R. P. Goenka himself was the director of this company. After RPG group purchased this company, entire share holding was bought back by two companies of RPG namely, Solty Commercial Pvt Ltd and Ritushri Vanijya Pvt Ltd. As expected after the purchase by Sanjeev RPG group, the investment worth Rs. 34 Crores in paper companies shown in the balance sheet of M/s. Dotex Merchandise Pvt Ltd, were sold on paper to the paper companies of Shri Mahawar and sale proceeds was credited in the bank account of Dotex Merchandise Pvt Ltd. As is clear from the statement of Shri Mahawar that the source of the sale proceed is cash provided by Sanjeev RPG Group to Shri Mahawar, who has routed it through different layers of paper companies and cheques have finally gone from paper companies of Shri Mahawar to Dotex Merchandise Pvt Ltd.
Thus there is reason to believe that the income of the assessee company amounting to Rs.34 crores has escaped assessment for the assessment year 2010-11. Proceedings u/s 147 is initiated, issue notice u/s 148 for the assessment year 2010-11.”
With reference the recorded reasons the Ld. AR submitted that the AO’s satisfaction that income had escaped assessment, was based solely on the information received by the AO from Investigation Wing. Based solely on information received from the Investigation Wing, the AO formed his belief that the assessee company was acquired by RPG Group during the relevant year and consequent thereto the assessee sold its investments of Rs.34
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crores held in various companies to paper companies belonging to Shri Uday Mahawar. The source of the proceeds received on sale of investments was the cash provided by RPG Group, being the alleged purchaser of the assessee. The AO therefore entertained a specific belief that proceeds of Rs.34 crores received on sale of investments was income of the assessee which had escaped assessment for the AY 2010-11. The Ld. AR therefore submitted that the assessment was reopened on the specific ground which was separate and distinct from the transaction of raising fresh capital during the relevant year. The Ld AR argued that even though in the recorded reasons the AO set out details of share capital raised by the assessee from time to time since 1995,he did not record his belief that the share capital of Rs 30.20 crs raised during the relevant year represented assessee’s income escaping assessment. The Ld AR thereafter took us through the requisition u/s 142(1), show cause notice and the impugned assessment order to show that after reasons were recorded on 09/02/2015,the AO abandoned the principal reason on which the assessment was reopened and at no point of time after 09/02/2015, did the AO enquire about the sale of investments. Instead, post issue of the notice u/s 148, entire line of enquiry and the ultimate addition was only in respect of the share subscription amount of Rs.30.20 crores received during the year. The Ld. AR therefore submitted that the reason for which the assessment was reopened was completely divorced from the findings ultimately recorded by the AO. He submitted that mere reference in the recorded reasons about the historical facts of raising of equity capital by the appellant company from time to time did not in any manner justify the Ld. DR’s argument that the AO had formed reason to believe that subscription to the equity capital received during the relevant year represented income escaping assessment. The Ld. AR pointed out that in the reasons recorded the AO was consciously aware that the share capital raised during the relevant year was only Rs.30.20 crores which was separate and distinct from the investments which the assessee had made in shares of other bodies corporate at a cost of Rs 34 crs and which were liquidated subsequent to assesse’s take over by RPG Group. Having taken note of these two distinct facts, the AO had consciously formed his reason to believe that proceeds received from sale of investment shares of paper companies, represented assessee’s income escaping assessment. He thus urged that when the foundational issue which formed the basis for initiation of reassessment, was not pursued by
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the AO nor any addition was made on that account, then the AO could not have legally proceeded with the income-tax assessment and made ‘other additions’ for which no reasons were recorded. In support of this proposition the Ld. AR relied on the following judicial decisions and pleaded that the order of the Ld. CIT(A) quashing the impugned reassessment order be upheld.
- Ranbaxy Laboratories Ltd Vs CIT (336 ITR 136) (Del HC) - CIT Vs Ram Singh (306 ITR 343) (Raj HC) - CIT Vs Infinity Infotech Parks Ltd (GA No. 1736 of 2014) (Cal HC) - CIT Vs Software Consultants (341 ITR 240) (Del HC) - Indu Arts Vs ACIT (88 taxmann.com 182) (ITAT Delhi) - ShriMotilal Jain Vs ITO (ITA No. 1986 to 1988/Kol/2016)
In support of the cross objections and the additional grounds of cross objections, the Ld. counsel further submitted that the reopening of assessment suffered from fundamental infirmity as the AO never obtained prior approval of the prescribed authority i.e. Additional/Joint Commissioner of Income-tax before issuing notice u/s 148 and therefore the proceedings conducted by the AO were bad in law. The Ld. AR drew our attention to proviso to Section 151as prevailing at the time when notice u/s 148 was issued which specified that where assessment was earlier completed u/s 143(3) or 147 then the AO below the rank of Additional/Joint Commissioner of Income-tax could not reopen any assessment within a period of four years from the end of the relevant assessment year unless he obtained prior approval of the Additional/Joint Commissioner of Income-tax. Inviting our attention to the facts of the present case, more particularly the order sheet entries and the notice issued u/s 148, the Ld. AR submitted that there was no mention regarding the prior approval being obtained by the AO from his Additional / Joint Commissioner of Income- tax. In particular he drew our attention to the fact that the notice u/s 148 was dated 09.03.2015. He also brought to our attention that as per the order sheet entries the reasons to believe were recorded by the AO on the same date as of the issuance of the notice. He also
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pointed out that having recorded his reasons which led him to form belief that income chargeable to tax had escaped assessment; he had categorically recorded as follows:
“Thus there is reason to believe that the income of the assessee company amounting to Rs.34 crores has escaped assessment for the assessment year 2010-11. Proceeding u/s 147 is initiated, issue notice u/s 148 for the assessment year 2010-11.”
The Ld. AR therefore submitted that if the notice u/s 148 and the reasons recorded on the same date are read in conjunction and harmoniously then the only conclusion that can be drawn is that the AO having recorded his own satisfaction about alleged escapement of income straightaway initiated the proceedings u/s 147 by issuing the notice u/s 148 without obtaining prior approval u/s 151 of the Act. The Ld. AR also brought to our attention the last paragraph of the notice u/s 148 which required the AO to inform assessee whether prior approval of the appropriate authority was obtained or not. In the notice issued to the assessee, copy of which is filed before us, the AO specifically cancelled out this part. He therefore submitted that it was apparent that without complying with the mandatory requirement of Section 151, the AO issued the notice u/s 148 of the Act on 09/02/2015 itself and in that view of the matter the proceedings suffered from fundamental infirmity and therefore consequent order was bad in law. When confronted with the Ld. AR’s such argument, the Ld. DR could not controvert the same by bringing to our attention any cogent material that the requirements of Section 151 were indeed complied with.
The Ld. AR additionally submitted that reasons recorded by the AO were solely based on borrowed satisfaction and there was complete non-application of mind by the AO to the facts of the case and for that reason also the reopening of assessment was bad in law. The Ld. Counsel submitted that after the receipt of information from the Investigation Wing of Kolkata, the AO without independently applying his mind or conducting any independent enquiry as regards correctness of the information or assessment records, straightaway reopened the assessment. According to Ld. AR, before the AO decides to reopen the assessment, he has to satisfy the condition precedent to assume jurisdiction and
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for that he drew our attention to the expression used in sec. 147 of the Act which states that AO should have 'reason to believe' about escapement of income. According to the Ld. AR, the expression "reason to believe" postulates a foundation based on information and belief based on reasoning. According to Ld AR, a belief that income chargeable to tax has escaped assessment, which expression used by Parliament is stronger than the expression 'satisfied' and in the present case such requirement as contemplated by law has not been met in the 'reason recorded' by the AO before venturing to re-open the assessment which vitiates the re-opening itself. According to Ld. AR, the information received from Investigation Wing could have at best prompted the AO to conduct enquiry but the same could not have been formed as a sole foundation for forming his reason to belief that income had escaped assessment. On receipt of information, it was incumbent upon the AO to verify the correctness of such information with reference to information and material already available in his records at the time of framing of the original order u/s 147/143(3). In such a scenario on receipt of the information, the proper course for the AO was to make reasonable enquiry and collect material, which would make him believe that there is in fact an escapement of income. Without doing so, the jurisdictional fact necessary to usurp jurisdiction to reopen the regular assessment cannot be made by the AO. For the said proposition, the Ld. AR drew our attention to following case laws :
- PCIT Vs. Meenakshi Overseas Ltd., 395 ITR 677(Del.) - PCIT Vs. Tupperware India Pvt. Ltd., 236 Taxman 494 (Del) - PCIT Vs. Shodiman Investments (P) Ltd., 93 taxmann.com 153 (Bom) - CIT VsParamjitKaur, 168 Taxman 39 (P&H HC) - Pr.CITVs RMG Polyvinyl (I) Ltd, 83 taxmann.com 348 (Del HC) - CIT VsInsceticides (India) Ltd, 357 ITR 330 (Del HC) - CIT Vs SFIL Stock Broking Ltd., 325 ITR 285 (Del HC)
We have heard rival submissions and gone through the facts and circumstances of the case. From the foregoing facts and applicable legal provisions the short question which needs to be adjudicated in the present appeal is whether the assessment order u/s 147 passed
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by the AO was legally sustainable when no addition was made by the AO with reference to reasons which were recorded prior to issue of notice u/s 148 of the Act. From the reasons recorded by the AO on 09.02.2015, we find that in the first instance the AO set out historical background of the equity shares issued by the assessee from the FY 1995-96 and onwards. Although in the recorded reasons the AO made a reference to the shares which the assessee company issued during FY 2010-11 to various entities allegedly controlled and managed by Shri Uday Mahawar, the AO did not record his satisfaction to the effect that the equity contribution received by the assessee from the Uday Mahawar entities represented assessee’s income escaping assessment for the AY 2011-12. We further find that having noted the details of contribution received to the equity capital from time to time totaling Rs.34 crores the AO then observed that the funds raised from issue of equity capital were invested in acquisition of shares of other bodies corporate allegedly controlled and managed by Shri Mahawar. Referring to the statement of Mr. Mahawar, the AO recorded that the investments made by the assessee in the shares of other bodies corporate belonging to Mr. Mahawar were allegedly sold by the assessee and thereby proceeds of Rs.34 crores were realized. According to AO in the garb of proceeds of sale of investments, Shri Mahawar introduced the alleged cash provided by RPG Group in the bank account of the assessee and the sum so introduced totaling Rs.34 crores represented Assessee Company’s income escaping assessment for the AY 2011-12. On these given facts therefore we find force in the submissions of the Ld. AR that even though in the reasons recorded the AO had made reference to the capital contribution received from companies belonging to and/or managed by Shri Uday Mahawar as also to the proceeds received on sale of investments in companies belonging to Shri Uday Mahawar, yet the AO had recorded his satisfaction about income escaping assessment only with specific reference to the sale of investment made by the assessee and in respect of which sales realization of Rs 34 Crores was made. We are of the considered view that merely because Mr. Uday Mahawar and companies controlled by him were a common thread in relation to assessee’s transactions involving issue of fresh shares and the sale of shares by the appellant, yet the transactions with reference to which the AO recorded his satisfaction about income escaping assessment, pertained specifically to sale of investments and not the fresh issue of shares by the appellant. It is for this reason that in the
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recorded reasons the AO recorded his satisfaction about income escaping assessment to the extent of Rs.34 crores and not Rs.30.20 crores being the amount received during the relevant year on issue of fresh shares. We therefore have no hesitation in holding that the reason for which the AO recorded his satisfaction about income escaping assessment had no connection whatsoever with the fresh issuance of equity shares totaling Rs.30.20 crores. In our considered opinion the AO’s satisfaction was specific and it was with reference to alleged introduction of unaccounted cash totaling Rs.34 crores in the guise of sale of investments by Mr. Mahawar. We however find that neither any enquiry with regard to this issue was conducted by the AO prior to completion of assessment nor we find any discussion with regard to the said issue in the AO’s order. We also note that in the order passed u/s 147, no addition was ultimately made in respect of the issue for which the satisfaction was recorded by the AO. In the foregoing factual background therefore the question arises for our consideration is whether the order u/s 147 was legally sustainable in view of the catena of judgments cited before us by the parties.
At the time of hearing, the Ld. DR vehemently argued that while recording reasons u/s 148(2) the AO made reference to the facts concerning fresh issue of shares during the relevant year totaling Rs.30.20 crores and in that view of the matter it was wholly inappropriate for the Ld. CIT(A) to hold that the assessment order was unsustainable on the premise that the reasons for which assessment was reopened had no connection with the addition ultimately made by the AO. As noted in the foregoing paragraphs, the recorded reasons took note of the details of equity shares which the assessee issued during the period 1995-96 to 2010-11 and set out the modus operandi for issuing the shares. Nowhere from the AO’s satisfaction recorded on 09/02/2015 it is discernible or from which it could be held that in AO’s opinion the subscription amounts received by the assessee against the issue of shares represented income escaping assessment. On the contrary we note that the AO was well aware about the identities of the bodies corporate who had subscribed to the equity capital during the relevant year. The AO was aware that the entities subscribing to the equity were managed by Mr. Mahawar. We also find that in respect of shares issued during the FY 2010-11, enquiries were conducted by the AO before the assessment order was
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passed on 30.03.2012 u/s 147/143(3) of the Act. Before completion of that assessment necessary enquires were made u/s 133(6) from the share subscribers and thereafter no adverse inference was drawn in respect of the fresh issue of share capital. In these circumstances we find force in the submissions of the Ld. AR that mere reference in the recorded reasons to the fact that during the relevant previous year the assessee had issued fresh equity capital totaling Rs.30.20 crores, did not amount to recording of satisfaction as required u/s 147/148 of the Act, particularly when the satisfaction recorded was specific and it was with reference to alleged introduction of unaccounted cash totaling Rs.34 crores in the guise of sale of investments by Mr. Mahawar. We are therefore unable to accept the Ld. DR’s contention that the AO had recorded his satisfaction about income escaping assessment with reference to issue of fresh capital during the relevant year. On the contrary we find that in the penultimate & last paragraph, the AO had specifically recorded his satisfaction as follows:
“…As expected after the purchase by Sanjeev RPG group, the investment worth Rs. 34 Crores in paper companies shown in the balance sheet of M/s. Dotex Merchandise Pvt Ltd, were sold on paper to the paper companies of Shri Mahawar and sale proceeds was credited in the bank account of Dotex Merchandise Pvt Ltd. As is clear from the statement of Shri Mahawar that the source of the sale proceed is cash provided by Sanjeev RPG Group to Shri Mahawar, who has routed it through different layers of paper companies and cheques have finally gone from paper companies of Shri Mahawar to Dotex Merchandise Pvt Ltd.
Thus there is reason to believe that the income of the assessee company amounting to Rs.34 crores has escaped assessment for the assessment year 2010-11. Proceedings u/s 147 is initiated, issue notice u/s 148 for the assessment year 2010-11.”
From the above it is apparent that in AO’s opinion the introduction of alleged cash received from RPG Group in the guise of sale proceeds of investments totaling Rs.34 crores constituted the income escaping assessment for AY 2011-12 and for which the proceedings u/s 147 were initiated on 09.02.2015. This reason was different and distinct from the reason for which the AO ultimately made addition for Rs.30.20 crores in the impugned assessment. Merely because in respect of both the issues Shri Uday Mahawar and/or companies
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controlled by him were a common factor, such fact ipso facto did not lead to conclusion that the reason for reopening of the assessment was same as the reason for which the addition was ultimately made. We therefore find merit in the finding of the Ld. CIT(A) that the reason for which the AO had recorded his satisfaction u/s 148(2) was not the same for which the addition was made in the order passed u/s 147/143(3) of the Act. We also find merit in the submissions of the Ld. AR as also in the findings of the Ld. CIT(A) that having initiated the proceedings u/s 147 for a specific reason, the said reason was completely abandoned and thereafter the AO’s enquiry proceeded entirely on different track and the addition in the assessment order was made in respect of an issue which was totally divorced from the issue for which the AO had recorded his reasons to believe that income had escaped assessment. We therefore find no reason to interfere in the order of the Ld. CIT(A) holding the order to be unsustainable in law on the ground that no addition was made in respect of the foundational issue for which the satisfaction was originally recorded u/s 147 of the Act.
The Ld. DR also urged us to set aside the order of the Ld. CIT(A) on the ground that the Ld. CIT(A) had powers which were co-terminus with that of the AO and therefore if there was any omission on the AO’s part to make the addition in respect of the issue for which reasons were recorded u/s 147 then such omission could be overcome by the Ld CIT(A) by making addition at the appellate stage. We however are unable to accept the contention raised by the Ld. DR at this stage. It may be true that the Ld. CIT(A) has co- terminus powers with that of the AO but it has been judicially held that such co-terminus powers are not so wide so as to include the power to consider a source of income which was not considered by the AO and which was not the subject matter of appeal before him. If there is a jurisdictional lacuna in the AO’s order then such infirmity cannot be cured by the first appellate authority while exercising his appellate jurisdiction even though the law grants him co-terminus and plenary powers to the extent of issues and sources considered by the AO.
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In this regard we rely on the judgment of the Hon’ble Delhi High Court in the case of CIT Vs Software Consultants (supra). In this case, in the course of search conducted against the promoter, the AO had found fixed deposits with bank and the person searched explained that the assessee company had provided the requisite funds. Based on such statement, the assessment of the assessee company was reopened u/s 147. While examining assessee’s sources of funds, the AO noted that the assessee had issued capital during the year and enquiry in respect of fresh issue was conducted u/s 133(6) of the Act. Ultimately the assessment was completed without making any addition. Later the CIT exercising powers u/s 263 held the assessment to be erroneous because in his opinion further enquiry was necessary in respect of fresh issue of shares, which the AO had failed to make. On appeal the Tribunal quashed the order of the CIT against which the appeal u/s 260A was preferred. While deciding the appeal, the Hon’ble High Court held as follows:
“9. One of the contentions, which has been accepted by the tribunal is that the order of the Assessing Officer cannot be regarded as erroneous even if the Assessing Officer had failed to carry out necessary verification and required enquiries in respect of the share application money, as no addition has been made on account of the reasons for reopening, which were recorded before issue of notice under Section 148 of the Act. It has been held that the Assessing Officer could not have made an addition on account of share application money as no addition has been made on account of FDRs of Rs.20 lacs. The tribunal has noticed and recorded that in the reasons for reopening it was mentioned that the assessee had made investment in form of FDRs of Rs.20 lacs but in the assessment order passed under Section 147/143(3) of the Act it has been held that the respondent assessee had been able to show and establish the genuineness of and capacity to make the said investment.
Similar issue had arisen before this Court in Ranbaxy Laboratories Ltd. v. CIT, [2011] 336 ITR 136/ 200 Taxman 242/ 12 Taxmann.com 74 (Delhi). In the said case, the Division Bench had also examined Explanation 3 to Section 147, which was inserted by Finance (No. 2) Act of 2009 with retrospective effect from 1st April, 1989. Reference was made to the decision of the Bombay High Court in CIT v. Jet Airways (I) Ltd., [2011] 331 ITR 236/[2010] 195 Taxman 117 in which it has been held as under:
"The effect of section 147 as it now stands after the amendment of 2009 can, therefore, be summarised as follows : (i) the Assessing Officer must have reason to believe that any income chargeable to tax has escaped assessment for any assessment year ; (ii) upon the formation of that belief and before he proceeds to make an assessment, reassessment or recomputation, the Assessing Officer has to serve on the assessee a notice under sub-section (1) of section 148;
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(iii) the Assessing Officer may assess or reassess such income, which he has reason to believe, has escaped assessment 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 the section ; and (iv) though the notice under section 148(2) does not include a particular, issue with respect to which income has escaped assessment, he may none the less, assess or reassess the income in respect of any issue which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under the section."
Thereafter, the High Court referred to the decision of the Rajasthan High Court in the case of CIT v.Shri Ram Singh, [2008] 306 ITR 343 in which it has been observed as under:
"It is only when, in proceedings under section 147 the Assessing Officer, assesses or reassesses any income chargeable to tax which has escaped assessment for any assessment year, with respect to which he had 'reason to believe' to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment, and which has come to his notice subsequently, in the course of proceedings under section 147.
To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the Assessing Officer were to come to the conclusion, that any income chargeable to tax, which, according to his 'reason to believe', had escaped assessment for any assessment year, did not escape assessment, then, the mere fact that the Assessing Officer entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the Assessing Officer may find to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147."
The Division Bench in Ranbaxy Laboratories Ltd. (supra) considered the judgment of the Supreme Court in the case of V. JagamohanRaov. CIT EPT, [1970] 75 ITR 373 and CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 / 64 Taxman 442 and has then elucidated:
"18. We are in complete agreement with the reasoning of the Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). We may also note that the heading of section 147 is "income escaping assessment" and that of section 148 "issue of notice where income escaped assessment". Sections 148 is supplementary and complimentary to section 147. Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some
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items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148. 19. In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding the items, viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those items of club fees, gifts and presents, etc., proceeded to make deductions under sections 80HH and 80-I and accordingly reduced the claim on these accounts.
The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which as per our discussion was not permissible. Had the Assessing Officer proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Explanation 3 to reduce the claim of deduction under sections 80HH and 80-I as well."
On the second aspect raised by the Commissioner of Income Tax with regard to the Assessing Officer accepting the loss return of Rs.1,02,756/-, we are of the view that the same did not require exercise of revisionary power under Section 263 of the Act. The observations of the Assessing Officer were only to the extent of stating that he had accepted the return. Benefit of carry forward of loss can be claimed in case a return is filed under Section 139(1). It is not the case of the Revenue that the assessee had tried to claim benefit of carry forward of loss on the basis of the order passed under Section 147/143(3) of the Act.
For exercise of power under Section 263 of the Act, it is mandatory that the order passed by the Assessing Officer should be erroneous and prejudicial to the interest of the Revenue. In the present case, the Assessing Officer did not make any addition for the reasons recorded at the time of issue of notice under Section 148 of the Act. This position is not disputed and disturbed by the Commissioner of Income Tax in his order under Section 263 of the Act. Sequitur is that the Assessing Officer could not have made an addition on account of share application money in the assessment proceedings under Section 147/148. Accordingly, the
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assessment order is not erroneous. Thus, the Commissioner of Income Tax could not have exercised jurisdiction under Section 263 of the Act.”
Similar view was expressed by this Tribunal at Delhi in the case of Indu ArtsVs ACIT (supra). In this case in the order u/s 147, the AO had made the addition in respect of an issue for which reasons were recorded. On appeal the CIT(A) deleted the addition in respect of the issue for which the reasons were recorded but made enhancement in respect of some other issue. No appeal against the relief allowed by the CIT(A) was preferred by the Revenue but the assessee objected to the enhancement made by the CIT(A). In deciding the appeal of the assessee, this Tribunal observed as follows:
“6. The Assessing Officer made a solitary addition of Rs. 22.57 lakh in the assessment under section 147 which was the only basis for initiating the reassessment and the same got finally deleted in the first appeal. At this juncture, it is relevant to note the mandate of the section, which provides that : '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...'. A bare perusal of the above provision divulges that the AO, in the course of assessment pursuant to notice u/s. 148, can make two types of additions, viz., first, the addition for which he formed reason to believe about the income chargeable to tax escaped assessment (hereinafter also called the 'foundational addition') and second, any other addition which comes to his notice subsequently in the course of the proceedings under this section (hereinafter also called the 'other addition'). It is trite that the 'other addition' can stand only if the 'foundational addition' is made by the AO. The logic appears to be simple and plain. Reassessment can't be made at the drop of a hat. There must be valid reasons with the AO on the basis of which a belief is formed that some income chargeable to tax escaped assessment. Jurisdiction to proceed with the assessment is acquired by the AO only by virtue of such belief. It is another thing that after validly acquiring the jurisdiction, the AO can make other additions as well. Thus the making of a 'foundational addition' is sine qua non for making 'other addition'. Reason behind this is not far to understand, being, prohibiting the Assessing Officer from needlessly exercising the power to reassess, by initiating the assessment proceedings on a fallacious ground and then making other additions as well. To put it simply, the Assessing Officer cannot proceed with the reassessment if the grounds mentioned in the re-assessment notice are non-existent. That is why, it has been held in several cases that no 'other addition' can be made unless the 'foundational addition' is made. The Hon'ble jurisdictional High Court in Ranbaxy Laboratories Ltd. v. CIT [2011] 12 taxmann.com 74/200 Taxman 242/336 ITR 136 (Delhi)
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has held that the AO has jurisdiction to reassess income other than the income in respect of which proceedings under s. 147 were initiated but he is not justified in doing so when the very reasons for initiation of those proceedings ceased to survive. The Hon'ble Bombay High Court in CIT v. Jet Airways (I) Ltd. [2010] 195 Taxman 117/[2011] 331 ITR 236, has also reiterated the same proposition by holding that the Assessing Officer may assess or reassess the income in respect of any issue which comes to his notice subsequently in the course of the proceedings though the reasons for such issue was not included in the notice. However, if, after issuing a notice u/s. 148, the Assessing Officer accepts the contention of the assessee and holds that the income, of which he has initially formed a reason to believe that it had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to assess some other income. Similar view has been taken by the Hon'ble Rajasthan High Court in CIT v. Shri Ram Singh [2008] 306 ITR 343.
The position which follows from the above discussion is that the Assessing Officer can make 'other addition' in the reassessment proceedings, provided, the 'foundational addition' is made. When this proposition is taken to a next level, no different consequences will emerge, if the 'foundational addition' is itself finally deleted in an appeal. In such a scenario, the 'other addition' made by the Assessing Officer would automatically cease to stand in isolation. This view has been affirmed by the Hon'ble jurisdictional High Court in CIT v. AdhunikNiryatIspat Ltd. [2011] 63 DTR 212 (Delhi). In that case, the return filed by the assessee for the asst. yr. 1999-2000 declaring income @ Rs. 1,22,460 was processed under s. 143(1) of the IT Act. However, notice was issued under section 148 of the Act subsequently, on the information received from the Director of IT (Inv.), New Delhi, to the effect that the assessee had accepted the accommodation entries from M/s. I.G. Properties (P.) Ltd., M/s. Parivartan Capital & Financial Services (P.) Ltd. and from M/s. Victoria (P.) Ltd. in the garb of share capital. The AO passed the reassessment order making additions of Rs. 31 lakh on account of unexplained share capital including the capital subscribed by the aforesaid three applicants on the basis of which the assessment was reopened. However, during the assessment proceedings, the AO also made certain additions of the credits received from M/s. AdhunikNiryat, M/s. Mahadev Metals, M/s. Royal International and M/s. Single Finshare India Ltd., albeit the assessment was not reopened on that basis. The assessee filed an appeal against these additions. The CIT (A) confirmed the additions of Rs. 31 lakh which was the basis for reopening reassessment, but deleted the other addition. Both the assessee as well as the Revenue preferred appeals against the orders of CIT (A). Appeal of the assessee was allowed by the Tribunal thereby deleting the addition of Rs. 31 lakh. Against this order, no appeal was preferred by the Revenue. Thus, the reasons which persuaded the AO to reopen the reassessment proceedings and on the basis of which additions were made were not found valid or justifiable as those additions were deleted by the Tribunal. Appeal of the Revenue was dismissed. In further appeal, the Hon'ble High Court upheld the order of the tribunal by holding that : 'Since the grounds for reopening the reassessment do not exist any longer and no additions were ultimately made on that account, the additions in respect of other items which were not part of "reasons to believe" cannot be made.' On going through the ratio decidendi of the above
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judgment, it is vivid that if the 'foundational addition' is finally deleted in appeal, then 'other addition' also can't stand.
At this stage, it is pertinent to note the effect of insertion of Explanation 3 to Section 147 by the Finance (No.2) Act, 2009 w.r.e.f. 1.4.1989, which reads as under : -
'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.'
The Memorandum explaining the provisions of the Finance Bill, in this regard, reads as under :
'The existing provisions of section 147 provides, inter alia, that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may assess or reassess such income after recording reasons for re- opening the assessment. Further, he may also assess or reassess such other income which has escaped assessment and which comes to his notice subsequently in the course of proceedings under this section. Some Courts have held that the Assessing Officer has to restrict the reassessment proceedings only to issues in respect of which the reasons have been recorded for reopening the assessment. He is not empowered to touch upon any other issue for which no reasons have been recorded. The above interpretation is contrary to the legislative intent. With a view to further clarifying the legislative intent, it is proposed to insert an explanation in section 147 to provide that the Assessing Officer may assess or reassess income in respect of any issue which comes to his notice subsequently in the course of proceedings under this section, notwithstanding that the reason for such issue has not been included in the reasons recorded under sub-section (2) of section 148. This amendment will take effect retrospectively from 1st April, 1989 and will, accordingly, apply in relation to assessment year 1989-1990 and subsequent years. [Clause 57]'
It is palpable that the Explanation has not enhanced the scope of the provision. It simply embodies the position more clearly, which is already embedded in the opening part of section 147 providing that the AO may: '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'. The foregoing legal position about not continuing with the 'other additions', if none of the 'foundational additions' is either made or finally sustained, has not been watered down by the insertion of Explanation 3. Ambit of the Explanation is confined only to making 'other addition' and not sustaining the 'other addition', when the 'foundational addition' is not made or finally deleted.
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Reverting to the facts of the instant case, it is found that the Assessing Officer made the 'foundational addition' of Rs. 22.57 lakh which came to be finally deleted in the first appeal. In the absence of such an addition, neither the Assessing Officer nor for that purpose, the ld. CIT (A), exercising his coterminous power, could have made the 'other addition'.
The situation can be viewed from another angle as well. The Assessing Officer initiated reassessment proceedings and made addition of Rs. 22.57 lakh. When the ld. CIT (A) held that the addition of Rs. 22.57 lakh was not sustainable, it meant that the jurisdiction of the Assessing Officer was lacking in initiating the reassessment proceedings. As a consequence of his deletion of the addition, not only the assessment order but all the proceedings flowing therefrom had the effect of becoming null and void. As such, he could not have gone ahead with any other issue and made enhancement of income. Making an enhancement in such circumstances would mean that though the jurisdiction of the Assessing Officer in initiating the reassessment was lacking, still, the assessment would be valid and ex consequenti, the addition would be sustainable. This, in my considered opinion, is a totally illogical and unsound proposition. I, therefore, order to delete the addition of Rs. 2.36 lakh and odd made by the ld. CIT (A).”
In both these decisions the concurrent view expressed was that unless in the order u/s 147 the AO makes addition on the ‘foundational’ issue for which the reason was recorded, the AO is not permitted to make addition in respect of ‘any other issue’ for which reason was not recorded prior to issue of the notice. The reason for arriving at such conclusion is not far to seek. It is a cardinal principle of any fiscal statute that any proceeding under the fiscal law must attain finality and it cannot be allowed to remain open forever. In the income-tax proceedings also there must be a finality and the assessee must be made known that his assessment has attained finality once the proceedings are completed by the AO by passing an order of assessment u/s 143(3) or 144 or 147, as the case may be. Once the assessment is complete, it is no more open for the tax authority to re-enter the issue of determination of income or to review or revise the assessment already completed. In the circumstances unless there are compelling reasons, the tax authority is not permitted to reopen the completed assessment and accordingly adequate safeguards are incorporated by the legislature in the statute. Even though provisions of Section 147, 154 or 263 permit the tax authorities to re-compute and re-assess the income of the assessee, yet the Act requires that before these powers are exercised the assessee is put to notice and the Authority is required to communicate the precise reasons for which the authority intends to re-visit the
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completed assessment. Communication of the reasons recorded is a pre-requisite and it is necessary for the authority to show that the reason recorded has a rational nexus with formation of his belief that income assessed earlier was incorrect and income assessable was something higher than what was assessed earlier. In the circumstances holding reasonable belief based on tangible material about incorrect assessment of income in the order earlier passed is a pre-requisite which must exist in all such proceedings where the tax authority is desirous of tampering with a concluded assessment. In the context of Section 147 read with Section 148, the Legislature has mandated that before the proceedings are initiated for re- assessment the AO must entertain an honest belief based on tangible material on the basis of which he comes to prima facie conclusion that some item of income which was assessable to tax, had escaped assessment and this has resulted in under-assessment of income or under charge of consequent tax payable. The reason to believe that assessee’s income chargeable to tax has escaped assessment must be based on some tangible material, which comes into AO’s possession subsequent to passing of the assessment order. Once the AO forms such reasonable belief then such reason constitutes the key to open the lock which is placed on the assessment by the order passed earlier u/s 143(3) or 147 as a case may be. It is therefore necessary for the AO to show that the key used for opening the lock placed earlier by an order u/s 143(3) is the most appropriate key to unlock and thereby reopen the proceedings for bringing to charge all items of income which had escaped assessment earlier. Once it is established by the AO that the reason recorded by him is the correct key for reopening of assessment, only then the entire assessment gets opened and the AO is then permitted to bring to tax every item of income which had escaped assessment earlier even though in respect of such ‘other items’ the AO may not have recorded his satisfaction prior to issue of notice u/s 148. It is this essence, which has been captured by the Legislature by enacting Explanation (3) to Section 147 of the Act. However in a case where the assessee demonstrates that the key used by the AO for reopening of assessment is either incorrect or where reason recoded is abandoned in the course of reassessment proceedings, then as a corollary it has to be held that the key used by the AO for opening the lock was inappropriate or incorrect and thereby the lock placed earlier on the concluded assessment remained unopened and therefore the AO could not enter upon the arena of reassessment. In
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a case where the reason recorded prior to issue of notice u/s 148 is not at all pursued or acted upon by the AO in the course of reassessment, then it is no more open for the AO to pursue some ‘other issues’ for which no reasons were recorded prior to issuance of notice u/s 148 of the Act. This legal proposition is well explained by the Hon’ble Delhi High Court in the case of CIT Vs Ranbaxy Laboratories Limited (supra) the ratio of which was followed in the above two decisions referred earlier.In this judgment the Hon’ble Delhi High Court had held as follows:
"18. We are in complete agreement with the reasoning of the Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). We may also note that the heading of section 147 is "income escaping assessment" and that of section 148 "issue of notice where income escaped assessment". Sections 148 is supplementary and complimentary to section 147. Sub- section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148. 19. In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding the items, viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those
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items of club fees, gifts and presents, etc., proceeded to make deductions under sections 80HH and 80-I and accordingly reduced the claim on these accounts. 20. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which as per our discussion was not permissible. Had the Assessing Officer proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Explanation 3 to reduce the claim of deduction under sections 80HH and 80-I as well.
In view of our above discussions, the Tribunal was right in holding that the Assessing Officer had the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but he was not so justified when the reasons for the initiation of those proceedings ceased to survive. Consequently, we answer the first part of question in affirmative in favour of Revenue and the second part of the question against the Revenue."
We find that the ratio laid down by the Hon’ble Delhi High Court in the foregoing judgment, was applied by the coordinate Bench of this Tribunal in the case of Infinity Infotech Parks Ltd (ITA No. 1316/Kol/2012) dated 20.12.2013. On appeal by the Revenue u/s 260A, the Hon’ble Calcutta High Court in its judgment dated 10.09.2014 had framed the following question of law :
“a) Whether the learned Tribunal erred in law in not appreciating that upon formation of the reason to believe that income chargeable to tax has escaped the assessment, the Assessing Officer is empowered to assess or to 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 the provisions of section 147 of the said Act ?
In deciding the above question, the Hon’ble High Court upheld the decision of this Tribunal by observing as follows:
“However, from the order of the Tribunal, it appears that reassessment was pursued by the Assessing Officer on the other issues for which reasons were not recorded. Upon assessee’s appeal, the CIT (Appeal) accepted the contention that the Assessing Officer was not
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competent to continue with the proceeding under section 147 of the Income Tax Act, 1961 on some other issues which were not mentioned in the reasons recorded under section 148(2) of the Act. In appeal preferred by the Revenue, the Tribunal following the judgments in Ranbaxy Laboratories Ltd. (supra) –vs- CIT and in CIT –vs- Jet Airways India Ltd. (supra) held as under :
“We further find that similar view was taken by the Hon'ble Bombay High Court in the case of CIT –vs- Jet Airways India Ltd. (supra) and the Hon'ble Delhi High Court in the case of Ranbaxy Laboratories India Ltd (supra). The ratio laid down in these decisions is that reassessment must be in the first place, be in respect of income escaped assessment for which the reasons were recorded and only thereafter in respect of some other items of escaped income. If, however, the income, escapement of which was the foundation for recording of reasons to believe, is not assessed or reassessed inthe order under section 147, then it is not mere open to the AO to independently assess any other income, which comes to his notice subsequently.”
In our view, since the reassessment proceedings could not be carried on the original grounds, the Tribunal was justified in dismissing the appeal as it was not open for the Assessing Officer to expand the scope of reassessment by including some other issues. Therefore, no substantial question of law arises. Hence, the application and the appeal are dismissed.”
We also rely on the judgment of the Hon’ble Rajasthan High Court in the case of CIT Vs Ram Singh (supra) wherein it was held as follows:
“24. Reverting back to language of section 147, this much is clear, that the sine qua non for conferment of jurisdiction on the AO, to initiate proceedings under that section is, that he should have "reason to believe" that "any income chargeable to tax has escaped assessment for any assessment year" and that, being that situation, being available, i.e., the AO having entertained a "reason to believe", obviously on valid grounds, he acquires the jurisdiction to assess or reassess "such income", which obviously means, the income, which was chargeable to tax, and had escaped assessment for any assessment year, according to his "reason to believe", and while so assessing or reassessing, he can also, in addition, assess or reassess "any other income chargeable to tax which has escaped assessment and which may come to his notice subsequently in the course of proceedings under section 147".
The precise question, thus requiring to be considered is, as to whether, the conjunctive word used, being "and", used between the expression "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 section 147" is required to be given its
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due, or is required to be ignored, or is required to be interpreted as "or". Obviously because, if it is to be interpreted as "or", then the language would read as under:
"147. If the AO 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 or 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 re-compute 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)."
But then if it were to be so read, the word "also" becomes redundant, and to make sense of the sentence, the section would be required to be read by ignoring the words "also", as well, in which event, the section would read as under:
"147. If the AO 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 or 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 re-compute 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)."
It is established principle of interpretation of statutes, that the Parliament is presumed to be not extravagant, in using the words, and therefore, every word used in the section, is required to be given its due meaning.
If considered on that principle, leaving apart for the moment, the aspect of interpretation of the word "and" as "or", the existence of the word "also" is of a great significance, being of conjunctive nature, and leaves no manner of doubt in our opinion, that it is only when, in proceedings under section 147 the AO, assesses or reassesses any income chargeable to tax, which has escaped assessment for any assessment year, with respect to which he had "reason to believe" to be so, then only, in addition, he can also put to tax, the other income, chargeable to tax, which has escaped assessment. and which has come to his notice subsequently, in the course of proceedings under section 147.
To clarify it further, or to put it in other words, in our opinion, if in the course of proceedings under section 147, the AO were to come to conclusion, that any income chargeable to tax, Which, according to his "reason to believe", had escaped assessment for any assessment year, did not escape assessment, then, the mere fact, that the AO entertained a reason to believe, albeit even a genuine reason to believe, would not continue to vest him with the jurisdiction, to subject to tax, any other income, chargeable to tax, which the AO may find
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to have escaped assessment, and which may come to his notice subsequently, in the course of proceedings under section 147.
It is a different story that for such other income, the AO may have recourse to such other remedies, as may be available to him under law, but then, once it is found, that the income, regarding which he had "reason to believe" to have escaped assessment, is not found to have escaped assessment, the AO is required to withhold his hands, at that only.”
We may also gainfully refer to the decision of the SMC Bench of this Tribunal in the case of Motilal Jain Vs ACIT (supra) dated 15.03.2017. In this case the assessments for three years were reopened by the AO after recording reasons to the effect that as per the information received the AO was of the opinion that in each of the three years the assessee had suppressed his sales and therefore in terms of Section 69C of the Act additions were required to be made. Having reopened the assessments of these years on the ground that escapement of income was caused as a result of suppression of sales, in the assessments ultimately passed u/s 147/143(3) for these years the additions were made on account of bogus purchases. Applying the ratio laid down by the Hon’ble Bombay High Court in the case of CIT Vs Jet Airways Ltd (331 ITR 236), the Tribunal held that the reasons which formed the basis of formation of belief that income had escaped assessment was not pursued and the additions were made on account of bogus purchase, the assessment order u/s 147/143(3) were therefore held to be legally unsustainable.
Applying the ratio laid down in foregoing decisions to the assessee’s case we find that the AO had recorded his satisfaction u/s 147 on the sole premise that the proceeds received by the assessee on sale of shares held as investments totaling Rs.34 crores represented assessee’s income escaping assessment. The said reason was based on the statement recorded in the course of survey, conducted against Mr. Uday Mahawar. The reasons which the AO recorded on 09/02/2015 and as set out in the foregoing, do not in any manner suggest that the AO was satisfied that the share subscription amounts received during the relevant year represented assessee’s income escaping assessment. Undeniably in the reasons set out, the AO has made reference to two separate and distinct transactions; one involving the shares which the assessee issued to twenty two share subscribing companies
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and another involving sale of investments which the assessee held in other bodies corporate. It may be so that Shri Mahavar or companies managed by him were connected with both the set of transactions. However both the sets of transactions were separate from each other and consequences flowing from these sets of transactions were also separate and could not be intermixed. In the reasons the AO recorded his satisfaction about escapement of income specifically with reference to assessee’s transactions involving sale of investments totaling Rs 34 Crs. The satisfaction recorded did not any manner suggest that in AO’s opinion share subscription amount of Rs 30.20 Crs. received during the year from 22 subscribers represented assessee’s income escaping assessment. We therefore concur with the findings of the Ld. CIT(A) that no addition was made in the order u/s 147/143(3) dated 31.03.2016 with reference to the reasons for which the assessment was reopened and in that view of the matter the impugned order u/s 147/143(3) is held to be legally unsustainable. Hence, we do not find any reason to interfere with the findings returned by the Ld. CIT(A) in his order.
In the Cross Objections the Ld. AR has made out a case for holding the assessment to be unsustainable for not complying with statutory provisions of Section 151 of the Act because apparently no permission from the Additional/ Joint Commissioner as required u/s 151 was obtained prior to issue of notice u/s 148 of the Act. Though we find prima facie merit in the case made out by the Ld. AR, since we have already held the order u/s 147/143(3) to be unsustainable in law for the reasons set above, we are not inclined to return our findings with regard to the issues raised in the cross objections as the same have now become academic in nature.
In the result, appeal of the Revenue is dismissed and the cross objections are also dismissed as infructuous. Order is pronounced in the open court on 3rd May, 2019. Sd/- Sd/- (Dr. A. L. Saini) (A. T. Varkey) Accountant Member Judicial Member Dated: 3rd May, 2019 Jd.(Sr.P.S.)
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Copy of the order forwarded to: 1 Appellant – DCIT, Cir-12(1), Kolkata. 2 Respondent – M/s. Dotex Merchandise Pvt. Ltd., Aakash Deep, Flat No. 3, 4th floor, 5, Lower Rowdon Street, Kolkata-700 020. . 3 CIT(A)-4, Kolkata (sent through e-mail) 4 CIT, , Kolkata. DR, Kolkata Benches, Kolkata (sent through e-mail) 5
/True Copy, By order,
Assistant Registrar