COMPACT TEXFAB PVT. LTD.,NEW DELHI vs. ITO WARD - 6(2) , NEW DELHI

From the above reasons, it could be seen that the ld. AO had not at the outset recorded any formation of belief that income of the assessee had escaped assessment within the meaning of section 147 of the Act. For this purpose, mere mentioning in the reasons that AO has reason to believe that income has escaped assessment would not be sufficient. The ld. AO should have tangible material or information in his possession and such material / information should have live link or nexus with the formation of belief that income of a person had escaped assessment. In the instant case, the ld. AO had merely recorded the details of opening stock, purchases, sales and closing stock without even mentioning from which business, the said transactions were carried out by the assessee. He had not formed any belief. Merely based on information from Innestigation wing, the ld. AO had recorded that the assessee had not reflected the true nature of transactions. Compact Texfab Pvt. Ltd No basis was reflected for arriving to this conclusion. Further, the ld. AO had stated that the assessee was a beneficiary of accommodation entries received from 4 parties by duly mentioning certain figures. The ld. AR before us pointed out that those figures mentioned in the reasons are factually incorrect as tabulated below:-

Accordingly, the ld. AR stated that the entire reasons recorded were based on incorrect assumption of facts without making any verification to the facts of the assessee. It was submitted that there was no application of mind on the part of the ld. AO before assuming jurisdiction u/s 147 of the Act. He argued that infact reopening has been done only for making roving and fishing enquiries by the ld. AO. Per Contra, the ld. DR submitted that sufficiency of information need not be gone into at the time of recording of reasons. Once there is prima facie information that income of the assessee had escaped assessment, the assumption of jurisdiction by the ld. AO u/s 147 of the Act cannot be questioned.

The assessee on receipt of reasons recorded for reopening the assessment, had filed objections before the ld. AO vide letter dated 10.10.2018 which is enclosed in Pages 37 to 124 of the Paper Book. The assessee prima facie submitted that it is engaged in the business of investments and in trading of shares and securities. It had derived turnover of Rs 8.80 crores and the trading business was running smoothly till financial year 2013-14 and thereafter due to fall in price of shares of Era Infra Engineering Col Ltd in Bombay Stock Exchange, the assessee company incurred huge losses and had to practically make its business dormant with effect from 4.5.2017. The assessee gave the complete list of loans and advances received and paid by the assessee company being an investment Page | 6 Compact Texfab Pvt. Ltd company together with their complete list. It was submitted that the loans borrowed were duly utilized for the purpose of its business and interest paid thereon was claimed as deduction. The said interest was duly subjected to deduction of tax at source. Some loans were received and paid for the purpose of purchase of shares. These shares were purchased by the assessee company as per requirement of the loanee company and many times shares were kept in common pool till they were sold on the request of the loanee. These loans and advances received by other companies were settled with the finalization of the purchase / sale of shares or at the time of booking profit / loss. The assessee specifically met the allegation leveled in the reasons that companies were in the business of providing accommodation entries who wish to introduce their unaccounted money in the form of share capital, share premium, share application money/unsecured loans, by stating that it being an investment company engaged in the trading of shares and securities and during the year under consideration had total turnover of Rs 8.80 crores. Hence it cannot be said that assessee company is providing any accommodation entry. The loans and advances received by the assessee company are utilized for the purchase of shares or they are returned back to the same entity by way of regular banking channels, if so desired by the loanee company. All loans and advances were received through regular banking channels and the same have been cleared or returned back properly from the bank account of the assessee. Hence it cannot be construed as mere accommodation entries. As regards inflation of expenses, it was submitted that no interest has been given on the loans and advances which have been received for the purpose of purchase of shares. However, loans and advances received for day to day business of the assessee were interest bearing and interest on the nominal rate of 12% per annum has been paid in the sum of Rs 5,75,285/- after due deduction of tax at source. Thereafter the assessee furnished the party wise details of aforesaid 4 entities mentioned in the reasons recorded as under:-

The assessee also furnished the complete details of all the aforesaid loan creditors such as confirmation of balance , ledger account as appearing in the respective books for the relevant period, bank statements of the lenders proving the immediate source of credit, copy of income tax return acknowledgements together with their statement of total income, audited financial statements of Olive Vinimay P Ltd, to prove the three necessary ingredients of section 68 of the Act viz identity of the lenders, creditworthiness of the lenders and genuineness of the transactions. The ld. AO was satisfied with the complete details furnished by the assessee with regard to three parties viz Rita Govil, Naman Govil and Padam Wires P Ltd and did not resort to make any addition thereon. However, with regard to loan received in the sum of Rs 10 lacs during the year from Olive Vinimay P Ltd, the ld. AO added the same as unexplained cash credit u/s 68 of the Act on the ground that the said lender in response to notice u/s 133(6) of the Act had responded that no loan was given by them to the assessee and also on the ground that the said lender company had declared Nil income in their income tax returns filed for Asst Years 2011-12 and 2017-18. We find from the ledger account confirmation given by Olive Vinimay Pvt Ltd which is enclosed in Page 126 of the Compact Texfab Pvt. Ltd Paper Book , it is clearly reflected that a sum of Rs 10,00,000/- was received as fresh loan during the year and total sum of Rs 32,00,000/- was repaid by the assessee to Olive Vinimay Pvt Ltd during the year itself. Hence the reliance placed by the ld. AO on the reply of the lender is completely misplaced in view of this fact. As far as availability of cash flow with Olive Vinimay Pvt Ltd, the same is duly reflected in the bank statement of Olive Vinimay Pvt Ltd which had been placed on record (once by the assessee and again directly by the said lender company in response to notice u/s 133(6) of the Act) and hence creditworthiness of the lender company is also proved beyond reasonable doubt. This fact is evident from perusal of the balance sheet of Olive Vinimay Pvt Ltd wherein it has interest free funds of Rs 2.27 crores in its kitty to advance interest free loan to the assessee company. All the transactions are routed through regular banking channels and in the instant case, the assessee had even repaid the entire loans to Olive Vinimay Pvt Ltd during the year under consideration. Hence the genuineness of the transactions are also proved beyond reasonable doubt. The same cannot by any stretch of imagination be construed as accommodation entries. Hence we have no hesitation to delete the addition made in the sum of Rs 10 lakhs as unexplained cash credit u/s 68 of the Act.

It could be seen that the entire reassessment proceedings had been initiated by the ld. AO by recording completely incorrect facts qua the asessee’s transactions with respect to the aforesaid lenders as could be seen from the differential figures mentioned in para 4 supra. Hence the basic assumption of jurisdiction is based on incorrect assumption of fact. Moreover, on perusal of the reasons recorded for reopening the assessment, we find that the ld. AO had merely stated the primary facts that are either incorrect or already accounted and available in the financial statements of the assessee company. The investigation wing had alleged these loan transactions with aforesaid 4 entities to be accommodation entries. The ld. AO without making any verification from his side with regard to the aforementioned loan transactions, had arrived at a prima facie conclusion that these are accommodation entries. Had the ld. AO resorted to make preliminary enquiry before assuming jurisdiction u/s 147 of the Act, he would have had no other option Page | 9 Compact Texfab Pvt. Ltd but to accept the transactions of the assessee as genuine, which fact is evident from the aforesaid observations made by us. Infact the ld. AO himself had subsequently accepted the loan transactions from Rita Govil, Naman Govil and Padam Wires P Ltd to be genuine and had not made any addition thereon. Hence there cannot be any reason to believe that income had escaped assessment for these loan transactions and they cannot be construed as accommodation entries. With regard to loan from Olive Vinimay P Ltd, we had already held hereinabove that the said loan transactions cannot be construed as accommodation entries as the assessee had duly repaid the entire loans in full during the year itself through regular banking channels and moreover the very basic assumption of jurisdiction u/s 147 of the Act was based on incorrect facts recorded by the ld. AO. Hence the assumption of jurisdiction u/s 147 of the Act fails on this count also. Our view is further fortified by the decision of Hon’ble Jurisdictional High Court in the case of Synfonia Tradelinks P Ltd vs ITO reported in 435 ITR 642 (Del) wherein it was held as under:-

The ld. AO had merely resorted to reopening the assessment based on borrowed satisfaction from investigation wing without having any independent application of mind from his side. We are in agreement with the argument of the ld. AR that the reopening in the instant case had been made only with a view to make roving and fishing enquiries, which is not permissible in law. Reliance in this regard is placed on the decision of Hon’ble Bombay High Court in the case of PCIT vs Sheetal Dushyant Chaturvedi reported in 134 taxmann.com 327 (Bom) wherein the Special Leave Petition (SLP) preferred by the revenue before the Hon’ble Supreme Court was dismissed in 285 Taxman 85 (SC). Similar views were taken in the following cases:-

A perusal of the reasons recorded by the ld. AO would show that on the mere suggestion of the investigation wing of the movement of funds escaping assessment by construing it to be accommodation entries, the reassessment proceedings have been initiated by the ld. AO in the belief of escapement of income of the assessee. Apparently as between the information received and the inference drawn by the ld. AO, there is absolutely no live link or nexus which would enable him to form a belief that income of the assessee had escaped assessment warranting reopening u/s 147 of the Act. Absence of live link between the material on record and the satisfaction recorded completely mutilates the validity of the Compact Texfab Pvt. Ltd action of the ld. AO. It is with reference to the contents of the material contained in the report of the investigation wing that the nexus of the reasons for the ld. AO’s formation of belief of escapement of income of the assessee would have to be tested. Absent that foundational material, the test would without doubt fail. Reliance has been rightly placed by the ld. AR before us on the decision of Hon’ble Supreme Court in the case of ITO vs Lakhmani Mewal Das reported in 103 ITR 437 (SC) , wherein at page 448, the Hon’ble Apex Court held as under:-

We find that the ld. AO had also made one more addition u/s 68 of the Act in respect of loan received in the sum of Rs 1.50 crores from Vvian Construction Private Limited. Since the entire reassessment proceedings have been quashed hereinabove, the adjudication of the addition u/s 68 of the Act on merits in respect of Rs 1.50 crores would be academic in nature and hence it is left open.

In the result, the appeal of the assessee is allowed.