M/S. PROFICIENT COMMODITIES PVT. LTD.,KOLKATA vs. DCIT, CIRCLE - 5(1), KOLKATA, KOLKATA

Per J. Sudhakar Reddy, AM :- Both these appeals by the assessee are directed against the separate but identical orders of the ld. Commissioner of Income Tax (Appeals) – 2, Kolkata, dt. 01/08/2017 passed u/s 250 of the Income Tax Act, 1961 (the ‘Act’), for the Assessment Years 2010-11 & 2011-12.

2 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd Assessing Officer. He submitted that there is no independent application of mind on the material by the Assessing Officer before recording of reasons that income subject to tax has escaped assessment. He pointed out that the information received from the Forward Markets Commission did not contain any allegation whatsoever against the assessee that the assessee had indulged in taking accommodation entries or booking bogus loss. He contended that the Assessing Officer has failed to come to a prima facie conclusion that income of the assessee has escaped assessment for the Assessment Year in dispute. He pointed out that serious allegation were made by the Forward Markets Commission which enquired into the affairs of National Multi-Commodity Exchange of India Ltd. (NMCEI), against one Shri Kailash Gupta, MD & CEO of NMCEI and that no allegation was made against the assessee or its Directors and that on such information, no reasonable person would conclude that income subject to tax has escaped assessment.

3.1. On merits he submitted that the assessee carries on its activities on the floor of NMCEI and the transactions were duly confirmed by the exchange. He submitted that the books of accounts were produced before the Assessing Officer and the Assessing Officer had not disputed the veracity of the transactions in the books and that the books were duly audited. He pointed out that the audit by FMC did not find any discrepancies in the books of account. He contended that the Assessing Officer without any verification whatsoever merely relied on the so called report of the Forward Markets Commission (FMC) and alleged that the assessee has indulged in booking bogus losses. He contended that there is no allegation leveled against the assessee by the FMC and hence no addition/disallowance can be made in the assessee’s hands, based on such a report. He further submitted that certain statements were recorded by the Assessing Officer and they were relied upon without giving copies of the same to the assessee. He pointed out that in none of the statements the name of the assessee was taken and that no adverse material was found against the assessee. He submitted that his request for copies of statements and opportunity to cross- examine were denied to the assessee. He submitted that factual inaccuracies crept

3 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd into the order of the Assessing Officer and had brought the same to the notice of the bench. He pointed out that Shri Manoj Desai has never admitted in his statement that the assessee had indulged in booking bogus losses. He pointed out that it was categorically stated that the assessee arbitrages in the same commodity in two different exchanges whereby if in one exchange there is a loss and in the other one there is profit. He reiterated that this is an undisputed fact that the activities of the assessee were in the nature of arbitrage with a miniscule 1% of brokerage. He pointed out that it is not in dispute that 99% of the trading activity of the assessee was on self account. He strongly disputed the findings of the revenue authorities that the loss was not genuine. He submitted that the audit by FMC had not found fault with the transactions of the assessee. He relied on a number of case-law both for the proposition that the re-opening is bad in law and also for the proposition that the disallowance of loss is bad in law.

4 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd Exchange (NMCE). The total loss incurred by the assessee on National Multi Commodity Exchange (NMCE) was Rs.8,28,02,646/- during the F.Y. 2009-10. I have therefore, reasons to believe that the income of the assessee to the extent of Rs.8,28,02,646/- has escaped assessment. A notice u/s 148 of the I.T. Act, 1961 is issued.”

The reasons recorded by the Assessing Officer for re-opening of the assessment for the Assessment Year 2011-12 is as follows:- “In this case the assessee had filed its ITR for A.Y. 2011-12 on 28.09.2011 disclosing total income of Rs.66,02,820/-. In the case of the assessee information was received from the Forward Market Commission (FMC), the regulatory authority of commodity exchange that the assessee M/s. Proficient Commodities Private' Limited had taken accommodation entries inform of bogus losses through National Multi Commodity Exchange (NMCE). The total loss incurred by the assessee on National Multi Commodity Exchange (NMCE) was Rs.13,49,40,920/- during the F.Y. 2010-11. I have therefore, reasons to believe that the income of the assessee to the extent of Rs.13,49,40,920/- has escaped assessment. A notice u/s 148 of the I.T. Act, 1961 is issued.”

A perusal of the above reasons demonstrate non-application of mind by the Assessing Officer to the information received from Forward Market Commission. A perusal of the assessment order demonstrates that in the report of the FMC there is no allegation whatsoever made that the assessee had booked bogus losses. The information was general in nature and the assessee company was not named. The Assessing Officer was duty bound to apply his mind to the information received prior to coming to the conclusion that he has reason to believe that income subject to tax has escaped assessment. This information received and the material had to be prima facie examined and the material has to have live link with the formation of belief that income subject to tax has escaped assessment. The Assessing Officer has discussed in detail the serious irregularities that have taken place in NMCE and the investigation by FMC, from para 3 to 3.6 at pages 2 to 5 of his order. There is no material or allegation against the assessee in these paragraphs. The allegations are against some other persons. Para 3.7., was regarding Shri Manoj Desai’s statement. Nothing turns out on this statement. In fact, NMCE has, in its action taken report, not framed any charges on account of this statement. A small token fee of

5 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd Rs.10,000/- was levied for non-production of bank books of HDFC. There is no allegation of wrong doing on the part of the assessee company in this audit report. When FMC audit does not find fault with the transactions of the assessee company and when the assessee company is not named in the FMC report, to base the reason on such information without verification, is bad in law. The assessee has produced all evidence to prove that the transactions are genuine and that he had participated as an arbitrager. There is no proof of cash changing hands. The FMC audit had cleared the transactions of the company. A plain look at the reasons demonstrates that the re-opening was based on the information which was never examined or verified by the Assessing Officer before recording reasons for reopening of assessment. On these facts, we examine the legal position.

5.1. We find that this Bench of the Tribunal in the case of ACIT vs. M/s. Adhunik Cement Ltd. in ITA No. 1375/Kol/2017; Assessment Year 2009-10, under identical facts and circumstances held as follows:- 7.1. The Hon'ble Delhi High Court in the case of Commissioner of Income-tax, IV v.Insecticides (India) Ltd[2013] 357 ITR 330 (Delhi) upheld the order of the ITAT Delhi Bench in ITA Nos. 2332-2333/Del/2010, holding as follows:- "7. We may point out at this juncture itself that the Tribunal did not go into the question of merits. It only examined the question of the validity of the proceedings under Section 147 of the said Act. The Tribunal, in essence, held that the purported reasons for reopening the assessments were entirely vague and devoid of any material. As such, on the available material, no reasonable person could have any reason to believe that income had escaped assessment. Consequently, the Tribunal held that the proceedings under Section 147 of the said Act were invalid. I.T.A. No. 1375/Kol/2017 Assessment Year: 2009-10 M/s. Adhunik Cement Ltd 8. The Tribunal gave detailed reasons for concluding that the proceedings under Section 147 were invalid. Instead of adding anything to the said reasons, we think it would be appropriate if the same are reproduced:-- "In the case at hand, as is seen from the reasons recorded by the AO, we find that the AO has merely stated that it has been informed by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 that the above named company was involved in giving and taking bogus entries/transactions during the relevant year, which is actually unexplained income of the assessee company. The AO has further stated that the assessee company has failed to disclose fully and truly all material facts and source of these funds routed through bank account of the assessee company. In the reasons recorded, it is nowhere mentioned as to who had given bogus entries/transactions to the assessee or to whom the assessee had given bogus entries or transactions. It is also nowhere mentioned as to on which dates and through which mode the bogus entries and transactions were made by

6 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd the assessee. What was the information given by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 has also not been mentioned. In other words, the contents of the letter dated 16.06.2006 of the Director of Income-tax (Inv.), New Delhi have not been given. The AO has vaguely referred to certain communications that he had received from the DIT(Inv.), New Delhi; the AO did not mention the facts mentioned in the said communication except that from the informations gathered by the DIT (Inv.), New Delhi that the assessee was involved in giving and taking accommodation entries only and represented unsecured money of the assessee company is actually unexplained income of the assessee company or that it has been informed by the Director of Income-tax (Inv.), New Delhi vide letter dated 16.06.2006 that the assessee company was involved in giving and taking bogus entries/transactions during the relevant financial year. The AO did not mention the details of transactions that represented unexplained income of the assessee company. The information on the basis of which the AO has initiated proceedings u/s 147 of the Act are undoubtedly vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which a reasonable person could have formed a belief that income had escaped assessment. In other words, the reasons recorded by the AO are totally vague, scanty and ambiguous. They are not clear and unambiguous but suffer from vagueness. The reasons recorded by the AO do not disclose the AO's mind as to what was the nature and amount of transaction or entries, which had been given or taken by the assessee in the relevant year. The reasons recorded by the AO also do not disclose his mind as to when and in what mode or way the bogus entries or transactions were given or taken by the assessee. From the reasons recorded, nobody can know what was the amount and nature of bogus entries or transactions given and taken by the assessee in the relevant year and with whom the transaction had taken place. As already noted above, it is well settled that only the reasons recorded by the AO for initiating proceedings u/s 147 of the Act are to be looked at or examined for sustaining or setting aside a notice issued u/s 148 of the Act. The reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No addition can be made to those reasons. Therefore, the details of entries or amount mentioned in the assessment order and in respect of which ultimate addition has been made by the AO, cannot be made a basis to say that the reasons recorded by the AO were with reference to those amounts mentioned in the assessment order. The reasons recorded by the AO are totally silent with regard to the amount and nature of bogus entries and transactions and the persons with whom the transactions had taken place. In this respect, we may rely upon the decision of Hon'ble jurisdictional Delhi High Court in the case of CIT v. Atul Jain [2000] 299 ITR 383, in which case the information relied upon by the AO for initiating proceedings u/s 147 of the Act did indicate the source of the capital gain and nobody knew which shares were transacted and with whom the transaction has taken place and in that case there were absolutely no details available and the information supplied was extremely scanty and vague and in that light of those facts, the Hon'ble Jurisdictional Delhi High Court held that initiation of proceedings u/s 147 of the Act by the AO was not valid and justified in the eyes of law. The recent decision of Hon'ble jurisdictional High Court of Delhi in the case of Signature Hotels (P.) Ltd. (supra) also supports the view we have taken above." 9. We do not see any reason to differ with the view expressed by the Tribunal. No substantial question of law arises for our consideration. The appeals are dismissed. There shall be no order as to costs.

7 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd 7.2. The Hon'ble Delhi High Court in the case of Principal CIT vs G&G Pharma India Ltd. in ITA 545/2015 vide order dt. 08.10.2015 at paras 12 and 13 was held as follows: "12. In the present case, after setting out four entries, stated to have been received by the assessee on a single date i.e. 10th Feb. 2003, from four entries which were received by the assessee on a single date i.e. 10th Feb. 2003, from four entries which were termed as accommodation entries, which information was given to him by the Director Investigation, the A.O. stated: 'I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has, introduced its own unaccounted money in its bank account by way of above accommodation entries'. The above conclusion is unhelpful in understanding whether the A.O. applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the A.O., if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the assessee, which must have been tendered along with the return, which was filed on 14th November, 2004 and was processed u/s 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the A.O. to have simply concluded: 'it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries'. In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decision discussed, the basic requirement that the A.O. must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment is missing in the present case. 13. A perusal of the reasons recorded demonstrate total non application of mind by the A.O. Thus applying the proposition laid down by the Jurisdictional High Court in G&G Pharma India (supra) we hold that the reopening of assessment is bad in law" 7.3. The Hon'ble Delhi High Court in the case of Signature Hotels (P) Ltd. vs ITO and another, reported in 338 ITR 51 (Delhi) has under similar circumstances held as follows: "For the A.Y. 2003-04, the return of income of the assessee company was accepted u/s 143(1) of the Income-tax Act, 1961 and was not selected for scrutiny. Subsequently, the Assessing Officer issued notice u/s 148 which was objected by the assessee. The Assessing Officer rejected the objections. The assessee company filed writ petition and challenged the notice and the order on objections. The Delhi High Court allowed the writ petition and held as under: '(i) Section 147 of the Income-tax Act, 1961, is wide but not plenary. The assessing Officer must have 'reasons to believe' that income chargeable to tax has escaped assessment. This is mandatory and the 'reason to believe' are required to be recorded in writing by the Assessing Officer. (ii) A notice u/s 148 can be quashed if the 'belief' is not bona fide, or one based on vague, irrelevant and non-specific information. The basis of the belief should be discernible from the material on record, which was available with the Assessing Officer when he recorded the reasons. There should be a link between the reasons and the evidence material available with the Assessing Officer. (iii) The reassessment proceedings were initiated on the basis of information received from the Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs.5 lakhs during F.Y.2002-03 as stated in the annexure. According to the information, the amount received from a company, S,

8 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income. (iv) Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, bad a paid up capital of Rs. 90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to the quashed. 7.4. In the case of CIT vs Atul Jain reported in 299 ITR 383 it has been held as follows: "Held dismissing the appeals, that the only information was that the assessee had taken a bogus entry of capital gains by paying cash along with some premium for taking a cheque for that amount. The information did not indicate the source of the capital gains which in this case were shares. There was no information which shares had been transferred and with whom the transaction had taken place. The A.O. did not verify the correctness of information received by him but merely accepted the truth of the vague information in a mechanical manner. The A.O. had not even recorded his satisfaction about the correctness or otherwise of the information for issuing a notice u/s 148. What had been recorded by the A.O. as his 'reasons to believe' was nothing more than a report given by him to the Commissioner. The submission of the report was not the same as recording of reasons to believe for issuing a notice. The A.O. had clearly substituted form for substance and therefore the action of the A.O. was not sustainable" Applying the proposition of law laid down in these cases to the facts of the case we hold that the reopening is bad in law as the reasons recorded are without independent application of mind.”

5.2. We also note that the coordinate bench of this Tribunal in ITA No. 660/Kol/2011 for AY 2002-03 in the case of DCIT Vs. Great Wall Marketing (P) Ltd. vide order dated 03.02.2016 has held as under:

" 8. We have heard the submissions of the learned counsel for the assessee both on the validity of initiation of re-assessment proceedings as well as the merits of the appeal. None appeared on behalf of the department. 8.1.We have considered the submissions of the learned counsel for the assessee. As far as the validity of initiation of re-assessment proceedings are concerned the reasons recorded by the AO for initiating proceedings u/s 148 are as follows :- "No.DCIT/Cir-6/reasons for reopening/09-10 Dated 22/04/2009 To The Principal Officer Greatwall Marketing (P) Ltd. c/o Sri. S.M. Daga 11, Clive Row, Room No. 2 .z-. Fir.

9 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd Kolkata- 700001. Sir. Sub: Recorded Reasons for Reopening in the case of Greatwall Marketing (P) Ltd. for Asst. Yr. 02-03 Ref: Your letter dated 02/04/09 Please refer to the above. As per information received from investigation wing New Delhi the introduced share capital during the year. had been received from corporate bodies which are non existent and whose capacity to invest ( credit worthiness ) could not be established . Therefore I have reasons to believe that unexplained cash credit had been introduced in your books of accounts in the name of introduction of share capital and receipt of share application money. In absence of satisfactory identity and credit worthiness of the other parties. the entire introduced capital and share application money will be treated as your income for that year. I will therefore continue the proceedings for reassessment of your return u/s 147. Statutory notices u/s 143(2) and 142(1) are enclosed herewith. Yours faithfully. Sd/- ( Sanjay Mukherjee) DCIT /Cir-6/Kol " 8.2. The submissions of the learned counsel for the assessee before us was that the reasons recorded by the AO were mere information received from D.I.T.(Investigation), New Delhi. There was no independent application of mind by the AO based on which it can be said that he arrived at the satisfaction that the income of the assessee is chargeable to tax has escaped assessment. It was submitted that information received by the AO was vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which reasonable person can form belief regarding escapement of income. Reliance was placed by the learned counsel for the assessee on the decision of the Hon'ble Delhi High Court in the case of CIT vs Insceticides (India) Ltd 357 ITR 330 and CIT vs SFIL Stock Broking Ltd. 325 ITR 285 (Delhi). In both the aforesaid decisions the reasons recorded by the AO for initiating proceedings u/s 148 of the Act the Hon'ble Delhi High Court upheld the order of the Tribunal quashing the proceedings. Reliance was also placed on the decision of ITAT, Kolkata 'C' Bench in the case of M/s. Controlla Electrotech (P)Ltd vs DCIT in ITA Nos.1443 & 1444/Kol/2014 wherein on identical facts the Tribunal was pleased to quash the reassessment proceedings. On merits the learned counsel for the assessee relied on the order of CIT(A). 9. We have given a careful consideration of the submissions made by the learned counsel for the assessee. It is clear from the reasons recorded by the AO that the AO acted only on the basis of a letter received from Investigation Wing, New Delhi. The reasons recorded does not give as to who has given the bogus entries to the assessee. The reasons recorded also does not mention as to on which dates and through which mode the bogus entries were made by the assessee. The reasons recorded which are extracted in the earlier part of the order does not show, what was the

10 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd information given by DIT(Inv.),New Delhi. The date of the information received by the AO were not spelt out in the reasons recorded. The involvement of the assessee is also not spelt out, except mentioning the corporate bodies who had subscribed to the share capital of the assessee were non-existent and not creditworthy. On identical facts the Hon'ble Delhi High Court in the case of CIT vs Insecticides (India) Ltd (supra) has taken a view that the reasons recorded were vague and uncertain and cannot be construed as satisfaction on the basis of the relevant material on the basis of which a reasonable person can form a belief that income has escaped assessment. The Hon'ble Delhi High Court has also come to the conclusion that the reasons recorded did not disclose the AO's mind regarding escapement of income. The Hon'ble Delhi High Court ultimately held that initiation of proceedings u/s 148 of the Act was not valid and justified in the eyes of law. The facts and circumstances in the present case are identical to the case decided by the Hon'ble Delhi High Court. Following the said decision we hold that initiation of re- assessment proceedings is not valid. On this ground, the assessment is liable to be annulled." 6. Applying the propositions of law laid down in these case-law to the facts of this case we hold that the re-opening is bad in law as the Assessing Officer has not independently applied his mind to the material and has recorded reasons which are vague and based on borrowed satisfaction. Hence this ground of the assessee for both the Assessment Years are allowed.

Kolkata, the 2nd day of October, 2018.

Sd/- Sd/- [S.S. Viswanethra Ravi] [J. Sudhakar Reddy] Judicial Member Accountant Member Dated: 02.11.2018 {SC SPS}

11 I.T.A. No. 2307/Kol/2017 Assessment Year: 2010-11 I.T.A. No.2308/Kol/2017 Assessment Year: 2011-12 Proficient Commodities Pvt. Ltd

Copy of the order forwarded to: 1. Proficient Commodities Pvt. Ltd C/o. S.N Ghosh & Associates, Advocates ‘Seben Brothers’ Lodge’ P.O. Buroshibtala P.S. Chinsurah Dist. Hooghly PIN-712 105