M/S. MAVERICK ELECTRONICS (P) LTD.,NEW DELHI vs. ITO, NEW DELHI

Appellant by : Sh. Deepak Ostwal, C.A. and Sh. Rishabh Ostwal, Adv. Respondent by : Sh. Rajesh Kumar, Sr.D.R. ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER This is an appeal filed by the Assessee directed against the order dated 23.01.2014 of Ld.CIT(A)-IX, New Delhi pertaining to the Assessment year (A.Y.) 2003-04.

2.1. The Ld. Authorised Representative relied upon the following case laws. (i) G&G Pharma India Ltd. vs. ITO 384 ITR 147 (Del) (ii) ITAT Delhi B Bench in and 4249/Del/2010 in the case of Comero Leasing & Financial P.Ltd. order dt. 14.8.2014.

- for the proposition that the ACIT has accorded approval u/s 151(1) of the Income Tax Act, 1961 (the Act) in a mechanical manner and without application of mind, he relied on the decision of the Delhi E Bench of the Tribunal in the case of ITO vs. MB Jewellers P.Ltd. in and C.O. 228/Del/2011 order dt. 14th November, 2014, which had in turn relied on a number of High Court judgements.

2.2. The Learned Departmental Representative on the other hand opposed the contentions of the assessee and submitted that after receiving the information, the AO has formed a prima facie opinion by applying his mind to the facts of this case and thereafter recorded reasons for re-opening as there was escapement of income.

2.3. He relied on the following case laws. i. ITO vs. Purushottam Das Bangur and another, 224 ITR 362 (SC) ii. Midland Fruit and Vegetable Products (India) vs. CIT, 208 ITR 266 (Del.)

“In this case, information has been received from the DIT (Investigation) New Delhi that the assessee has received an amount of Rs.1,28,00,000/- as follows.

Beneficiary’s name Beneficiary Bene- Value of Instru- Date of Name of account Bank from Branch of A/c no bank name ficiary entry ment which holder of entry which entry .entry bank taken – No. by entry giving account entry giving giving branch Rs. which taken given bank account entry taken HC Jain and Syndicate Punjabi 10,00,000 13894 11.6.02 ESS Square Syndicate Punjabi 4728 Co.Pvt.Ltd. Bank Bagh Travels P.Ltd. Bank Bagh HC Jain and Syndicate Punjabi 5,00,000 246280 1.15.03 Srishti Fincap Syndicate 4837 Co.Pvt.Ltd Bank Bagh Pvt.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 7,00,000 246277 1.15.03 A.R.S.Securities Syndicate Co.Pvt.Ltd Bank Bagh Pvt.Ltd. Bank Punjabi 4835 Bagh HC Jain and Syndicate Punjabi 9,00,000 246278 1.15.03 A.R.S.Securities Syndicate 4835 Co.Pvt.Ltd Bank Bagh Pvt.Ltd. Bank Punjabi Bagh Syndicate Punjabi 9,00,000 246879 1.15.03 A.R.S.Securities Syndicate 4835 HC Jain and Bank Bagh Pvt.Ltd. Bank Punjabi Co.Pvt.Ltd Bagh HC Jain and Syndicate Punjabi 5,00,000 246486 1.15.03 KVF Securities Syndicate 4820 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Punjabi Bagh Syndicate Punjabi 7,50,000 246017 1.15.03 KVF Securities Syndicate 4820 HC Jain and Bank Bagh P.Ltd. Bank Punjabi Co.Pvt.Ltd Bagh Syndicate Punjabi 8,00,000 246019 1.15.03 KVF Securities Syndicate 4820 HC Jain and Bank Bagh P.Ltd Bank Punjabi Co.Pvt.Ltd Bagh HC Jain and Syndicate Punjabi 9,50,000 246018 1.15.03 KVF Securities Syndicate 4820 Co.Pvt.Ltd Bank Bagh P.Ltd Bank Punjabi Bagh HC Jain and Syndicate Punjabi 2,00,000 1.17.03 ESS Square Syndicate 4728 Co.Pvt.Ltd Bank Bagh Travels P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 1.17.03 Neeraj Corrosion Syndicate 4727 Co.Pvt.Ltd Bank Bagh Products Bank Punjabi HC Jain and Bagh Co.Pvt.Ltd HC Jain and Syndicate Punjabi 5,00,000 1.17.03 Neeraj Corrosion Syndicate 4727 Co.Pvt.Ltd Bank Bagh Products Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 2.10.03 Bharat Bearings Syndicate 4740 Co.Pvt.Ltd Bank Bagh Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 316706 2.10.03 Bharat Nylons Syndicate 4743 Co.Pvt.Ltd Bank Bagh Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 2.14.03 KVF Securities Syndicate 4820 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 2.14.03 KVF Securities Syndicate Punjabi 4820 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Bagh HC Jain and Syndicate Punjabi 5,00,000 246735 2.14.03 Bharat Nylons Syndicate 4743 Co.Pvt.Ltd Bank Bagh Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 5,00,000 246735 2.14.03 Bharat Nylons Syndicate 4743 Co.Pvt.Ltd Bank Bagh Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 1,00,000 246864 3.21.03 Saudamini Syndicate 4824 Co.Pvt.Ltd Bank Bagh Trading & Bank Punjabi Investment Bagh Syndicate Punjabi 1,00,000 246864 3.21.03 Saudamini Syndicate 4824 HC Jain and Bank Bagh Trading & Bank Punjabi Co.Pvt.Ltd Investment Bagh HC Jain and Syndicate Punjabi 1,00,000 316606 3.21.03 Prateek Syndicate 4726 Co.Pvt.Ltd Bank Bagh Securities P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 1,00,000 316606 3.21.03 Prateek Syndicate 4726 Co.Pvt.Ltd Bank Bagh Securities P.Ltd. Bank Punjabi HC Jain and Bagh Co.Pvt.Ltd HC Jain and Syndicate Punjabi 1,00,000 245475 3.21.03 Chemiex India Syndicate 4811 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 1,00,000 238823 3.21.03 KVF Securities Syndicate 4820 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 1,00,000 238823 3.21.03 KVF Securities Syndicate 4820 Co.Pvt.Ltd Bank Bagh P.Ltd. Bank Punjabi HC Jain and Bagh Co.Pvt.Ltd HC Jain and Syndicate Punjabi 1,00,000 246275 3.22.03 Roopali Syndicate 4832 Co.Pvt.Ltd Bank Bagh Marketing P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 1,00,000 246275 3.22.03 Roopali Syndicate 4832 Co.Pvt.Ltd Bank Bagh Marketing P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 3,00,000 3.29.03 ESS Square Syndicate 4728 Co.Pvt.Ltd Bank Bagh Travels P.Ltd. Bank Punjabi Bagh HC Jain and Syndicate Punjabi 3,00,000 3.29.03 ESS Square Syndicate Punjabi 4728 Co.Pvt.Ltd Bank Bagh Travels P.Ltd. Bank Bagh The above said instruments are in the nature of accommodation entry, which the assessee has taken after paying unaccounted cash to the accommodation entry giver, who is a known entry operator as per the report of the Investigation Wing. In view of these facts, the alleged transaction is not the bonafide one. Therefore, I have reason to believe that an Income of Rs. 1,28,00,000/- has escaped assessment in the assessment year 2003-01 due to the failure in the part of the assessee to disclose and truly all material fact necessary for its assessment so far as this amount is concerned. Therefore, this case is fit for issuing notice u/s 148 of the Income Tax Act. 1961. In this case the assessment was made u/s 143(1), not u/s 1-+3(3) of the 1. T. Act, 1961.

I am therefore, satisfied that the said income. on a count of accommodation entry worth Rs.1,28,00,0001- received by the assessee has escaped assessmen and accordingly after recording the above said reasons as laid down under the provisions of Section 148(2) of the Income Tax Act, 1961 notice u/s 148 is being issued.”

3.1. A perusal of the same demonstrates that there were duplicate entries (i.e. the same entries were repeated) at item numbers 20, 22, 24, 26, 28 and 30. In fact the A.O. acknowledges this fact that the same entry was recorded more than once, in the information provided by the DDIT, at para 8.1 and 8.2 of the assessment order. This demonstrates that the A.O. has not gone through the information received from the Investigation Wing. A basic verification would have revealed the duplication of entries. He simply based his reasons on this information without application of mind or verification.

3.2. The Jurisdictional High Court in the case of Principal CIT vs. G&G Pharma India Ltd. in ITA 545/2015 vide order dt. 8.10.2015 at paras 12 and 13 it 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 of Investigation, the AO 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 AO 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 AO, 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 AO 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 AO 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.

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 ‘reason 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, 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, had 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.”

3.4. 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 AO did not verify the correctness of information received by him but merely accepted the truth of the vague information in a mechanical manner. The AO 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 AO 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 AO had clearly substituted form for substance and therefore the action of the AO was not sustainable.”

5.1. Under such circumstances the reopening is held to be bad in law. For this proposition we rely on the judgement of the Mumbai ‘E’ Bench of the Tribunal in ITA 611/Mum/2004 in the case of Amarlal Bajaj vs. ACIT reported in 333 ITR 237 (Del) vide order dt. 24.7.2013 has considered the legal position and held as follows. “5. We have considered the rival submissions and carefully perused the orders of the lower authorities and also the material evidences brought on record from both sides. We have also the benefit of perusing the order sheet entries by which the Ld. CIT has granted sanction. Let us first consider the relevant part of the provisions of Sec. 151 of the Act. 151. (1) In a case where an assessment under sub-section (3) of section 143or section 147has been made for the relevant assessment year, no notice shall be issued under section 148[by an Assessing Officer, who is below the rank of Assistant Commissioner [or Deputy Commissioner}, unless the [Joint} Commissioner is satisfied on the reasons recorded by such Assessing Officer that it is a fit case for the issue of such notice} : Provided that, after the expiry of four years from the end of the relevant assessment year, no such notice shall be issued unless the Chief Commissioner or Commissioner is satisfied, on the reasons recorded by the Assessing Officer aforesaid, that it is a fit case for the issue of such notice. (2) In a case other than a case falling under sub-section (1), no notice shall be issued under section 148by an Assessing Officer, who is below the rank of [Joint} Commissioner, after the expiry of four years from the end of the relevant assessment year, unless the [Joint} Commissioner is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice.} [Explanation.-For the removal of doubts, it is hereby declared that the Joint Commissioner, the Commissioner or the Chief Commissioner, as the case may be, being satisfied on the reasons recorded by the Assessing Officer about fitness of a case for the issue of notice under section 148,need not issue such notice himself.} "

6. A simple reading of the provisions of Sec. 151(1) with the proviso clearly show that no such notice shall be issued unless the Commissioner is satisfied on the reasons recorded by the AO that it is a fit case for the issue of notice which means that the satisfaction of the Commissioner is paramount for which the least that is expected from the Commissioner is application of mind and due diligence before according sanction to the reasons recorded by the AO. In the present case, the order sheet which is placed on record show that the Commissioner has simply affixed "approved" at the bottom of the note sheet prepared by the ITO technical. Nowhere the CIT has recorded his satisfaction. In the case before the Hon'ble Supreme Court (supra) that on AO's report the Commissioner against the question "whether the Commissioner IS satisfied that it is a fit case for the issue of notice under section 148 merely noted 11 Yes 11 and affixed his signature there under. On these facts, the Hon'bIe Supreme Court observed that the important safeguards provided in sections 147 and 151 were lightly treated by the officer and the Commissioner. The Hon'ble Supreme Court further observed that the ITO could not have had reason to believe that income had escaped assessment by reasons of the appellant-firm's failure to disclose material facts and if the Commissioner had read the report carefully he could not have come to the conclusion that this was a fit case for issuing a notice under section 148. The notice issued under section 148 was therefore, invalid. It would be pertinent here to note the reasons recorded by the AO. "Intimation has been received from DCIT-24(2), Mumbai vide his letters dt. 22nd February, 2002 that one Shri Nitin 1. Rugmani assessed in his charge had arranged Hawala entries in arranging loans, expenses, gifts. During the year Shri Amar G. Bajaj, Prop. Of Mohan Brothers, 712, Linking Road, Khar (W), Mumbai-52 was the beneficiary of such loans, expenses and gifts. The modus-operandi was to collect cash from the parties to whom loans were given and cash was deposited into account of Shri Nitin 1. Rugani and cheques were issued to the beneficiary of the loan transaction. In order to ensure that the money reached by cheques to the beneficiary Shri Nitin 1. Rugani kept blank cheques of the third parties. The assessee Shri Amar G. Bajaj had taken benefit of such entries of loans, commission ad bill discounting of Rs. 8,00,000/-, 11,21,243/- and 9,64,739/- respectively. The assessment was completed u/s. 143(3) of the 1. T. Act on 3Ft March, 1998 by DCIT-Spl. Rg. 40, Mumbai. It is seen from records that the aforesaid points have not been verified in the assessment. I have therefore reason to believe that by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, income has escaped assessment within the meaning of proviso to Sec. 147 and explanation 2 (c)(i) of the income-tax Act, 1961."

5.2. Recently the Hon’ble Delhi High Court in the case of Pr.CIT vs. C.Cables Ltd. in judgement dt. 11.01.2017 has upheld the order of the ITAT Delhi Benches on the very same issue. It held that “the mere appending of the expression ‘approved’ say nothing. Applying the propositions laid down in these case laws to the facts of the case we have to necessarily quash the assessments on the ground that re-opening is bad in law.

Order pronounced in the Open Court on 21st March, 2017.