M/S. M.D.PACKAGING LTD.,NEW DELHI vs. ITO, NEW DELHI

The brief facts of the case are that assessee is a private limited company engaged in the business of manufacturing of air bubble sheets used for packaging purposes. It filed its return of income on 27.11.2003 showing income of Rs. 87690/-. Subsequently, on 19.03.2010 notice u/s 148 was issued, in response to which the assessee submitted a letter requesting to treat the original return filed as return filed in response to notice u/s 148 of the act. Subsequently, the assessment was made by the LD AO making addition of Rs. 10 lakhs u/s 68 and Rs. 777992/- on account of lower GP. Consequently, income was assessed u/s 143 ( 3) rws 148 of the act at Rs. 1797992/- vide order dated 24.12.2010. Subsequently, aggrieved by the order of the ld AO the assessee preferred an appeal before the ld CIT(A) challenging the action of the ld AO in reopening of the assessment as well as on the merits. However, the ld CIT(A) dismissed the appeal of the assessee on both the counts and therefore the assessee is in appeal before us.

The AR advancing the argument on reopening of the assessment submitted that notice u/s 148 of the Act issued on 19.03.2010 is bad in law and for this he referred to the reasons recorded by the ld AO which are appended at Page 21 to 22 of the PB. He further submitted that the ld AO merely on the basis of investigation report of the DIT has formed a reason to believe that income of the assessee has escaped assessment without applying his mind and not even coming to a prima facie conclusion that the transaction to which he referred to were accommodation entry. He further submitted its case is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in case of Pr. CIT Vs/ G&G Pharma India Ltd 384 ITR 147 (DEL). 5. Against this the ld AR vehemently supported the orders of the lower authorities and relied on the decision of the Hon'ble Supreme Court in case of Phool Chand Bajranglal Vs. ITO [203 ITR 456]. 6. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The reasons recorded by the ld AO for Page 3 of 6 reopening of the assessment completed beyond 4 years but within 6 years at Page 21 and 22 of the PB are as under:- “The investigation wing of the Income Tax Department had unearthed a huge money laundering mechanism wherein it was established that bogus accommodation entries were being provided/taken. These accommodation entries are received in lieu of payment of cash of equivalent amount plus commission thereon to the entry operator. For obvious reasons, these cash transactions are not routed through the books of account of the assessee. In this case, information has been received from Directorate of Income Tax, (Investigation), New Delhi that during the relevant assessment year, this assessee had received the following cheque amount(s) in nature of accommodation entry: VALUE INSTRUM DATE NAME OF BANK PROW BRANCH OF A/C NO. OF ENT NO. ON ACCOUNT WHICH ENTRY ENTRY ENTRY BY WHIC HOLDER ENTRY GIVING BANK GIVING TAKEN WHICH H OF ENTRY GIVEN ACCOUN ENTRY ENTR GIVING T TAKEN Y ACCOUNT TAKE N 500000 S13261 5-Jul- MELODE JAILAXMI FATEHPURI 3332 02 ELECTRONIC COOP BANK S(P) LTD Therefore, I have reason to believe that an income of Rs.5,00,000/- plus commission @ 2% thereon amounting to Rs.10,000/-, totaling to Rs.5,10,000/- has escaped assessment during the assessment year. On the basis of this information, I have reason to believe that the incomes described above have escaped assessment and the case is fit for issuing Notice u/s 148 of Income Tax Act, 1961."

On perusal of the above reason it is apparent that the ld AO has merely relying upon the report of the DIT (Investigation) has reopened the case of the assessee without coming to a prima facie conclusion that the transaction to which he relied were not genuine transaction and he appeared to have only a vague feeling that the income of the assessee has escaped assessment. The identical issue has been considered by the Hon'ble Delhi High court in case of Pr. CIT Vs. G & G Pharma Ltd 384 ITR 147 wherein the Hon’ble Court has held that “11. The above basic requirement of sections 147/148 has been reiterated in numerous decisions of the Supreme Court and this court. Recently, this court rendered a decision dated September 22, 2015 in I. T. A. No. 356 of Page 4 of 6 2013 (CIT v. Multiplex Trading and Industrial Co. Ltd. [2015] 378 ITR 351 (Delhi)) where the assessment was sought to be reopened beyond the period of four years. This court considered the decision of the Supreme Court in Phool Chand Bajrang Lal v. ITO (supra) as well as the decision of this court in Haryana Acrylic Manufacturing Co. (P.) Ltd. v. CIT [2009] 308 ITR 38 (Delhi) The court noted that a material change had been brought about to section 147 of the Act with effect from April 1, 1989 and observed (page 368 of 378 ITR) : "It is at once seen that the amendment in section 147 of the Act brought about a material change in law with effect from April 1, 1989. Section 147(a) as it stood prior to April 1, 1989, required the Assess ing Officer to have a reason to believe that (a) the income of the assessee has escaped assessment and (b) that such escapement is by reason of omission or failure on the part of the assessee to file a return or to disclose fully and truly all material facts necessary for his assessment for that year. After the amendment, only one singular requirement is to be fulfilled under section 147(a) and that is, that the Assessing Officer has reason to believe that income of an assessee has escaped assessment. However, the proviso to section 147 of the Act provides a complete bar for reopening an assessment, which has been made under section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an assessee has escaped assessment on account of failure on the part of the assessee to make a return or to disclose fully and truly all material facts necessary for his assessment. Thus, in order to reopen an assess ment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failure on the part of the assessee to truly and fully disclose all material facts must be concluded with certain level of certainty. It is in the aforesaid context that this court in Haryana Acrylic Manufacturing Co. (P.) Ltd. (supra) explained that the ratio of the decision in Phool Chand Bajrang Lal (supra) may not be entirely applicable since the same was in respect of section 147(a) as it existed prior to the amendment."

In the present case, after setting out four entries, stated to have been received by the assessee on a single date, Page 5 of 6 i.e., February 10, 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the Assessing Officer 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 Assessing Officer 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 Assessing Officer, 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 November 14, 2004, and was processed under section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the Assessing Officer 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 decisions discussed hereinbefore, the basic requirement that the Assessing Officer 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.

Mr. Sawhney took the court through the order of the Commissioner of Income-tax (Appeals) to show how the Commissioner of Income-tax (Appeals) discussed the materials produced during the hearing of the appeal. The court would like to observe that this is in the nature of a post mortem exercise after the event of reopening of the assessment has taken place. While the Commissioner of Income-tax may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the Assessing Officer has to, applying his mind to the materials, conclude that he has reason to believe that income of the assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity.”