SIMCORP FUND LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE- 4(3), MUMBAI, MUMBAI

Facts in brief are that the return of income was filed by the assessee on 31st October, 2005 declaring total income of Rs. 1,23,63,328/-. Thereafter, the assessment was completed u/s 143(3) of the Act on 24.12.2007 at an assessed income of Rs. 1,24,22,210/-. Thereafter, the AO has issued the impugned notice u/s 148 of the Act dated 18.03.2010 and thereafter re-opened the assessment of the assessee and framed the assessment u/s 144 of the Act on 10.12.2010, wherein he made an addition of Rs. 40 lakhs u/s 68 of the Act. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to dismiss the same. Aggrieved the assessee is before us.

We have heard both the parties and perused the records. Since the assessee has challenged the juri iction of AO to have reopened the assessment, we need to examine the ‘reasons recorded' by AO need to be examined to see whether he had satisfied the conditions precedent necessary for doing so, as prescribed u/s Section 147 of the Act i.e. Firstly whether AO has recorded the reasons before reopening the assessment. And if so, whether the reasons recorded fulfil the requirement of law or not. The fundamental requirement of law as stipulated u/s 147 of the Act is that before reopening an assessment, AO has to record the reasons wherein he has to spell out the “Reasons to believe, escapement of income". It is well settled that “Reasons to believe" postulate foundation based on information, and belief based on reason. After a foundation based on information is made, there still must be some reason which should warrant the holding of a belief that income chargeable to tax has escaped assessment. And one should bear in mind the fine distinction between “Reason to Suspect" and "Reason to believe". Information adverse may trigger “Reason to Suspect” which is not sufficient to reopen an assessment because as per section 147 of the Act, AO should have "Reasons to believe", escapement of income" and not Reasons to suspect escapement of income. So when AO receives adverse information against an assessee, he should make preliminary inquiry and collect material which would make him form a belief, that there is in fact an escapement of income. Then only AO should record the necessary facts and reason for reopening the assessment i.e (the "reason to believe escapement of income") and thereafter issue notice u/s 148 of the Act. Once the AO satisfies the aforesaid requirement of law, then only he can invoke the juri iction of reopening an assessment and then only it can be held to be valid in the eyes of law. Further it has to be born in the mind that, when the validity of re-opening is tested, the reasons recorded by AO has to be tested on a standalone basis. Nothing can be added nor anything be deleted from the reasons so recorded. No inference can be allowed to be drawn on the basis of reasons not recorded by him. AO has to speak through the reasons so recorded by him. The reasons recorded should be self-explanatory and should not keep the assessee guessing for reasons. Reasons provide the link between conclusion and evidence. So the reasons recorded by the AO before re-opening as it is, it should be examined to see whether AO had met in the “reasons recorded”, the essential condition precedent to do so i.e. “Reason to believe, escapement of income". So in this back-drop let us look at the reasons recorded in this case by AO to re-open the assessee's assessment for AY 2010-11, which is found placed at page no. 2 of the paper book which reads as under: Reasons recorded by AO on 18.03.2010 The assessment for A.Y 2005-06 was made u/s 143(3) on 24.12.2007 at total income of Rs. 1,24,22,210/-. An intimation has been received from CIT(A)-37, Mumbai through the Chief CIT vide order dated 12.03.2010 shows that the share transaction shown by the assessee are found to be bogus “hawala transaction” in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd entered into by the assessee on 01.12.2004 for a value of Rs. 10,00,000/-. This fact has been admitted by one Mr. Narendra R Shah who was hawala operator through whom the assessee has entered into such bogus hawala transaction. Therefore, I have reason believe that transaction of Rs. 10,00,000/- shown by the assessee in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd is assessee's own concealed income utilized for non genuine transaction thereby the assessment is escaped assessment within the meaning of provision of Sec. 147 of the Income Tax Act, 1961, issue notice u/s 148 accordingly.

In this context, the Ld. AR drew our attention to page no. 4 of the assessment order, wherein the AO has extracted the information from office of the CIT(A)-37, Mumbai on the basis of which the AO has recorded the reasons for re-opening of assessment of the assessee and has alleged that the share transaction shown by the assessee in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd entered into by the assessee on 01.12.2009 for value of Rs. 10 lakhs are found to be bogus (hawala transaction). According to the Ld. AR a perusal of the ibid information from the office of the CIT(A)-37, Mumbai would reveal that the informant CIT(A) came across a case of Shri Narendra R Shah who has submitted a paper book containing the name of the 1314 persons who allegedly laundered their black money and became beneficiaries of the penny stock scam by availing accommodation entries in the form of bogus long term capital gain etc. According to the Ld. AR, based on the first part of aforesaid information, the AO has recorded the reasons that assessee's share transaction was bogus in respect of the said script (supra) was bogus. In this context, the Ld AR pointed out that the assessee has not traded in the scrip of M/s. Suryadeep Salt Refinery & Chemical Works Ltd, and has not claimed any capital gain or business income from such transaction as alleged in the reasons recorded. Therefore, according to him, the AO upon receiving the information from the external source [CIT(A)-37, Mumbai] could not have formed the belief that assessee's income has escaped. The facts narrated by AO in reason recorded are that assessee has transacted in the relevant year, the shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd for a value of Rs. 10 lakhs, which is assesseee's own concealed income based on admission of one hawala operator. Whereas the correct fact was that assessee received share capital of Rs. 40 lakhs from the said entity and when the assessee brought to the notice of AO the correct fact, the AO realized his mistake, has departed from the facts [recorded in the reasons to reopen as recorded on 18.03.2010] and tried to improve the reasons to reopen by letter dated 22.11.2010 wherein the fact of assessee receiving share application money to the tune of Rs. 40 lakhs was stated. According to Ld. AR, this fact of receiving share application money from M/s Suryadeep was brought to the notice of AO by assessee while objecting to the reopening of assessment vide letter dated 26.10.2010 that is prior to AO changing the facts from the initial reasons recorded as on 18.03.2018. Therefore according to Ld. AR, the improvement made in the facts recorded in the reasons recorded to reopen the assessment on 18.03.2010 cannot be looked into as held by the Hon'ble Bombay High Court in the case of Hindustan Leave Ltd, (268 ITR 332), and the impugned addition of Rs. 40 lakhs is not sustainable became the AO has not made any addition on the basis of the issues / facts alleged in the reasons recorded on 18.03.2010 and refered to the Hon'ble Bombay High Court decision in Jet Airways (331 ITR 236). Further according to Ld. AR, the AO on receipt of adverse information against the assessee, ought to have conducted preliminary enquiry and collected materials, if any, against the assessee and ought not to have recorded in the reasons recorded wrong facts for alleging escapement of income; and therefore, according to Ld AR, the formation of belief of escapement of income was on incorrect facts, so it is vitiated and therefore, notice dated 18.03.2010 issued u/s 148 of the Act is bad in law. And the Ld. AR wondered as to how the adverse information which was based on 3rd party statement taken behind the back of assessee which was factually riddled with in-accuracy can be the basis for drawing “reason to believe escapement of income" and according to him at best it can be termed "Reasons to Suspect" which is not sufficient for invoking juri iction to reopen the assessment of assessee.

In this regard we note from a reading of reasons recorded by the AO that he received information from the office of the CIT(A)-37, Mumbai that one Shri Narendra P Shah admitted that he was hawala operator and through him, assessee has carried out bogus share transactions in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd on 01.12.2009 for a value of Rs. 10 lakhs. Therefore, according to the AO, he had reason to believe that the transaction of Rs. 10 lakhs shown by the assessee in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd is assessee's own concealed income utilized for non genuine transaction which escaped assessment. In this regard we find that assessee has not carried out any share transaction, wherein he has claimed to have earned any income from business income / capital gain (long term capital gain / short term capital gain / loss) in respect of shares of M/s Suryadeep Salt Refinery & Chemical Works Ltd and since we have to test the 'reasons recorded' by the AO on standalone basis while examining its validity for assumption of juri iction u/s 147 of the Act, we find that the foundation on the basis of which the AO has formed the belief is itself incorrect, in other words the AO has reopened the assessment based on the wrong assumption of fact. We note that the assessee had already undergone scrutiny assessment u/s 143(3) of the Act on 24.12.2007, wherein some addition was made in the assessment proceedings. And the assessee had duly disclosed in its return to have received share application to the tune of Rs. 40 lakhs by account payee cheques from M/s Suryadeep Salt Refinery & Chemical Works Ltd and pursuant thereto, they were allotted shares of assessee as per the Companies Act and details of which were produced before the AO in the original assessment proceedings and accepted by him. In such a back drop, where the AO received adverse information from office of the CIT(A)-37, Mumbai vide letter dated 12.03.2010, he ought to have made preliminary enquiry and noted the correct facts in respect of the issue, rather than forming his belief of escapement of income on incorrect assumption of facts as noted (supra), which action of AO cannot be countenanced. In this context, it should be borne in mind that adverse information made trigger ‘reason to suspect' and not 'reason to believe' which is necessary condition precedents for reopening the assessment. When the AO receives adverse information about the assessee he should carry a preliminary enquiry and collect material and thereafter, he should have recorded reasons to believe escapement of income, which exercise AO has not done in this case. Consequently, the notice issued by the AO u/s 148 of the Act on 18.03.2010 is vitiated and held to be bad in law and quashed. Consequently, the re-assessment order dated 10.12.2010 is non-est in eyes of law.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 29/02/2024. (BR BASKARAN) (ACCOUNTANT MEMBER) मुंबई Mumbai; दिनांक Dated: 29/02/2024. KRK, PS (ABY T. VARKEY) JUDICIAL MEMBER आदेश की प्रतिलिपि अग्रेषित/Copy of the Order forwarded to : 1. 2. 3. 4. 5. 6. अपीलार्थी / The Appellant प्रत्यर्थी / The Respondent. आयकर आयुक्त (अपील) / The CIT(A)- आयकर आयुक्त / CIT विभागीय प्रतिनिधि, आयकर अपीलीय अधिकरण, मुंबई / DR, ITAT, Mumbai गार्ड फाईल / Guard file. सत्यापित प्रति //// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार /(Dy./Asstt.