ITO, NEW DELHI vs. M/S. NAVODAYA CASTLES PVT. LTD., NEW DELHI

Date of Hearing : 02.08.2016 Date of Order : 24.08.2016

O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Since common questions of facts and law have been raised in both the aforesaid appeal and cross objection, the same are being disposed off by way of consolidated order to avoid repetition of discussion. passed by the Hon’ble jurisdictional High Court in ITA 320/2012 vide which appeal has been remitted to the Tribunal to decide the whole issue afresh along with cross objections dismissed as infructuous by the Tribunal. For ready reference, operative part of the judgment rendered by Hon’ble jurisdictional High Court is reproduced as under :-

“20. Now, when we go to the order of the tribunal in the present case, we notice that the tribunal has merely reproduced the order of the Commissioner of Income Tax (Appeals) and upheld the deletion of the addition. In fact, they substantially relied upon and quoted the decision of its coordinate bench in the case of MAF Academy P. Ltd., a decision which has been overturned by the Delhi High Court vide its judgment in C.I.T vs. MAF Academy P. Ltd [ (2014) 206 DLT 277). In the impugned order it is accepted that the assessee was unable to produce directors and principal officers of the six shareholder companies and also the fact that as per the information and details collected by the Assessing Officer from the concerned bank, the Assessing Officer has observed that there were genuine concerns about identity, creditworthiness of shareholders as well as genuineness of the transactions.

(hereinafter referred to as ‘the revenue’), by filing the present appeal sought to set aside the impugned order dated 02.08.2010 passed by the Commissioner of Income-tax (Appeals)-XVI, New Delhi qua the assessment year 2002-03 on the grounds inter alia that :-

“1. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition of Rs.54,00,000/- made u/s 68 of the Income tax Act, 1961 on account of share application money 2. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in ignoring the fact that the assessee failed to produce directors/authorized representative of the alleged applicants even after specifically being asked to do so by the A.O. and, thus failed to discharge its onus to establish the identity and creditworthiness of the share applicants and the genuineness of transaction.

3. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in relying upon the decision given in the case of Lovely Exports (P) Ltd. In the case of Lovely Exports P.Ltd., the A.O. did not ask the assessee to produce any of the investor shareholders. However, in the instant case the assessee was specifically asked and given a number of opportunities to produce the directors/authorized representatives of the investing companies, but yet none could be produced before the A.O. by the taxpayer.

4. The Objector, by filing the present cross objection, sought to set aside the impugned order dated 02.08.2010 passed by the Commissioner of Income-tax (Appeals)-XVI, New Delhi qua the assessment year 2002-03 on the ground that :-

“1. That having regard to the facts and circumstances of the case Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in assuming jurisdiction u/s 147 and that too without complying with the mandatory conditions as prescribed under section 147 to 153 of the Income Tax Act, 1961.

Benefi- Benefi- Value of Instru- Date Name of Bank Branch of A/c No. ciary ciary Entry ment on a/c from entry of entry taken No. by which Account which giving giving which entry Holder of entry bank account Entry taken Entry of given taken giving A/c HDFC Rajender 70000 972521 07.3.02 Sekhawati SBP Daryaganj 50111 Bank Nagar Finance P. Mkt., Ltd.

ND HDFC Old 1000000 13.3.02 D.K. Ispat SBP -do- 50090 Rajender & Timber Nagar, Ltd. ND HDFC -do- 650000 13.3.02 Kuberso SBP -do- 50084 Sales P. Ltd. HDFC -do- 1200000 14.3.02 Dinanath SBP -do- 50103 Luhariwal Spinning Mills Ltd. HDFC -do- 850000 33834 16.3.02 Technocom Innova Wazirpur 220 Associates tive P.Ltd. HDFC -do- 1000000 18.3.02 Chintpuri SBP DG 50058 Credits Total 5400000

“Information has been received from the Investigation Wing of the Income Tax Department that the above named assessee is a beneficiary of accommodation entries received from certain established entry operators identified by the Wing during the period relevant to A.Y. 2002-03. A comprehensive investigation was carried out by the Investigation wing for identification of entry operators engaged in the business of money laundering for the beneficiaries and on the basis of investigation carried out and evidences collected, a report has been forwarded. The Assessing Officer has perused the information contained in the report and the evidences gathered. The report providers details of the modus operandi of the ‘money laundering scam’ and explain how the unaccounted money of the beneficiaries are ploughed back in its books of account in various forms including the form of bogus share capital / capital gains etc. after routing the same through the bank account(s) of the entry operators. Entry operators were identified after thorough investigation on the basis of definite analysis of their identity, creditworthiness and the source of the money ultimately received by the beneficiaries. These entry operators are found to be mostly absconding / non-complying after the unearthing of the ‘Money Laundering Scam’ leaving the said money at the disposal of the beneficiaries without any associated cost or liability. In the instant case, the assessee is found to be the beneficiary of accommodation entry from such entry operators as per the following specific details of transaction :-

Benefi- Benefi- Value of Instru- Date Name of Bank Branch A/c ciary ciary Entry ment No. on a/c from of entry No. of Bank Bank taken by which which Account which giving entry Name Branch Entry entry Holder of entry bank giving taken taken Entry given account giving A/c HDFC 79, Old 70000 TO CLG. 7-Mar- Sekhawati SBP DG 50111 Bank Rajender 00972521 02 Finance P. Nagar Ltd. Mkt., ND HDFC Old 1000000 13- D.K. Ispat SBP DG 50090 Rajender Mar-02 & Timber Nagar Ltd. HDFC Old 1000000 13- D.K. Ispat SBP DG 50090 Rajender Mar-02 & Timber Nagar Ltd. DG HDFC Old 650000 13- Kuberso SBP 50084 Rajender Mar-02 Sales P. Nagar Ltd. DG HDFC Old 650000 13- Kuberso SBP 50084 Rajender Mar-02 Sales P. Nagar Ltd. DG HDFC Old 1200000 14- Dinanath SBP 50103 Rajender Mar-02 Luhariwal Nagar Spinning Mills Ltd. DG HDFC Old 1200000 14- Dinanath SBP 50103 Rajender Mar-02 Luhariwal Nagar Spinning Mills Ltd. HDFC Old 850000 33834 16- Technocom Innova Wazirpur 220 Rajender Mar-02 Associates tive Nagar P.Ltd. HDFC Old 850000 33834 16- Technocom Innova Wazirpur 220 Rajender Mar-02 Associates tive Nagar P.Ltd. HDFC Old 1000000 18- Chintpuri SBP DG 50058 Rajender Mar-02 Credits Nagar HDFC Old 1000000 18- Chintpuri SBP DG 50058 Rajender Mar-02 Credits Nagar

The assessee has received unexplained sums from the entry operators as per the above details as per information available with the undersigned. As explained above, the identity, creditworthiness and genuineness of transactions with the persons found to be entry operators cannot be established. The Assessing Officer therefore have reasons to believe that on account of failure on the part of the assessee or disclose truly and fully all material facts necessary for assessment for ./2010 CO No.366/Del/2010 above assessment year, the income chargeable to tax to extent of accommodation entry mentioned above, has escaped assessment within the meaning of Section 147 of the Act.”

“as to whether AO is empowered to initiate the proceedings u/s 147/148 of the Act merely on the basis of report received from the Investigation Wing that the assessee has been provided with accommodation entry to the tune of Rs.54,00,000/- by the entry operators, without applying his mind?”

“The Supreme Court was dealing with a case where the AO had received certain communications from the Commissioner of Income Tax showing that the alleged creditors of the Assessee were “name-lenders and the transactions are bogus.” The AO came to the conclusion that there were reasons to believe that income of the Assessee had escaped assessment. The Supreme Court disagreed and observed that the AO “had not even come to a prima facie conclusion that the transactions to which he referred were not genuine transactions. He appeared to have had only a vague felling that they may be “bogus transactions.” It was further explained by the Supreme Court that : “Before issuing a notice under S. 148, the ITO must have either reasons to believe that by reason of the omission or failure on the part of the assessee to make a return under S. 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year or alternatively notwithstanding that there has been no omission or failure as mentioned above on the part of the assessee, the ITO has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year. Unless the requirements of cl. (a) or cl. (b) of S. 147 are ./2010 CO No.366/Del/2010 satisfied, the ITO has no jurisdiction to issue a notice under S. 148.” The Supreme Court concluded that it was not satisfied that the ITO had any material before him which could satisfy the requirements under Section 147 and therefore could not have issued notice under Section 148.”

“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 February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate 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 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 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 decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the

(i) the AO has merely acted in mechanical manner on receipt of the report from the Investigation Wing that “he has reason to believe that income of Rs.54,00,000/- has escaped assessment for the assessment year 2002-03 due to failure on the part of necessary for assessment”;

(ii) the AO has not even satisfied himself to prima facie make out that income of Rs.54,00,000/- has escaped assessment in the year under assessment by pursuing record, if any;

(iii) that when the AO has been provided with copies of share application forms containing names, addresses,

PAN, bank details and confirmation of the investors, he was required to conduct the independent investigation to satisfy himself that such and such income has escaped assessment before assuming jurisdiction u/s 147 of the Act; (iv) that even on merits when the assessee had provided copies of share application forms containing names, addresses, PAN, bank details and confirmation of the investors, the onus stood shifted to the AO to prove that these are the shell companies and not to fasten the liability of the assessee on the ground that assessee has failed to produce the aforesaid six investor prove negative; (v) that forming an opinion merely on the basis of information supplied by Investigation Wing of the revenue that such and such company has provided an accommodation entries to the assessee to the tune of Rs.54,00,000/- does not amount to the satisfaction of the AO in any manner whatsoever to reopen the case u/s 147 of the Act; (vi) that when the AO has sufficient material to conduct the independent investigation to assume the jurisdiction u/s 147/148 of the Act, which he has not used for the reasons best known to him rather proceeded on the basis of report of Investigation Wing without applying his mind, which is not permissible under law; (vii) that in view of the law laid down by the Hon’ble

Supreme Court and Hon’ble jurisdictional High Court in the judgment cited as Chhugamal Rajpal vs. S.P. Chaliha and G & G Pharma India Ltd.(supra) respectively when the initiation of proceedings u/s 147