M/S MKM FINSES P. LTD.,,NEW DELHI vs. ITO, NEW DELHI

The Assessee has filed the Appeal against the Order dated 23.5.2013 of the Ld. CIT(A)-IX, New Delhi pertaining to assessment year 2003-04 and raised the following grounds:-

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 framing impugned assessment order

without assuming jurisdiction as per law and without serving the mandatory notices uls 148 and 143(2) of Income Tax Act,

1961.

2. That having regard to the facts and circumstances of the case Ld. CIT(A) has erred in law and on fact 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 151 of the Income Tax Act, 1961 and the reasons recorded are invalid and contrary to law and facts and there is no satisfaction as per law U/S 151 of the Act.

3. That having regard to the facts and circumstances of the case Ld. CIT(A) has erred in law and in confirming the action of Ld. AO in making addition of Rs.36,35,140/- on the rounds of alleged commission received by the assessee company on the alleged accommodation entries and that too without any basis

and evidences.

4. That having regard to the facts and circumstances of the case Ld. CIT(A) has erred in law and n facts in confirming the action of Ld. AO in making addition of Rs.29,43,644/- on the ground of allegedly earning commission on the alleged

providing intermediate accommodation entries and that too without any basis and evidences.

opportunity of hearing and the same is not sustainable on various legal and factual grounds.

6. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in upholding the action of Ld. AO in treating the assessee's business as bogus

and in the nature of accommodation entry that too without any basis, without confronting any adverse material and without making available opportunity of hearing as per law.

7. That having regard to the facts and circumstances of the case Ld. CIT(A) has erred in law and on facts in not reversing

the action of Ld. AO in charging interest u/s 234B of Income

Tax Act, 1961.

8. That the appellant craves to leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.

5. Ld. Counsel for the assessee has only argued the legal grounds raised vide ground no. 1 & 2 stating that Ld. CIT(A) has erred in confirming the action of the AO in framing the impugned assessment order without assuming jurisdiction as per law and without serving the mandatory notices u/s. 148 and 143(2) of the I.T. Act, 1961 and also erred in confirming the action of the AO in assuming jurisdiction u/s. 147 and that too without complying with the mandatory conditions as prescribed under section 147 to 151 of the I.T. Act, 1961 and the reasons recorded are invalid and contrary to law and facts and there is no satisfaction as per law u/s. 151 of the Act. He further draw our attention towards the copy of reasons for reopening the case u/s. 148 and stated that no proper reasons were recorded; no nexus between the materials relied upon and the belief formed for escapement of income; no application of mind; no proper satisfaction was recorded before issue of notice u/s. 148; no independent conclusion that there was escapement of income. It was further stated that the case was reopened only on the basis of Investigation Wing information which suffers with serious debility and lacks definiteness, without describing the basic aspects of alleged transaction and in the absence of the same, whole action of the AO gets vitiated. To support his contention he submitted that the issue in dispute is squarely covered in favour of the assessee by the ITAT decision dated 09.1.2015 in the case of G&G Pharma India Limited vs. ITO passed in (AY 2003-04) in which the Judicial Member is the Author. He further stated that the above decision of the ITAT dated 9.1.2015 has been upheld by the Hon’ble Jurisdictional High Court in its Decision dated 08.10.2015 in ITA No. 545/2015 in the case of Pr. CIT-4 vs. G&G Pharma India Ltd. In this behalf, he filed the copy of the order dated 9.1.2015 of the ITAT, Delhi Bench passed in the case of G&G Pharma India Ltd vs. ITO (Supra). In this regard, he filed the copies of the aforesaid decisions before the Tribunal. In view of the above, he requested that by following the aforesaid precedents the reassessment proceedings of the AO may be quashed by accepting the Appeal filed by the Assessee.

“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 the Directorate of Income Tax,

(Investigation), New Delhi that during the relevant assessment year, the assessee has received the cheque amounts in the nature of accommodation entry (as shown in Annexure-A).

On this amount of Rs. 24,23,42,612/-, the commission @2% comes out to be at Rs. 48,46,852/-

The quantum of escaped income is summarized as under:- (A) Above Rs. 20,01,67,820/- (B) Above Rs. 48,46,852/- Total Rs. 20,50,14,672/-

On the basis of this information, I have reason to believe that the income described above have escaped assessment and the case is fit for issuing notice u/s. 148 of the Income Tax Act, 1961.”

7.1 On going through the above reasons recorded by the AO, we are of the view that AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. In our view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt.

Year in dispute is bad in law and deserves to be quashed. Our view is supported by the following judgments/decisions:-

(a) Pr. CIT vs. G&G Pharma India Ltd. in ITA No.

545/2015 dated 8.10.2015 of the Delhi High Court wherein the Hon’ble Court has adjudicated the issue as under:-

“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 materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case.

of the CIT(A) to show how the CIT (A) 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 CIT 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 AO 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 .

(b) Signature Hotels (P)_ Ltd. vs. ITO and another reported in 338 ITR 51 (Del) has under similar circumstances 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 ‘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.”

Order pronounced in the Open Court on 08/08/2016.