CABLE CORPORATION OF INDIA LTD,MUMBAI vs. ITO 2(1)(4), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “C”, MUMBAI

Before Shri G S Pannu, AM & Shri Saktijit Dey, JM ITA No. 04/Mum/2009 Assessment Year 1998-1999 ITA No. 05/Mum/2009 Assessment Year 1999-2000 ITA No. 843/Mum/2010 Assessment Year 2000-2001 ITA No. 06/Mum/2009 Assessment Year 2001-2002

Cable Corporation India Ltd., ACIT Cir 2(1) / ITO 2(1)(4), Laxmi Building, Mumbai Vs. 6, Shoorji Vallabhdas Marg, Ballard Estate, Mumbai – 400 001.

PAN AAACC2936J (Appellant) (Respondent)

Appellant By : Shri Nitesh Joshi, AR Respondent By : Shri Rajat Mittal, DR

Date of Hearing :23.03.2017 Date of Pronouncement : 09.05.2017

O R D E R Per Saktijit Dey, Judicial Member:

Aforesaid appeals of the assessee are directed against separate orders

of learned CIT(A)-II, Mumbai for A.Ys. 1998-99, 1999-2000, 2000-01 and

2001-02. As the appeals relate to the same assessee and are more or less

involving common issues, for the sake of convenience, they have been

clubbed together and disposed of in this consolidated order.

to validity of proceedings initiated u/s. 147 of the Act. Briefly, the facts which

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are more or less common in all these appeals, as culled out from record are

the assessee - a company, filed its returns voluntarily in regular course for

assessment years under dispute as under:

Assessment Year Date of filing of return 1998-1999 26.11.1998 1999-2000 24.09.1999 2000-2001 29.11.2000 2001-2002 31.10.2001

As far as assessment years 1998-99 and 2000-01 are concerned,

assessments were originally completed u/s. 143(3) of the Act, vide order

dated 23.03.2001 and 13.12.2000 respectively. In respect of A.Y. 1999-2000

and 2001-02 returns were processed u/s. 143(1) of the Act. The AO having

reason to believe that income has escaped assessment on account of bogus

claim of payment of commission and brokerage to M/s. Narotam Agencies,

re-opened assessment u/s. 147 of the Act for the aforesaid assessment years

by issuing notices u/s. 148 of the Act on 31.03.2004 for A.Y. 1998-99 and on

26.03.2004 for A.Ys. 1999-2000, 2000-2001 and 2001-02. Ultimately, the AO

completed assessments u/s. 143(3) r.w.s. 147 of the Act for the aforesaid

assessment yeas on 11.03.2005. While doing so, the AO added back

service/commission charges paid to M/s. Narotam Agencies by treating it as

bogus. Being aggrieved of the assessment orders so passed, the assessee

preferred appeals before the CIT(A), inter alia, on the ground that reopening

of assessment is invalid. The CIT(A) however, rejected the ground raised by

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the assessee on the validity of the reassessment by holding that the AO has

properly exercised his power u/s. 147. The CIT(A) also upheld the addition

of commission/brokerage payment to M/s. Narotam Agencies on merits also.

recorded by the AO for reopening the assessment as communicated to the

assessee, a copy of which is at page 53 of the paper-book, submitted that in

the reasons recorded the AO has referred to information received from

another Officer to form his belief that commission paid to the proprietor of

M/s. Narotam Agencies is bogus. He submitted, at the time of recording of

reason for re-opening assessment, the AO had no tangible material before

him to form such belief. The learned AR submitted, inspite of specific request

of the assessee, the AO has not confronted the material/information on the

basis of which he formed the belief. The learned AR submitted, since there is

no tangible material before the AO at the time of recording reasons for re-

opening assessment, the belief formed has no nexus with the material on

record, therefore, the assumption of jurisdiction u/s. 147 is invalid. The

learned AR submitted, even, as on date the department has failed to bring on

record any material to demonstrate the nature of information/material

available before the AO to form his belief that income has escaped

assessment. The learned AR submitted, reason to believe as contemplated

u/s. 147 of the Act is that of the AO of the assessee and not of another AO.

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The learned AR submitted, in the present case the reason for formation of

belief in absence of any tangible material and merely on suspicion. In

support of said contention the learned AR relied upon the following decisions:

• Chhugamal Rajpal vs. S P Chaliha (1971) 79 ITR 603 (SC) • Sheo Nath Singh vs. Appellate Assistant Commissioner of Income tax (1971) 82 ITR 147 (SC)

on the basis of specific information received from the AO of M/s. Narotam

Agencies at Madras, the AO has reopened the assessment. The learned DR

submitted, when the AO has formed belief that income had escaped

assessment, the sufficiency of reasons recorded cannot be called into

question. He therefore submitted that the proceedings u/s. 147 of the Act

were validly initiated for all the assessment years.

materials on record keeping in view the decisions relied upon. Undisputedly,

in all the assessment years under appeal, the AO has re-opened the

assessment by assuming jurisdiction u/s. 147 of the Act. The reasons

recorded for reopening the assessment in the aforesaid assessment years as

communicated to the assessee reads as under:

“Notices u/s. 148 have been issued and served on you for and from A.Ys 1998-99 to 2001-02. The reasons for reopening the said assessments are as under:-

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“As per information received from the Assessing Officer, Madras it is found that the commission paid by you to Shri D.D.Vyas, Prop. Of Shri Narotam Agencies, 12, Errabalu Chetty Street, Chenai-1, as per details given hereunder, has been found to be bogus. Therefore, I have reason to believe that the said commission claimed as expenses has escaped assessment.” As could be seen from a plain reading of the reasons recorded, on the basis

of information received from the AO, Madras, to the effect that commission

paid to Shri D D Vyas, Proprietor of M/s. Narotam Agencies of Chennai is

found to be bogus, the AO had formed belief that by claiming commission

payment as deduction income has escaped assessment. However, in the

reasons recorded the AO has not mentioned in detail what is the nature of

information/material available before him for formation of belief that there is

escapement of income. Therefore, in course of appellate proceedings before

this forum the learned DR was directed to call for the assessment records

pertaining to the aforesaid assessment years and bring to the notice of the

Bench the material/information available before the AO at the time of

recording of reasons. To the aforesaid specific query raised by the Bench,

the best the department could come up with is a letter dated 10.12.2010

written by the ITO Business Ward IX(3), Chennai to Dy CIT 2(1), Aaykar

Bhavan, Mumbai. The content of the said letter, a copy of which is at page 3

of the department’s paper book reads as under:

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“Sir,

Sub: Information called for in the case of Sri D D Vyas, Prop. Shree Narotham Agencies, No.13, Errabalu Street, Chennai-1 – assessment years 1998-99 to 2001-02 – reg. Ref : Dy. Commissioner’s letter in No DCIT – /Information/10-11 dt. 11.11.2010.

Please refer to your letter cited. Three statements were recorded from Sri D D Vyas i.e. on 23.12.2003; 29.12.2003 & 05.01.2004. Copy of the above three statements recorded from DD Vyas, Prop. M/s. Narottam Agencies, are enclosed herewith, as required by you. No other material relating to M/s. Cable Corporation Of India Ltd., Mumbai, seems to have been obtained either at the time of survey or during the course of assessment proceedings.”

The learned DR admitted before us that except the letter dated 10.12.2010

there is no other material available on record which can be said to be

information/material available with the AO at the time of recording the

reasons for initiating proceedings u/s. 147 of the Act. Even, on thorough

examination of the assessment record of the aforesaid assessment years

under appeal, we have not found any other information/material purportedly

received from the AO, Madras on the basis of which the AO re-opened the

assessment. Thus, as could be seen, the only material available in the

assessment record which can be treated as information relating to the nature

of the commission/brokerage payment made by the assessee to M/s.

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Narotam Agencies is the letter dated 10.12.2010. Thus, obviously the

aforesaid letter dated 10.12.2010 could never be available before the AO at

the time of recording of reasons in March 2004. Therefore, it becomes clear,

at the time of recording reasons, the AO had no tangible material before him

to form his belief that income has escaped assessment. In other words, the

formation of belief by the AO is not on the basis of concrete

material/information available on record but on mere hearsay and suspicion.

It is well settled principle of law that expression ‘reasons to believe’ as used

in section 147 postulates that the belief must be of a honest and reasonable

person based on reasonable grounds. The AO is required to act not on mere

suspicion but on direct or circumstantial evidence. It has been held that the

expression “reason to believe” is stronger than the words “is satisfied”. The

belief entertained by the AO should not be arbitrary or irrational and it must

be based on reasons which are relevant and material. Though, the court

cannot investigate into adequacy or sufficiency of reasons for formation of

belief but the court certainly can examine whether the reasons are relevant

and have bearing on the matters with regard to which the AO is required to

entertain belief before he can issue notice u/s. 148. If there is no rational

and intelligible nexus between the reasons and the belief, the inevitable

conclusion is, the AO could not have reason to believe that any part of

income of the assessee had escaped assessment. The reasons are the live

link between the material placed on record and the conclusion reached by the

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authority in respect of an issue. In absence of tangible material before the

AO demonstrating escapement of income, belief cannot be formed in

vacuum. The Hon’ble Supreme Court in the case of Chhugamal Rajpal vs. S P

Chaliha (supra), while dealing with a case of reassessment u/s. 147 of the Act

on more or less identical facts and situation held as under:

“In the report the Income-tax Officer does not set out any reason for coming to the conclusion that this is a fit case to issue notice under section 148. The material that he had before him for issuing notice under section 148 is not mentioned in the report. In his report he vaguely refers to certain communications received by him from the Commissioner of Income-tax, Bihar and Orissa. He does not mention the facts contained in those communications. All that he says is that from those communications it appears that these persons (alleged creditors) are name-lenders and the transactions are bogus.” He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of section 151(2). What that provision requires is that he must give reasons for issuing a notice under section 148. In other words he must have some prima facie grounds before him for taking action under section 148. Further his report mentions: "Hence proper investigation regarding these loans is necessary". In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under section 148. Before issuing a notice under section 148, the Income-tax Officer 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 section 139 for any assessment year to the Income-tax Officer 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 Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any

9 Cable Corporation India Ltd.

assessment year. Unless the requirements of clause (a) or clause (b) of section 147 are satisfied, the Income-tax Officer has no jurisdiction to issue a notice under section 148. Front report submitted by the Income-tax Officer to the Commissioner, it is clear that he could not have had reasons to believe that by reason of the assessee's omission to disclose fully and truly all material facts necessary for his assessment for the accounting year in question, income chargeable to tax has escaped assessment for that year, nor could it be said that he, as a consequence of information ill possession, had reasons to believe that the income chargeable to tax has escaped assessment for that year. We are not satisfied that the Income-tax Officer had any material before him which could satisfy the - requirements of either clause (a) or clause (b) of section 147. Therefore, he could not have issued a notice under section 148. Further, the report submitted by him under section 151(2) does not mention any reason for coming to the conclusion that it is a fit case for the issue of a notice under section 148. We are also of the opinion that the Commissioner has mechanically accorded permission. He did not himself record that he was satisfied that this was a fit case for the issue of a notice under section 148. To question No. 8 in the report which reads "Whether the Commissioner is satisfied that it is a fit case for the issue of notice under section 148", he just noted the word "Yes" and affixed his signature thereunder. We are of the opinion that if only he had read the report carefully, he could never have come to the conclusion on the material before him that this is a fit case to issue notice under section 148. The important safeguards provided in sections 147 and 151 were lightly treated by the Income-tax Officer as well as by the Commissioner. Both of them appear to have taken the duty imposed on them under these provisions as of little importance. They have substituted the form for the substance. In the result this appeal is allowed, the order of the High Court is set aside and the impugned notice quashed. The respondent No. 2 shall pay the costs of the appellant both in this court and in the High Court.” Following the aforesaid decision, the Hon’ble Apex Court in the case of Sheo

Nath Singh vs. Appellate Assistant Commissioner of Income tax (supra) held

as under:

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It is abundantly clear that the two reasons which have been given for the belief which was formed by the Income-tax Officer hopelessly fail to satisfy the requirements of the statute. In a recent case, Chhugamal Rajpal v S.P.Chaliha [1971]79 ITR 603 (SC), which came up before this court, a similar situation had arisen and under the directions of the court, the department produced the records to show that the Income-tax Officer had complied with the conditions laid down in the statute for issuing a notice relating to escapement of income. There also, the report submitted by the Officer to the Commissioner and the latter's orders thereon were produced. In his report, the Income-tax Officer referred to some communications received by him from the Commissioner of Income-tax, Bihar and Orissa, from which it appeared that certain creditors of the assessee were mere name-lenders and the loan transactions were bogus and, therefore, proper investigation regarding the loans was necessary. It was observed that the Income-tax Officer had not set out any reason for coming to the conclusion that it was a fit case for issuing a notice under section 148 of the income-tax Act, 1961. The material that he had before him for issuing notice had not been mentioned. The facts contained in the communications which had been received were only referred to vaguely and all that had been said was that from those communications, it appeared that the alleged creditors were name-lenders and the transactions were bogus. It was held that from the report submitted by the Income-tax Officer to the Commissioner it was clear that he could not have had reasons to believe that on account of the assessee's omission to disclose fully and truly all material facts, income chargeable to tax had escaped assessment.

In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court.

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There is no material or fact which has been stated in the reasons for starting proceedings in the present case on which any belief could be founded of the nature contemplated by section 34(IA). The so-called reasons are stated to be beliefs thus leading to an obvious self-contradiction. We are satisfied that the requirements of section 34(IA) were not satisfied and, therefore, the notices which had been issued were wholly illegal and invalid. In the result, the appeal is allowed and the judgment of the High Court is set aside. The writ petition succeeds to the extent that the impugned notices shall stand quashed. The assessee shall be entitled to his costs.

Applying the principle laid down in the aforesaid judicial precedents to the

facts of the present case the only conclusion one can arrive at is, at the time

of recording of reasons the AO, since, had no tangible material before him to

form a belief that income has escaped assessment, the reopening of

assessment on mere suspicion, rumor and gossip is invalid. The AO in case

of a particular assessee while initiating action u/s. 147 must form his own

belief on the basis of materials/information in his possession and not at the

behest of another officer. In the facts of the present case, we are convinced

that at the time of recording of reasons there was no material before the AO

to form a belief that income has escaped assessment. Though, the AO has

referred to the information received from the AO at Madras, however, there is

nothing available in the assessment record to throw light on the exact nature

of information received from the AO, Madras and the mode of communication

of such reasons. Therefore, on overall consideration of facts and material on

record, we are of the considered opinion that the formation of belief by the

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AO relating to escapement of income being not on the basis of any tangible

material available before him at the time of recording of reasons, the

initiation of proceedings u/s. 147 is invalid and without jurisdiction, hence,

deserves to be annulled. Consequentially the assessment orders passed in

pursuance thereof being invalid are also quashed / annulled. Ground no.1 in

all these appeals are allowed.

assessment orders, ground no.2 raised by the assessee challenging the

addition on merit have become inconsequential and infructuous requiring no

adjudication.

excess appeal fees paid by the assessee at the time of filing of appeal before

the CIT(A).

against the re-assessment orders before the CIT(A), the assessee instead of

depositing the actual appeal fess of `.1000 paid an amount of `.10,000/-

Before the first appellate authority, the assessee raised a specific ground

claiming refund of the excess appeal fees paid by treating it as tax paid for

the years under appeal. The learned CIT(A) however, rejected the claim of

the assessee by observing that section 246A does not contain any provision

for refund of excess appeal fees. He also observed, u/s. 251(1) the CIT(A)

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has no power to grant refund of excess appeal fees. Accordingly, he rejected

the ground raised by the assessee.

that appeal fees paid in excess by ignorance should be refunded to the

assessee . In this context, he relied upon the decision of Hon’ble Bombay

High Court in the case of Ranchodlal Maneklal vs. Maneklal Pranjivan Das AIR

1953 (Bom) 436.

material on record. As per section 246A of the Act, any appeal filed by the

assessee should be accompanied by appeal fees of `.1000/-. Undisputedly,

the assessee has paid appeal fees of `.10,000/- while filing the appeals

before the CIT(A) challenging the assessment orders. The CIT(A) has not

disputed the aforesaid factual position. Therefore, when there is no dispute

to the fact that the assessee has paid appeal fees in excess of what it was

required to pay under the statutory provisions, such excess appeal fees has

to be refunded to the assessee. We direct the AO to verify this aspect and

refund the excess appeal fees paid by the assessee following due process of

law. Ground no.3 in all the appeals are allowed.

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Order pronounced in the open court on 9th day of May, 2017.

Sd/- Sd/- (G S Pannu) (Saktijit Dey) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai; Dated : 9th May, 2017 SA Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT(A),Mumbai 4. The CIT 5. DR, ‘C’ Bench, ITAT, Mumbai BY ORDER, //True Copy// (Assistant Registrar) Income Tax Appellate Tribunal, Mumbai