ACIT, CENTRAL CIRCLE- 30, NEW DELHI vs. LOKPRIYA TRADING (P) LTD., KOLKATA

In the grounds of appeal, the following grounds are raised by the Revenue :-

Facts in brief are that the assessee had filed its return of income on 31.03.2009 which was duly processed under section 143 (1) of the Act. Later on, the AO reopened the case u/s 147 and notice u/s 148 was issued on 18.02.2015. The reasons recorded by the AO read as under :-

Thereafter, the AO had proceeded to make the assessment on an income of Rs.8,28,65,150/- after making following additions :- (a) Unexplained cash credit u/s 68 of Rs.7,50,00,000/- on protective basis;

Before the ld. CIT (A), one of the main arguments challenging the validity of notice u/s 148 was that the AO has reopened the assessment without applying his mind and the reasons recorded in the realm of suspicion and there was no reason to believe. Apart from that, it was stated that the reasons were recorded on the basis of statement recorded u/s 132(4) of Ved Prakash Aggarwal and Shiv Shankar Banka which has no relevance to the case of the assessee because it was allegedly to introduce undisclosed profits of Prakash Industries Ltd. Thus, AO has simply relied upon statements without application of mind. Another important objection which was raised was that the AO has resorted to make protective addition in his assessment order, which clearly shows that that he was not clear as to whether the income escaping assessment belongs to the assessee or to Prakash Industries Ltd. Another very important fact which was brought on record that the alleged share application money of Rs.7,50,00,000/- was not received in this year, therefore, there was no occasion to make the addition u/s 68 of the Act in this year. On this ground also reasons recorded are based on erroneous presumption of facts and there is no application of mind.

After considering the relevant facts on record it is seen that, Assessee company had applied for 25 lakhs equity shares @ Rs.30 per share of Prakash Industries Ltd. amounting to Rs.7,50,00,000/- and during the FY 2006-07 i.e. AY 2007-08, the share application money of Rs.3,75,00,000/- was paid and balance amount of Rs.3,75,00,000/- was paid during the relevant FY 2007-08 i.e. AY 2008-09. Thus, it was submitted before the authorities below that there was non-application of mind and non-perusal of the material already available on file. Ld. CIT (A), after considering the aforesaid facts, held that enunciation of proceedings u/s 147 is invalid and bad in law and accordingly, he quashed the assessment.

Before us, the ld. CIT DR submitted that there was definite information from the Investigation Wing on the basis of which reasons have been recorded which was sufficient to entertain reason to believe that income chargeable to tax has escaped assessment. There is no prohibition in the law that protective assessment cannot be made and the reassessment proceedings which have been reopened u/s 147 and strongly relied upon the judgment of Hon’ble Delhi High Court in the case of CIT vs. Mahindra Finlease (P.) Ltd. (2012) 343 ITR 464 (Delhi) wherein Hon’ble Court held that AO has power to make protective assessment in the block assessment proceedings.

On the other hand, ld. counsel on behalf of the assessee submitted that first of all, the reasons of believe the facts are legally incorrect and contained certain errors and, therefore, assumption of jurisdiction u/s 147 on the basis of erroneous assumption of facts cannot be sustained. It is evident from the fact that AO in the last two paras of reasons has recorded that, “From the examination of accounts of the company, it is found that the amount of Rs. 8.25 crore has been invested in Prakash Industries Ltd group. The funds by way of share capital & premium are shown to have been received from companies which are paper companies & run by entry operators. Hence the source of funds is non genuine. The said amount is liable to be taxed under I.T. Act. Therefore I have reason to believe that income of Rs. 8.25 crore has escaped assessment for the Asst. Year 2008-09 by reason of failure on part of assessee to disclose fully and truly all material facts necessary for its assessment.”

Ld. counsel thus submitted that firstly, there was no reference of records already filed in the income-tax return by the assessee so there cannot be any reason that the assessee has failed to disclose any material fact and it is merely a bald statement; secondly, the ld. AO has recorded the reasons that amount of Rs.8.25 crores was invested in Prakash Industries Ltd. after examining all books of account, however in the books of account/audited balance sheet, the total amount invested is Rs.7,50,00,000/- that means there is no application of mind. Lastly, another important fact that out of Rs.7,50,00,000/-, a sum of Rs.3.75 crores was invested in AY 2007-08, therefore, the AO could not have added the entire amount in the relevant assessment year and accordingly section 68 is not applicable. Thus, the entire reasons recorded as bad in law because it is based on non-application of mind.

He further submitted that it is a well-settled law that reopening u/s 147 cannot be resorted to for making protective addition, that means there was no reason to believe that income chargeable to tax has escaped in the hands of assessee. In support, he relied upon various judgments and synopsis filed before us.

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material placed on record. The main issue before us is the validity of reopening u/s 147 which the ld. CIT (A) had quashed the assessment proceedings u/s 147 on the grounds stated above. From the perusal of the reasons recorded, we find that ld. AO has mentioned certain facts during the course of search and seizure, action of seizure was carried out on 30.10.2012 and the statements of Ved Prakash Aggarwal, Chairman of M/s. Prakash Industries Ltd. and also of alleged entry provider Shiv Shankar Banka, an alleged entry operator were recorded. Insofar as the said information and material is concerned, there is nothing which can be pertaining to the assessee’s case. What the AO has drawn presumption that, since assessee has invested in shares in the Prakash Industries Ltd., therefore, the source of investment by the assessee is also non-genuine.

Be that as it may be, if we see the actual reasons recorded specifically in last two paras, it is seen that AO has mentioned that he has examined the accounts of the assessee company from where he has found that an amount of Rs.8.25 crores was invested in Prakash Industries Ltd. and therefore, income of Rs.8.25 crores has escaped assessment for the AY 2008-09 on the reasons of failure on part of the assessee on fully and truly facts. First of all, there was no such amount of Rs.8.25 crores invested by the assessee company in the FY 2007-08 relevant to AY 2008- 09 which is a matter of record. From the perusal of the balance sheet which was already part of the record filed along with return of income, originally there is no fresh share application in this year and assessee had subscribed to share application amounting to Rs.7,50,00,000/- in the FY 2006-07 and had made payment of Rs.3.75 crores in the FY 2006-07. Thus, there was no other share application which was made during the year. There is no such amount of Rs.8.25 crores invested in shares or subscribed for any share application as recorded in the reasons by the Assessing Officer. This is evident from the copy of balance sheet filed in the paper book and also in the submissions made before the AO/CIT(A). Thus, the very premise of the reasons to believe that the assessee had invested Rs.8.25 crores is de hors of facts and material on record is incorrect. There is no such amount invested by the assessee company. On this ground alone, the reason to believe turns out to be in the realm of conjectures without any application of mind by the AO on the material already on record.

Not only that, while framing the assessment, AO himself was not very sure whether the addition should be made in the hands of assessee company because he had made protective assessment of Rs7.50 crores in the hands of the assessee company and held that the amount would be added in the hands of beneficiary company i.e. Prakash Industries Ltd. This also goes to show that the reopening was purely mechanical and without application of mind when the alleged income chargeable to tax was not found to be added in the hands of assessee. The reopening of assessment merely to make protective assessment cannot be sustained. This has been held so by Hon’ble Bombay High Court in the case of DHFL Venture Capital Fund vs. ITO 34 taxman 300 wherein the Hon’ble High Court has held that recourse can be taken to the provisions of section 148 where the AO has a reason in present, meaning thereby, a reason which is present to his mind when he forms his reason to believe, that income has escaped assessment. Recourse of section 148 cannot be founded in law on the hypothesis of what could be the position in future should an appeal before the appellate authority. Here in this case also, the reopening was done to make addition on protective basis which was held to be invalid.

Before us, ld. CIT DR had placed heavy reliance on the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Mahindra Finlease (P.) Ltd. (supra) wherein the issue is whether the protective assessment can be framed in the proceedings u/s 115BC & 158BD. First of all, the principles of said judgment is not applicable here in this case because, it was reopened u/s 147 which is to be decided on the basis of reasons to believe by the AO based on certain tangible material on record. In that case, a search and seizure operation u/s 132 was carried out in the case of one P.K. Sood who was a Director in the assessee companies and during the course of search operation, certain incriminating documents were found from its possession indicating that he was indulged in giving accommodation entries to various parties on commission basis and accordingly in his block assessment, addition was made on substantive basis on undisclosed income. The said assessee company had also been benefitted by the accommodation entry in the form of introduction of share capital. Since addition was made u/s 68 in the block assessment in the case of P.K. Sood u/s 115BC, therefore, proceedings u/s 158BD were taken in the case of assessee company as the assessee company was the beneficiary of such accommodation entries. In that case, substantive addition was deleted by the ld. CIT(A) in the case of P.K. Sood and the said order was upheld by the Tribunal and accordingly, the protective addition in the case of assessee was confirmed. It was in this background, the Hon’ble High Court held that AO has power to make protective assessment while carrying out the normal assessment proceedings in the absence of specific provisions. Here, the case is entirely different because even before making any substantive assessment in the case of Prakash Industries Ltd., the AO has proceeded to record the reasons to believe purely on hypothetical presumption that there was non- genuine transaction of share application and then held that addition should be made on protective basis. Thus, it cannot be held that AO has reason to believe which is the basis substratum and foundation for acquiring jurisdiction u/s 148. Here the basic assumption of jurisdiction itself was based on wrong presumption of facts, therefore, such reasons cannot be sustained. Accordingly, we hold that the ld.CIT (A) was justified in holding that reopening u/s 147 on the aforesaid reasons was bad in law, consequently entire proceedings ensued thereafter is null and void. Consequently, we also upheld the quashing of the impugned assessment order.

In the result, the appeal filed by the Revenue is dismissed. Order pronounced in open court on this 14th day of December, 2021.