PR. COMMISSIONER OF INCOME TAX--6 vs. MEENAKSHI OVERSEAS PVT. LTD.

Admit.

The following question of law is framed for consideration: Whether the ITAT erred in law and on facts in quashing the assessment proceedings under Section 147/148 of the Act?

The facts in brief are that the Assessee, Meenakshi Overseas Private Limited, filed its return of income on 30th October, 2004 for the AY 2004-05 declaring its income as Rs. 2,050. The return was processed under Section 143(1) of the Act on 25th November, 2004.

It is stated that information was received from the Director of Income Tax (Investigation), New Delhi [„DIT(I)‟] that during the year under consideration, the Assessee had received accommodation entries. Notice under Section 148 of the Act was issued after taking approval from the Additional Commissioner of Income Tax („ACIT‟) under Section 151(1) of the Act. Notice under Section 148 of the Act was thus issued on 23rd/24th March, 2011 after recording the reasons for re-opening of the assessment.

The said reasons as recorded by the Assessing Officer („AO‟) read as under: “Reasons for the belief that income has escaped assessment: In this case, information has been received from the Director of Income Tax, (Investigation) New Delhi that the Assessee has received amount of Rs. 5,00,000/- as follows: Beneficiary‟s Name

In response to the said notice served on it, the Assessee wrote a letter dated 25th April, 2011 stating that the original return of income under Section 139 of the Act be treated as return filed in compliance with the notice under Section 148 of the Act.

An assessment order was passed by the AO on 30th November 2011 under Section 143 (3) read with Section 147 of the Act treating the credit received from Shubham Electronics & Electricals Pvt Ltd. as unexplained income under Section 68 of the Act. Besides from the statement of the

The Assessee then appealed before the Commissioner of Income Tax (Appeals) [„CIT(A)‟] which appeal was dismissed by an order dated 12th February, 2013.

Thereafter, the Assessee filed an appeal before the ITAT. In the first round, the ITAT by an order dated 18th March, 2015 held that the requisite sanction had not been obtained by the AO from the Competent Authority under Section 151 of the Act and, therefore, invalidated the re-opening of the assessment under Section 147/148 of the Act. The Revenue‟s appeal against the said order of the ITAT was allowed by this Court. The appeal of the Assessee was restored to the file of the ITAT to consider the other grounds relating to the validity viz., ground Nos. 1(a) to 1(d).

Therefore, in the impugned order dated 22nd March 2016, only those grounds were considered by the ITAT.

Perusing the reasons for re-opening of the assessment in the present case, the ITAT came to the conclusion that it was apparent that the AO proceeded to send a notice under Section 147/148 of the Act “solely on the basis of information received from the DIT(I).” After writing about

Mr. Rahul Chaudhary, learned Senior standing counsel appearing for the Revenue submitted that as the original return was processed under Section 143(1) of the Act, the Revenue was only to demonstrate the existence of tangible material which formed the basis of formation of a belief by the AO that the income had escaped assessment. This tangible material was in the form of an investigation report of the DIT(I) which was mentioned in the reasons for re-opening the assessment. Relying on the decisions in Signature Hotels Pvt. Ltd. v. Income Tax Officer (2011) 338 ITR 51 (Del), AGR Investment Ltd. v. Additional Commissioner of Income Tax (2011) 336 ITR 146 (Del.), AG Holding v. Income Tax Officer (2013) 352 ITR 364 (Del), Mr. Chaudhary submitted that the adequacy or sufficiency of the material of the basis on which the belief was formed by the AO for re- opening of the assessment could not be enquired into at this stage.

Mr Chaudhary referred to the fact that it became apparent in the assessment proceedings that credible information was received in the case of one Mr. Mahesh Garg, accommodation entry provider. Statements were made during investigation by former directors who admitted that Mr Garg was providing accommodation entries to various persons including the Assessee. This itself shows the formation of belief by the AO that the escaped assessment was justified.

Countering the above submissions, Mr. Kapil Goel, learned counsel for the Respondent/Assessee first pointed out that the Court is not obliged to examine the reasons with reference of any material that may be disclosed subsequently by the Revenue either at the stage of considering the objections by the Assessee to the reopening or during the re-assessment proceedings. The reasons for the reopening as penned by the AO had to speak for themselves. Secondly, it is submitted that the reasons recorded by the AO in the present case were based on a „borrowed satisfaction‟ and on the directions of the Investigation Wing without any independent application of mind. The crucial link between the material and the formation of the belief was missing. Thirdly, it is submitted that in G&G Pharma (supra) this Court dealt with a similar instance of reopening of an assessment by the AO on the basis of the report of the DIT(I) without making any effort to discuss the material on the basis of which such belief was formed. The reopening was invalidated by this Court and its decision was accepted by the Revenue since no Special Leave Petition was filed by it.

Relying on the decision in Union of India v. Kaumudini Narayan Dalal

In support of his contention that the information received from the Investigation Wing cannot constitute tangible material for re-opening the assessment without the Assessee being informed what in the report of the investigation wing constituted tangible material for forming a belief, Mr Goel placed reliance on the decisions in CIT v. SFIL Stock Broking Limited (2010) 325 ITR 285 (Del.), Sarthak Securities Co. Pvt. Ltd. v. ITO

It must be noted at the outset that by an order dated 4th November, 2016, this Court had directed that “the file by which reasons to believe for the escapement of income was recorded by the AO for the purpose of reassessment shall be produced for consideration by the Court.” The said file has been produced today by Mr. Chaudhary, learned counsel for the Revenue. It is seen that the reasons recorded by the AO for re-opening the assessment has been extracted verbatim by the ITAT in para 2 of the impugned order.

A perusal of the reasons as recorded by the AO reveals that there are three parts to it. In the first part, the AO has reproduced the precise information he has received from the Investigation Wing of the Revenue. This information is in the form of details of the amount of credit received, the payer, the payee, their respective banks, and the cheque number. This information by itself cannot be said to be tangible material.

Coming to the second part, this tells us what the AO did with the information so received. He says: “The information so received has been gone through.” One would have expected him to point out what he found when he went through the information. In other words, what in such information led him to form the belief that income escaped assessment. But this is absent. He straightaway records the conclusion that "the abovesaid instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given

The third and last part contains the conclusion drawn by the AO that in view of these facts, “the alleged transaction is not the bonafide one. Therefore, I have reason to be believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004-05 due to the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment... ”

As rightly pointed out by the ITAT, the 'reasons to believe' are not in fact reasons but only conclusions, one after the other. The expression 'accommodation entry' is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the Assessee on his paying "unaccounted cash" is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be "a known entry operator" is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.

Thus, the crucial link between the information made available to the AO and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a

The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of Section 147 (1) of the Act.

At this stage it requires to be noted that since the original assessment was processed under Section 143 (1) of the Act, and not Section 143 (3) of the Act, the proviso to Section 147 will not apply. In other words, even though the reopening in the present case was after the expiry of four years from the end of the relevant AY, it was not necessary for the AO to show that there was any failure to disclose fully or truly all material facts necessary for the assessment.

The first part of Section 147 (1) of the Act requires the AO to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the

Each case obviously turns on its own facts and no two cases are identical. However, there have been a large number of cases explaining the legal requirement that requires to be satisfied by the AO for a valid assumption of jurisdiction under Section 147 of the Act to reopen a past assessment.

The aforesaid reasons do not satisfy the requirements of Section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except Annexure, which has been quoted above. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The Commissioner also acted on the same basis by mechanically giving his approval. The reasons recorded reflect that the Assessing Officer did not independently apply his mind to the information received from the Director of Income-Tax (Investigation) and arrive at a belief whether or not any income had escaped assessment."

To plough back unaccounted black money for the purpose of business or for personal needs such as purchase of assets etc., in the form of gifts, share application money, loans etc.

To inflate expense in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes.

In Commissioner of Income Tax v. G&G Pharma (supra) there was a similar instance of reopening of assessment by the AO based on the information received from the DIT (I). There again the details of the entry provided were set out in the 'reasons to believe'. However, the Court found that the AO had not made any effort to discuss the material on the basis of which he formed prima facie view that income had escaped assessment. The Court held that the basic requirement of Section 147 of the Act that the AO should apply his mind in order to form reasons to believe that income had escaped assessment had not been fulfilled. Likewise in CIT-4 v. Independent Media P. Limited (supra) the Court in similar circumstances invalidated the initiation of the proceedings to reopen the assessment under Section 147 of the Act.

In Oriental Insurance Company Limited v. Commissioner of Income Tax 378 ITR 421 (Del) it was held that “therefore, even if it is assumed that, in fact, the Assessee‟s income has escaped assessment, the AO would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. In absence of the jurisdictional pre-condition being met to reopen the assessment, the question of assessing or reassessing income under Section 147 of the Act would not arise.”

In Rustagi Engineering Udyog (P) Limited (supra), it was held that “...the impugned notices must also be set aside as the AO had no reason to believe that the income of the Assessee for the relevant assessment years had escaped assessment. Concededly, the AO had no tangible material in regard to any of the transactions pertaining to the relevant assessment years.

Recently in Agya Ram v. CIT (supra), it was emphasized that the reasons to believe "should have a link with an objective fact in the form of information or materials on record…" It was further emphasized that “mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments.”

In the decision of this Court dated 16th March 2016 in W.P. (C) No. 9659 of 2015 (Rajiv Agarwal v. CIT) it was emphasized that “even in cases where the AO comes across certain unverified information, it is necessary for him to take further steps, make inquiries and garner further material and if such material indicates that income of an Assessee has escaped assessment, form a belief that income of the Assessee has escaped assessment.”

In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a 'borrowed satisfaction'.

For the aforementioned reasons, the Court is satisfied that in the facts and circumstances of the case, no error has been committed by the ITAT in the impugned order in concluding that the initiation of the proceedings under Section 147/148 of the Act to reopen the assessments for the AYs in question does not satisfy the requirement of law.

The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue. The appeal is, accordingly, dismissed but with no orders as to costs.