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Income Tax Appellate Tribunal, DELHI BENCH “C” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI O.P. KANT
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER The Revenue has questioned first appellate order raising the issue as to whether the Learned CIT(Appeals) was correct in deleting the addition of Rs.40,02,780 made by the Assessing Officer under sec. 68 of the Income-tax Act, 1961 treating the share application money as unexplained cash credits.
The assessee on the other hand has moved application under Rule 27 of the ITAT Rules, 1962 seeking permission to raise following ground: “That in the facts and circumstances of the case and in law, the CIT(A) erred in upholding the assumption under sec. 148 of the Act.”
2 3. In support of the above application, the Learned AR submitted that since the addition in question was deleted by the Learned CIT(Appeals), hence, the assessee applicant did not file appeal against the issue of the validity of reopening of assessment. The Revenue, however, has preferred the present appeal questioning the action of the Learned CIT(Appeals) in deleting the addition of Rs.40,02,780. In such a situation, the applicant- assessee seeks permission of the ITAT through the present application under Rule 27 of the ITAT Rules to raise the above mentioned ground. The Learned AR submitted that the above issue on the validity of reopening of assessment was raised before the Learned CIT(Appeals) but it was decided by him against the assessee.
The Learned Senior DR on the other hand opposed the application.
Considering the above submissions, we find that as per Rule 27 of ITAT Rules, a respondent in the appeal, though may not have appealed, may support the order appealed against on any of the grounds decided against him. In the present case, undisputedly a similar issue was raised before the Learned CIT(Appeals) regarding the validity of reopening of the assessment and the Learned CIT(Appeals) decided the issue against the assessee but deleted the addition made by the Assessing Officer questioned by the 3 assessee before him. Thus, the assessee though is not in appeal before the ITAT but it fulfills all the pre-condition of Rule 27 of the ITAT Rules to raise the above stated ground before the ITAT against the action of the Learned CIT(Appeals) in upholding the assumption of jurisdiction under sec. 148 of the Act as valid. The application is accordingly allowed and since the issue raised in the ground under Rule 27 of the ITAT Rules is legaly in nature and goes to the root of the matter, we preferred to adjudicate upon this issue firstly. The parties were directed to advance their respective arguments on the issue.
In support of the above grounds, the Learned AR submitted that the reopening of assessment was initiated by the Assessing Officer merely on the basis of information received from the Investigation Wing of the Department. Referring to the Investigation Report of Entry Operator and certain decisions, the Assessing Officer treated the share application money as bogus mainly on the basis that the burden lay upon the assessee was not discharged. He contended that report of the investigation wing does not show any linkage with the assessee to form a belief that any income chargeable to tax in the hands of the assessee has escaped assessment. The reasons to belief do not refer to the statement of alleged entry operators 4 implicating the assessee. The Learned AR referred to the reasons to belief recorded by the Assessing Officer for initiation of the reopening proceedings with this submission that it is a apparent case of non-application of mind on the part of the Assessing Officer since similar figure have been repeated thrice against the same cheque No. dated 16.11.2002. He placed reliance on the following decisions: a) Signatures Hotel (P) Ltd., vs. ITO – (2011) – 338 ITR 51 (Del.); b) Sarthak Securities Co. (P) Ltd. vs. ITO – 2010) – 329 ITR 110 (Del.); c) Pr. CIT vs. G& G Pharma India Ltd.- ITA 545/2015 – order dated 08.10.2015 (Del.); d) ITO vs. Rajat Export Imports (P) Ltd., - (A.Y. 2003-04) – order dated 27.11.2015; e) Rasalika Trading & Investment Co.(P) Ltd., vs. ITO – ITA No. 3103/Del/2013 (A.Y. 2004-05) – order dated 27.11.2015; f) RKG International Pvt. Ltd. vs. ITO – ITA No., 101/Del/2013 (A.Y. 2004-05) – order dated 14.11.2014.
The Learned Senior DR on the other hand submitted that there was specific information regarding entries operators and their beneficiaries received from the Investigation Wing of the Department with this averment that the assessee company was one of the beneficiaries and had taken entry from the entry operator, details of which were provided. He submitted that here in the present case though there was repetition of same entry in the reasons recorded but no such repetition was there in the assessment order passed under sec. 147/143(3) of the Act. The Assessing Officer applied his
5 mind on the information received from the Investigation Wing of the Department and thereafter only he has formed his reasons to belief that there was escapement of assessment of taxable income. He submitted that the decisions relied upon by the Learned AR having distinguishable facts are not helpful to the assessee. He placed reliance on the decision in the case of CIT vs. Navodaya Castles Pvt. Ltd. – – decision dated 25.8.2014 (367 ITR 306 – Del ) – upheld by the Hon'ble Supreme Court – reported in (2015) – 230 Taxman 268 (S.C).
The Learned AR rejoined with the submission that the decision in the case of CIT vs. Navodaya Castles Pvt. Ltd., (supra) replied upon by the Learned Senior DR is not helpful to the Revenue as in that case the ITAT had decided the issue of validity of addition made under sec. 68 of the Act in favour of the assessee on its merit and had held the legal issue on the validity of reopening raised by the assessee in its cross objection as having become infructuous and academic only. Thus, the legal issue remained to be decided there. The Revenue went in appeal before the Hon'ble High Court and the Hon'ble High Court remitted the matter to the file of the ITAT for fresh adjudication. The assessee thereafter went to Hon'ble Supreme Court and the SLP was dismissed. The Learned AR submitted further that even on merits, the assessee has got good case as the Assessing Officer had made the 6 addition ignoring the evidences which were sufficient to establish the claimed transaction in question. He submitted that the genuineness of the entries in question was fully supported with the evidences like confirmation from the investor company, its acknowledgement of return, PAN, certificate of incorporation, ROC Data generated from the ROC Website, affidavit for payment of share application money supporting the identity of the investor company were filed and considering the same, the Learned CIT(Appeals) has righty deleted the addition in question.
We find that in its recent decision, the Hon’ble jurisdictional High Court of Delhi in the case of Pr. CIT vs. G&G Pharma India Ltd. (supra) has been pleased to summarize the jurisdictional requirement for initiation of reopening of the assessment under sec. 147 of the Act. The relevant paragraph Nos. 9 to 13 of the said decision are being reproduced hereunder for ready reference:
“9. The Court at the outset proposes to recapitulate the jurisdictional requirement for reopening of the assessment under Section 147/148 of the Act by referring to two decisions of the Supreme Court. In Chhugamal Rajpal v. SP Chaliha (1971) 79 ITR 603, 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 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.
10. In ACIT v. Dhariya Construction Co.(2010)328 ITR 515 the Supreme Court in a short order held as under: "Having examined the record, we find that in this case, the Department sought reopening of the assessment based on the opinion given by the DVO. Opinion of the DVO per se is not an information for the purposes of reopening assessment under s. 147 of the IT Act, 1961. The AO has to apply his mind to the information, if any, collected and must form a belief thereon. In the circumstances, there is no merit in the civil appeal. The Department was not entitled to reopen the assessment."
11. The above basic requirement of Sections 147/148 has been reiterated in numerous decisions of the Supreme Court and this Court. Recently, this Court rendered a decision dated 22nd September 2015 in of 2013 (Commissioner of Income Tax II v. Multiplex Trading and Industrial Co. Ltd.) where the assessment was sought to be reopened beyond the period of four years. This Court considered the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-tax Officer (supra) as well as the decision of this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. v. CIT 308 ITR 38 (Del). The Court noted that a material change had been brought about to Section 147 of the Act with effect from 1st April 1989 and observed: "29. It is at once seen that the Amendment in Section 147 of the Act brought about a material change in law w.e.f. 1st April, 1989. Section 147(a) as it stood prior to 1st April 1989 required the AO to have a reason to believe that (a) the income of the Assessee has escaped assessment and (b) that such escapement is by reason of omission or failure on the part of the Assessee to file a return or to disclose fully and truly all material facts necessary for his assessment for that year. After the Amendment, only one singular requirement is to be fulfilled under Section 147(a) and that is, that the AO has reason to believe that income of an Assessee has escaped assessment. However, the proviso to Section 147 of the Act provides a complete bar for reopening an assessment, which has been made under Section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return or to disclose fully and truly all material facts necessary for his assessment. Thus, in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failure on the part of the Assessee to truly and fully disclose all material facts must be concluded with certain level of certainty. It is in the aforesaid context that this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) explained that the ratio of the decision in Phool Chand Bajrang Lal (supra) may not be entirely applicable since the same was in respect of Section 147(a) as it existed prior to the amendment."
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.
13. Mr. Sawhney took the Court through the order 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 analyzing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity.”
When we examine the reasons to believe recorded in the present case, reproduced hereunder, in view of the above decision, we find substance in the contention of the Learned AR that there was total non-application of mind by the Assessing Officer for initiation of reopening proceedings merely based upon the information received from the Investigation Wing of the Department that the assessee was one of the beneficiaries of the accommodation entry:
“Assessee has filed return of income declaring an income of NIL on 02.12.2003. The return was processed u/s. 143(3) on 11.03.2004.
An information regarding entry operators and their beneficiaries was received from DIT(Inv.I), New Delhi vide D. No. 1399 dated
11 02.03.2006 and No. DIT(Inv)-I/2006-07AE/1536 dated 05.02.2007 that the assessee company is one of the beneficiaries and took entry from the entry operator as detailed below:
Assessee Value of Instrument Date on Name of Bank a/c. Bank a/c. entry taken No. by which account from which entry taken holder of which entry entry entry taken. giving given account 2852 500500 88413 23 Nov- M.V. Vijaya 2002 Marketing P Ltd. 854 750000 118878 28-Jan- Shimmer Keshav 2003 Marketing Sehkari P. LTd. 24619 750765 25-March- Rahul SBBJ Finlease 2003 Pvt. Ltd. 24594 750765 26-March- Nishant SBBJ Finvest 2003 50058 500750 Transfer 16-Nov. Fair ‘N’ SB Indore Square Chq 2002 Exports Ltd. 00254803 50050 500750 Transfer 16-Nov- Fair ‘N’ SB Indore Squares Chq. 2002 Exports Ltd. 00254803 50058 500750 Transfer 16-Nov- Fair ‘N’ SB Indore
12 Chq. 2002 Square 00254803 Exports P. Ltd. CA 3324 750000 983251 15-Feb- Kohinoor KVB 2003 Oil Mills Ltd. 50,04,530 As a result of above, I am convinced that assessee has evaded income chargeable to tax and has not declared proper source of income or expenditure for which accommodation has been taken as referred to above. The assessment for A.Y. 2003-04 was not made. The return has only been processed u/s. 143(1) and no action u/s. 143(3) has been taken in this case. As a result of above income chargeable to tax has escaped assessment. Hence, a notice u/s. 147 read with sec. 148 for reopening for assessment is required to be sent in this case.”
The Assessing Officer in the present case has not bothered himself to apply his mind independently on the information received from the Investigation Wing of the Department regarding the assessee being alleged beneficiaries of the accommodation entry to form his reasons to believe regarding the alleged escapement of assessment of income chargeable to tax before jumping to his conclusion that as a result of information received from Investigation Wing of the Department, he is convinced that assessee has evaded income chargeable to tax and has not declared proper source of income or expenditure for which accommodation has been taken as referred
13 above. The Hon'ble jurisdictional High Court of Delhi in its above cited recent decision in the case of G & G Pharma India Ltd. (supra) has been pleased to hold that prior to reopening of the assessment, the Assessing Officer has to apply his mind to the materials available to conclude that he has reasoned to believe that income of the assessee has escaped assessment. It has been further held that unless that basic jurisdictional requirement is satisfied, a postmortem exercise of analyzing material produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity. In the present case, the A.O. has not verified the information before banking upon it. We thus respectfully following the ratios laid down in the above decision of Hon'ble High Court hold that the initiation of reopening proceedings was not valid in the present case in absence of application of mind on the part of the Assessing Officer. As discussed above, the Assessing Officer has initiated the reopening proceedings solely based upon the information received from the Investigation Wing of the Department that the assessee was one of the beneficiaries and two entries from the entry operator. The issue raised in the ground under consideration is thus decided in favour of the assessee with this finding that the Assessing Officer was not justified to acquire jurisdiction to initiate reopening proceedings and the action of the Assessing Officer in this regard was not 14 valid. The assessment framed in furtherance to the said initiation of reopening proceedings is thus also held as void ab initio and is quashed as such.
12. In view of the above finding on the validity of the very assessment, the ground of the appeal preferred by the Revenue questioning the validity of the action of the Learned CIT(Appeals) deleting the addition of Rs.40,02,780 under sec. 68 of the Income-tax Act, 1961 treating the share application money as an unexplained cash credits, has become infructuous.
In result, the appeal preferred by the Revenue is dismissed. Order pronounced in the open court on 22 .04.2016 Sd/- Sd/- ( O.P. KANT ) ( I.C. UDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22/04/2016 Mohan Lal Copy forwarded to: 1) Appellant 2) Respondent 3) CIT 4) CIT(Appeals) 5) DR:ITAT ASSISTANT REGISTRAR
15 Date Draft dictated directly on computer 21.04.2016 Draft placed before author 21.04.2016 Draft proposed & placed before the second member Draft discussed/approved by Second Member. 22.04.2016 Approved Draft comes to the Sr.PS/PS 22.04.2016 Kept for pronouncement on 22.04.2016 File sent to the Bench Clerk 22.04.2016 Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.