M/S. GENIUS ELECTRICALS & ELECTRONICS PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

2 2. During the course of hearing, the Learned AR preferred to argue the issue raised in ground No.2 which is legal in nature and goes to the root of the matter. In support of this ground, he submitted that the assessee company is engaged in the business of manufacturing of electrical parts. It maintained regular books of account and the same were audited under the Companies Act. The assessee company had also filed annual returns with the Registrar of the Companies, Delhi and Haryana giving the names and addresses of its directors and shareholders in the said annual returns besides the audited balance sheet and profit and loss account. The assessee company had received Rs.6,50,000 from the private limited company during the year under consideration and had filed several documents in support of receipt of share application. He submitted that the return of income filed on 30.10.2001 was processed under sec. 143(1) of the Act and no notice under sec. 143(2) of the Act was issued. Subsequently, on the basis of report of the Investigation Wing of the Department, the Assessing Officer initiated reopening proceedings under sec. 147 of the Act without application of his mind and solely based upon the said report. Statements of some persons alleged to have been engaged in providing accommodation entry, as per the assessment order were provided to the Assessing Officer. The Assessing Officer stated that those entry operators had admitted that they were 3 instrumental in providing the accommodation entry. In the light of observations made by the Investigation Wing in their report, the Assessing Officer initiated reopening proceedings against the assessee and notice under sec. 148 of the Act was issued. In response, the assessee filed its letter dated 26.4.2008 requesting therein that the return of income originally filed be treated as return filed under sec. 148 of the Act. On request, the assessee was supplied with the reasons to believe recorded by the Assessing Officer. The Learned AR referred page Nos. 15 to 18 of the paper book wherein copy of the said reasons has been made available. The Learned AR submitted that the reasons recorded are vague and similar entries of Rs.2,50,000, Rs.2,00,000 and Rs.2,00,000 have been repeated. It has been alleged that on investigation made by the Investigation Wing, it has been found that assessee is a beneficiaries of taking the alleged accommodation entry. Thereafter, the Assessing Officer has recorded the reason that he had also perused various material and report received from Investigation Wing from which it is evident that assessee company had introduced its own unaccounted money in its bank by way of accommodation entry. He, thereafter, noted that he has reasoned to believe that the income amounting to Rs.13 lacs has escaped assessment. He submitted that during the year the assessee had received share application money of Rs.13,49,000 through 4 account payee cheques. The assessee had allotted shares to the share applicants. Out of the said share application money, the Assessing Officer has made addition of Rs.6,50,000 received from Polo Leasing & Finance Pvt. Ltd. (Rs.2,50,000), Fair ‘N’ Square Exports Pvt. Ltd. (Rs.2,00,000) and Tashi Contractors Pvt. Ltd. (Rs.2,00,000). These amounts were paid through account payee cheques and sufficient evidences in the form of confirmation of accounts from all the entities who had applied for allotment of equity shares of the assessee company, certificate of incorporation, proof of filing of income-tax return of those entities, form No. 2 for share allotment, board resolutions etc. were filed. In the reasons recorded, the Assessing Officer has not mentioned about the nature of accommodation entry nor is there any evidence to support the allegation of the Assessing Officer that it was money of the assessee which routed through those entries. Copies of the above evidences have been made available at page Nos. 22 to 42 of the paper book. The Assessing Officer has made the addition only on the basis that the assessee could not produce the share applicant. Since the reasons recorded are vague and solely based upon the information received from the Investigation Wing of the Department without application of mind by the Assessing Officer, the initiation of reopening proceedings based on those reasons is invalid. In support, he placed reliance on the following decisions:

The Learned Senior DR on the other hand opposed the ground with this submission that the information received from the Investigation Wing of the Department was specific showing the involvement of assessee in the activity of accommodation entry as beneficiaries. In their statement, the entry providers have admitted before the Investigation Wing that they are engaged in providing accommodation entry in the name of the entities from whom the assessee company has received the claimed share application money. The Assessing Officer after applying his mind and being satisfied with the report of the Investigation Wing has formed his reasons to believe that the income assessable to tax has escaped assessment. She submitted that 6 the investigation wing is the part of the department and during the recording of reason, the Assessing Officer is needed to record a prima facie case of escapement of taxable income. She contended that sufficiency of reasons recorded cannot be questioned before the Court of Law and in this regard she placed reliance on the decision of Hon'ble Supreme Court in the case of Raymond Woolen Mills – 236 ITR 34 (SC). The Learned Senior DR submitted further that in the present case, there was no assessment under sec. 143(3) of the Act before issuance of notice under sec. 148 of the Act. The same entry operator was there in the case of CIT vs. Nova Promoters – 342 ITR 169 (Del.). The Learned CIT(Appeals) was thus justified in rejecting the ground regarding validity of notice issued under sec. 148 of the Act raised before him.

Having gone through the above cited decisions especially the recent decision of Hon'ble jurisdictional High Court of Delhi in the case of Principal CIT vs. G & G Pharma India Ltd. (supra), for acquiring jurisdiction under sec. 147 of the Act, the Assessing Officer is required to form a prima facie opinion on the basis of material available before it. In other words, application of mind by the Assessing Officer for forming reason to believe that there is escapement of assessment of taxable income is 7 a pre-condition for acquisition of jurisdiction under sec. 147 of the Act. The Assessing Officer cannot act upon merely on the basis of information received from the Investigation Wing of the Department alleging some escaped assessment of taxable income to initiate the reopening proceedings. The purpose of the legislature behind it is that the reopening proceedings should not be invoked in a casual manner and in absence of some tangible material as on the date when reasons to believe in this regard is formed by the Assessing Officer. Relevant para Nos. 9 to 13 of the recent decision of the Hon'ble jurisdictional High Court of Delhi in the case of Pr. CIT vs. G & G Pharma India Ltd. (supra) are being reproduced hereunder for a ready reference:

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."

The above basic requirement of Sections 147/148 has been reiterated in numerous decisions of the Supreme Court and this Court.

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.

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 facts of the present case in view of the ratios laid down in the above cited decisions, we find that the Assessing Officer in the present case has initiated reopening proceedings without verifying the information received from the Investigation Wing of the Department alleging that the assessee was beneficiary of accommodation entry provider. For a ready reference, the reasons recorded by the Assessing Officer are being reproduced hereunder: