KARSHNI METAL STORE,DELHI vs. ITO, NEW DELHI

The above captioned six appeals have been filed by different assessees and are directed against the separate orders of the CIT(A)-New Delhi passed for A.Y 2006-07. Since the facts and circumstances of these cases are similar and all these appeals were heard together, therefore, for the sake of brevity and convenience, we are disposing them off by this consolidated order.

2. First of all, for appreciation of facts and circumstances of the case, we take up Karshni Metal Store Vs. ITO for A.Y 2006-07.

3. The grounds raise by the assessee read as under:

“1. On the facts and circumstances of the case, the order passed by the learned CIT(A) is bad, both in the eye of law and on the facts.

2. On the facts and circumstances of the case, CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the initiation of the reassessment proceedings and the reassessment order are bad both on facts and in law and liable to be quashed as the statutory conditions and procedure prescribed under the statute have not been complied with.

3 (i) On the facts and circumstances of the case, CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the reassessment proceedings initiated by the learned A.O. are bad in the eye of law as the reasons recorded for the issue of notice under Section 148 are bad in the eye of law and are contrary to the facts. (ii) On the facts and circumstances of the case, CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the reassessment order passed by the A.O. is bad and liable to be quashed as the same has been reopened on the basis of the reasons which are vague and has been recorded without application of mind on the part of the A.O.

4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in confirming the rejection of the books of accounts of the assessee by the AO, despite the fact that the assessee has been maintaining proper books of accounts as per law.

5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in confirming the addition of an amount of Rs.3,80,792/- on account of bogus purchases.

6. On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition to the extent of 20% of such purchases, without there being any basis for the same. 7.(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in confirming that the firms M/s Vishnu Trading Company, M/S Shree Shyam Trading Company & M/s Shree Bankey Bihari Trading Co. are not engaged in the actual business ignoring the fact that during the course of the search substantial inventory in respect of the material being purchased by the assessee were found which confirm the fact that this firm was doing actual business. (ii) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in rejecting that the inference drawn by the AO merely on the basis of a statement that these firms are not in actual business is baseless and contrary to the facts on record. 8. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in rejecting the contention of the assessee in ignoring the fact that there being a complete tally of the quantity purchased and sold the allegation that the assessee has not made purchases cannot be sustained. 9. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in confirming the addition to the extent of 20% of such purchases rejecting the material and evidences brought on record by the assessee to show that the purchases were made in regular course of the business and material so purchased was sold in the regular course of business.

10. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in rejecting the contention of the assessee that the addition so made on the basis of material collected at the back of the assessee is bad in law & liable to be deleted.

11. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts & in law in rejecting the contention of the assessee that the addition made by the learned AO is untenable in the eye of law having been made without providing opportunity to cross examine the person on the basis of whose statement the allegations have been made against the assessee and without following the principle of natural justice.

12. The appellant craves leave to add, amend or alter any of the grounds of appeal.”

4. Ground Nos. 1 and 12 are general in nature and need no adjudication at our end.

5. Ground Nos. 2 and 3 challenging the validity of reopening of assessment are legal grounds.

7. Replying to the above, the ld. DR strongly supported the action of the AO for reopening of assessment, initiation of proceedings and issuance of notice u/s 147/148 of the Income-tax Act, 1961 ['the Act' for short]. The ld. DR further submitted that the ld. CIT(A) was quite correct and justified in upholding the conclusion of the AO on legal issues as well as on merits. However, on a specific query from the bench, the ld. DR fairly submitted that the facts and circumstances of the case as well as reasons recorded by the AO in the case of Unique Metal Industries Vs. ITO [supra] and other cases mentioned hereinabove, are quite synonymous and similar to the facts of the present case.

“ Reasons for the belief that the income has escaped assessment in the case of M/s Karshni Metal Store the assessment year 2006- 07

A letter bearing F.No. Addl.CIT /(Hq) /(Coord.) / Accommodation entry/2012-13/15016 dated 26.03.2013 was received from the Office of the Chief Commissioner of I.Tax, Delhi-1, New Delhi therein forwarding letter bearing F.No. CIT(C)-II/2012-13/3898 dated 19.03.2013 received from the Commissioner of I.Tax, Central-II, New Delhi along with a CD containing the details of accommodation entries provided by Sh. Rakesh Gupta & Sh. Vishesh Gupta & Sh. Navneet Jain & Sh. Vaibhav Jain and directing this office to take necessary action as per section 148 in respect of entries pertaining to A.Y. 2006-07, which is time barring on 31.03.2013.

The information provided by the CIT, Central-II, New Delhi vide his letter dated 19.03.2013 reads as under:

1. “Kindly find enclosed herewith letter dated 13.03.2013 of ACIT, Central Circle-10 duly forwarded by the Addl. CIT, Central Range-IV, along with its enclosures on the subject mentioned above.

2. The assessment of search cases of Sh. Rakesh Gupta, Sh. Vishesh Gupta, Sh. Navneet Jain & Sh. Vaibhav Jain are under process with the ACIT, Central Circle-10. During the assessment proceedings u/s 153A in the aforesaid cases,

details regarding accommodation entries given by the above entry providers has been obtained by the Assessing Officer.

3. The list of accommodation entry recipients has been obtained from Sh. Rakesh Gupta and Sh. Vishesh Gupta. Hard copy of the list is enclosed as Annexure A, duly signed by Sh. Vishes Gupta. The list given the name of the firm which has provided the accommodation entry along with the name and address of the recipients of accommodation entry.

4. Sh. Navneet Jain & Sh. Vaibhav Jain has provided accommodation entry through thirty seven paper entities. The list of the firms giving accommodation entry is enclosed as annexure-B. The list of accommodation entry recipients, has been obtained from Sh. Naveneet Jain & Sh. Vaibhav Jain. It does not give year wise bifurcation. Hard copy of the list is enclosed as annexure-C, duly signed by Sh. Vaibhav Jain. Thus, the firms mention in the list ‘B’ have provided accommodation entries to the firms mentioned in list ‘C’.

6. The information of accommodation entry includes A.Y. 2006-07 also, which is a time baring year for taking action u/s 148.

On examining the list of accommodation entries provided by Shri Rakesh Gupta & Shri Vishesh Gupta and Shri Navneet Jain & Shri Vaibhav Jain pertaining to A.Y. 2006- 07. It is noticed that the following accommodation entries have been taken by the assessee namely M/s Krishan Lal Gambhir & Sons:

S. Accommodati Name of party to Amount of No. on entry whom Accommodation Accommodatio provided by entry is provided n entry 1. Shree Shyam M/s Karshni Metal Store Rs. 2,66,062 Trading Co.

out from ITD System. Further, no scrutiny assessment was done in A.Y. 2006-07. Therefore, I have reasons to believe that income chargeable to tax amounting to Rs. 7,58,321/- for the F.Y. 2005-06 relevant to A.Y. 2006-07 has escaped assessment and it is a fit case for initiation of proceedings u/s 147 of the Act. Proposal in the prescribed form for the AY 2006-07 (F.Y. 2005-06) is submitted herewith for kind consideration and necessary approval u/s 151(2) of the I.T. Act, 1961 as the same is getting barred by limitation on 31/03/2013. If approved, notice u/s 148 of the act may be issued. Sd/- (Pawan Kumar Vashist) Income Tax Officer Ward 39(3), New Delhi

9. From the first order of the Tribunal in the case of Unique Metal Industries Vs. ITO [supra] it is vivid that the Tribunal in the similar facts, circumstances and situation of the case, satisfaction note held as under:

“8. On going through the above reasons it is evident that this assessment has been reopened on the basis of the letter received from the ld. CIT, Central-2, New Delhi with the direction to take necessary action as per section 148 of the Act. As per this, accommodation entries were obtained by various persons from Sh. Rakesh Gupta and Sh. Vishesh Gupta as well as Sh. Navneet Jain and Sh. Vaibhav Jain. Copy of this list was forwarded in a CD to the Assessing Officer. Thus this list contained the name of the assessee. The Assessing Officer reopened the assessment on the basis of this information. The basis given by the Assessing Officer in the reasons is that these persons have admitted that they have given accommodation entries to the parties whose lists have been provided by them. From the above facts it is apparent that the Assessing Officer at that point of time when he recorded the reasons was not having the copy of the statement or any other material in which these people have alleged to have provided accommodation entries to the assessee. This position gets also corroborated from the facts stated by the Assessing Officer himself in the reassessment order in para 3 page 5 which read as under:-

“Here it is pertinent to mention that in the intervening period, this office had conversations with the ACIT, Central Circle-10, New Delhi from whom vide this office’s letter dated 23.07.2013, 02.09.2013, 14.10.2013, 06.11.2013, 22.11.2013, 09.12.2013 & 24.12.2013 and vide Joint CIT, Range-39, New Delhi’s letter dated 16.12.2013, the following details/documents were sought:-

(i) Copies of the statements recorded of Sh. Rakeh Gupta & Sh. Vishesh Gupta dn Sh. Navneet Jain & Sh. Vaibhav Jain in search/post search/assessment proceedings. (ii) Soft copies of the tatements recorded of Sh. Rakeh Gupta & Sh. Vishesh Gupta dn Sh. Navneet Jain & Sh. Vaibhav Jain in search/post search/assessment proceedings.\ (iii) Hard copy of assessment orders passed in these cases for A.Y. 2006-07 (iv) Soft copy of assessment orders passed in these cases for A.Y. 2006-07 (v) Any other detail/document you may deem fit that need to be confronted with the parties whose cases have been reopened u/s 148 of I. Tax Act.

10. The above observation of the Assessing Officer also shows that it was letter dated 20.12.2013 received by him on 27.12.2013 on the basis of which the Assessing Officer could make a view that the purchase bills provided by these persons or their family members is nothing but bogus purchase bills. At the time of recording of the reasons the Assessing Officer apparently was not having any idea about the nature of the transactions entered into by the assessee. In the reasons recorded there

is no mention about the nature of the transactions. As per provision of section 147 an assessment can be reopened if the Assessing Officer has reasons to believe that any income chargeable to tax has escaped assessment. The reasons to believe has to be that of the Assessing Officer and further there have to be application of mind by the Assessing Officer though the reasons to believe does not mean that the Assessing Officer should have finally ascertained the fact that income has escaped assessment but at the same time, it also means that the Assessing Officer is required to examine the facts on the basis of the information and satisfy himself that the taxable income has escaped assessment. In the present case, on going through the reasons it is quite evident that the Assessing Officer was also not aware of the nature of the accommodation entries. In the reasons recorded he has simply mentioned the name of the party and the amount and nowhere has stated the nature of such entry. This also shows that the Assessing Officer has made no effort to look into the return of the assessee which was available with him. This fact gets further supported from the sheet appended to the reasons and quoted on page 4 of the assessment order whereby against Item no. 7, whether the assessment is proposed to be made for the first time, the Assessing Officer has stated ‘Yes’, and in Column no. 7(a), whether any voluntary return had already been filed and in Column no. 8 (b), date of filing the said return ‘NA’ has been stated. Thus this is a clear case of non-application of mind by the Assessing Officer. It may also be relevant that on page 2 of the assessment order, the Assessing Officer himself has stated that in this case the return of income for the year under consideration was filed with this ward on 27.09.2006. These facts clearly demonstrate that the return was with the same ward and at the time of recording of the reasons for reopening the assessment, the Assessing Officer has not looked at the return and in a mechanical way, on receipt of the letter from the CIT, Central-2, New Delhi the assessment has been reopened. It is a settled position of law that there must be material for formation of a belief that income has escaped assessment. Further reasons referred to must disclose process of reasoning by which the Assessing Officer holds reason to believe. There must be nexus between such material and belief. Further and most importantly the reasons referred to must show application of mind by the Assessing Officer. It is also a settled law that the validity of the initiation of the reassessment proceeding is to be judged with reference to the material available with the Assessing Officer at the point of time of the issue of notice under section 148. In the present case, as is evident from the assessment order, the Assessing Officer was having nothing except the list provided by the CIT, Central-2, New Delhi about the list of accommodation entries. Beyond that he was not having the copies of the statement of any of these persons. He was not having copy of the assessment orders and other details or document which would have enabled the Assessing Officer to apply his mind and form a belief that income has escaped assessment. In fact this information was not with the Assessing Officer till fag end of the reassessment proceedings, a fact admitted by the Assessing Officer himself in the assessment order. The judgment relied upon by the learned AR also supports the case of the assessee. In the case of Sarthak Securities Pvt. Ltd. vs. ITO (2009) 329 ITR 110 the Hon’ble jurisdictional Delhi High Court has held that under the circumstances narrated hereinabove the reopening cannot be said to be a valid reopening. The Hon’ble Court has held as under:- “In the case at hand, as is evincible, the AO was aware of the existence of four companies with whom the assessee had entered into transaction. Both the orders clearly exposit that the AO was made aware of the situation by the Investigation Wing and there is no mention that these companies are fictitious companies. Neither the reasons in the initial notice nor the communication providing reasons remotely indicate independent application of mind. True it is, at that stage, it is not necessary to have the established fact of escapement of income but what is necessary is that there is relevant material on which a reasonable person could have formed the requisite belief. To elaborate, the conclusive proof is not germane at this stage but the formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply. As is manifest from the perusal of the supply of reasons and the order of rejection of objections, the names of the companies were available with the authority. Their existence is not disputed. What is mentioned is that these companies were used as conduits. The same has not been referred to while passing the order of rejection. The assessee in his objections had clearly stated that the companies had bank accounts and payments were made to the assessee company through banking channel. The identity of the companies was not disputed. Under these circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It is totally unwarranted. Resultantly, the initiation of proceedings under s. 147 and issuance of notice under s. 148 are hereby quashed.”

On merits

11. The remaining issues on merits are sustenance of addition made by the ld. CIT(A) to the extent of 20% purchases made by the assessee during F.Y. 2005-06 pertaining to A.Y 2006-07, from the order of the Tribunal in the case of Unique Metal Industries [supra] dated 30.11.2015 and other cases of the Tribunal, we note that the Tribunal has followed the findings given by the coordinate bench of the Tribunal in the order dated 28.10.2015 in the case of Unique Metal Industries [supra]. The relevant operative finding of the order of the Tribunal in the case of Radhey Shyam [supra] reads as under:

7. “Now coming to the merit about the sustenance of the addition by the CIT(A) @ 20% of the purchases made by the assessee from Shri Bankey Bihari Trading Co., after hearing the rival submissions and going through the order of the Tribunal, I

noted that this Tribunal vide its order dated 28.10.2015 in the case of Unique Metal Industries (supra), deleted similar addition by observing in para 27 as under:

“27. As regards the addition of 20% sustained by the ld. CIT(A) I am of the view that since purchases are not bogus the addition on this account cannot be sustained. Even otherwise the addition of 20% on the facts and circumstances is apparently too high. The ld. CIT(A) having held that tax has to be levied on real income and the profit cannot be ascertained without deducting the cost of purchases from the sales as otherwise it amount to levy of tax on gross receipt, she ought to have applied’ profit rate in this nature of trade. Estimating profit @ 20% by taking into consideration the or visions of section 40A(3) will not lead to determination of correct real income. Section 40A(3) is meant for a different purpose when the assessee has made purchases in cash. This provision cannot be applied in such cases. Once the purchases are held to be bogus then the trading results declared by the assessee cannot be accepted and right course in such case is to reject books of accounts and profit has to be estimated by applying a comparative profit rate in the same trade. Though there can be a little guess work in estimating profit rate but such profit rate cannot be punitive.”

12. However, we may point out that the ld. DR has vehemently supported the addition made by the AO and sustained by the ld. CIT(A) and contended that the ld. CIT(A) has quite correct in holding that since the purchases are bogus, therefore, the addition to the extent of 20% of purchases has to be sustained. On specific query from the Bench, the ld. DR could not bring to our notice any cogent or relevant material or evidence which may compel us to take a different view which could lead us to not to follow the decision of the co ordinate benches of the Tribunal in the case of Unique Metal Industries [supra] and other relevant orders. We therefore, respectfully following the decision of the Tribunal in the case of Unique Metal Industries [supra] which deleted the addition as sustained by the ld. CIT(A) being 20% of the purchases made by the assessee during the relevant F.Y. Consequently, the grounds of the assessee on merits are also allowed.

13. As a result, the appeal of the assessee in Krishni Metal Store Vs. ITO are allowed.

The order is pronounced in the open court on 23.03.2016.