RENUKA FINANCIAL SERVICES LTD.,NEW DELHI vs. ITO, NEW DELHI

ORDER PER BEENA A. PILLAI, JM: The present appeal has been filed by the assessee against the order of the ld. CIT(A)-XVII, New Delhi, vide order dated 10th January, 2013 for assessment year 2004-05, on the following grounds of appeal:-

“1. On facts and in the circumstances of the case and in law, the Id. Commissioner of Income Tax (Appeals)(CIT (A)) erred in confirming the addition of Rs. 1,06,06,355/- on account of income from undisclosed sources.

4. That the A.O. had no material whatsoever for formation of any belief that income of the appellant chargeable to tax had escaped assessment since the appellant had not received accommodation entries by way of share capital/capital gains.

5. That the A.O. erred in initiating the reassessment proceedings on mere change of opinion for reviewing order of assessment made earlier which is contrary to the law.

6. That in any case, the alleged undisclosed income was already offered by the appellant as its income hence the CIT(A) erred in upholding the said addition which amounted to adding the same income twice.

7. That the Id. CIT(A) erred in confirming the said addition by holding that the appellant failed to prove identity, genuineness and creditworthiness of the transactions as if these transactions were on capital account whereas the transactions were on revenue account and the 2

appellant had already accounted the said transactions as its income. 8. The appellant prays that it may be permitted to add, amend or forego all or any of the above grounds of appeal

.”

2. Brief facts of the case as recorded by the AO are that the assessee had filed return declaring income of Nil after setting off brought forward losses to the extent of profit of Rs.10,71,42,915/-.

The income u/s 115JB was however shown at Rs.10,50,87,168/-.

The case was completed u/s 143(3) on 24.11.2006 at a book profit of Rs.10,50,87,168/-. Later on, an information was received from the Investigation Wing, New Delhi, that the assessee is amongst the beneficiaries of bogus accommodation entries totaling to Rs.1,06,06,355/-. Accordingly, the proceedings u/s 147 of the Act were initiated and notice u/s 148 of the Act was issued on 30.03.2011. The AO made an addition of Rs.1,06,06,355/- 2.1. Aggrieved by the order of the ld. AO, the assessee preferred an appeal before the ld.CIT(A). The ld.CIT(A) confirmed the findings of the ld.AO and held as under:-

“The appellant has thus been unable to prove the identity, genuineness and creditworthiness of the persons who have allegedly entered into share transactions. As the assessee did not offer any 3 explanation about the nature and source of the sums found credited in the books there was, prima facie, evidence against the assessee, viz., the receipt of money. The burden was on the assessee to rebut the same, and, it failed to rebut it, it can therefore be held against the assessee that it was a receipt of an income nature. The appellant has failed to discharge its onus to produce legally acceptable evidence of creditworthiness of the persons. The expression “the assessee offers no explanation” means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. In this case the appellant has offered no creditable explanation about the amounts credited in its books, the receipt of Rs.1,06,06,355/- therefore cannot be treated as explained. Considering the above facts, the addition of Rs.1,06,06,355/- made by the AO u/s 68 is confirmed.”

3. Aggrieved by the order of the ld.CIT(A), the assessee is in appeal before us.

3.1. Grounds of appeal Nos.2, 3, 4 and 5 are directed against the reopening of the assessment u/s 147 as there was no failure on the part of the assessee to disclose fully and truly all materials for assessment and ground Nos.1, 6 and 7 are directed against the addition of Rs.1,06,06,355/- on account of income from undisclosed sources. Since all the grounds are interconnected with each other, they are being discussed together.

3.2. The ld. AR submitted that the assessee is engaged in dealing in shares and advancing of loans. During the year under consideration, the assessee had entered into share trading transactions with M/s Creative Financial Services Pvt. Ltd., which resulted in net trading profit of Rs.1,06,06,440/-. He submitted that the assessee has specifically disclosed the profit earned from the share trading in P&L Account under the head ‘Profit on sale purchase of shares.’ The ld. AR submitted that during the course of the assessment proceedings, the AO had asked for the details of profit on sale and purchase of shares.

3.3. It is further submitted that vide letter dated 22nd November, 2006, the assessee had submitted all the relevant details in respect of the share purchase. The relevant letter dated 22nd November, 2006 is placed at pages 48 to 86 of the paper book. The ld. AR submitted that it was after going through the relevant details provided by the assessee that the ld. AO had accepted the same while passing the original assessment order u/s 143(3) dated 24.11.2006. He submitted that the ld. AO has applied his mind on the entire details filed by the assessee which includes contract notice, copy of the account in the books of the company, etc., before passing the original assessment order. The ld. AR strongly objected the re-assessment proceedings on the following grounds:-

� That the re-assessment proceedings initiated is beyond the jurisdiction and not in accordance with the provisions of the law; � That there is no reason to believe that any income has escaped assessment which could be prejudicial to the interests of the revenue. � That there is a non-application of mind by the ld. AO at the time of recording of reasons which leaves the re-assessment invalid; � That the reopening is invalid in terms of the Proviso to section 147 of the Act; and � That the reopening is a mere change of opinion by the ld. AO.

5.1. On perusal of the records before us, it is observed that the assessee had submitted all the details regarding the income from trading of shares amounting to Rs.1,06,05,440/-. The ld. AO, while passing the original assessment order has gone through these details and has applied his mind before accepting the submissions made by the assessee in lieu of the profits earned from trading in shares. It is further observed that the assessee has disclosed the amount in the Profit & Loss Account under the head ‘Profit and loss from trading in shares’, thereby leading to the conclusion that the assessee has disclosed the said amount as income in the hands of the assessee for the relevant year under consideration.

5.2. The notice issued by the ld. AO for reopening is on the ground that the assessee has received accommodation entries to the tune of Rs.1,06,06,355/- in the nature of share capital/capital gains which have escaped assessment. It is also noticed that the said notice of reopening has been issued by the ld. AO on 30.3.2011 which is beyond four years from the end of the relevant assessment order.

The ld. AO has proceeded with the re-assessment proceedings merely on the information received from the Investigation Wing, without verifying the same. In the light of the above, we shall evaluate the provisions u/s 147 of the Act as under.

No reason to believe that income has escaped assessment 5.3. The initiation of reassessment proceedings on the basis of the above reasons/information is void ab initio since there is no reason to believe that income has escaped assessment. The information that accommodation entries aggregating to Rs.1,06,06,355/- was received by the assessee has not been established by the ld.AO. The assessee company entered into share trading transactions with the said company and on such trading it had earned profit. Thus the information that such entries have been taken and introduced either as share capital or capital gain is incorrect. Therefore, the very reason on the basis of which the case was reopened is non- existent and therefore the proceedings are void ab initio.

5.4. It is further submitted that the assessee has duly accounted the said profit in its books of account. The assessee has specifically disclosed the same under the heading "profit on sale-purchase of shares" at Rs. 1,06,05,440/- in the Profit and loss account (there is marginal difference of Rs.915/-). Thus the said income has been duly shown and duly assessed. It is therefore impossible to form a believe, in the above background that income has escaped assessment with regard to Rs. 1,06,06,355/- as alleged in the notice.

Non-application of mind at the time of recording of reasons leaves the assessment invalid. 5.5. It is well settled law that the AO has to independently apply his mind to the information received from outside agency (the Investigation wing in this case), and arrive at the belief that income has escaped assessment. In the instant case, the reasons do not show any application, nor the same show any belief independently arrived at, which is the basic pre-requisite for issuing notice u/s

5.6. The law postulates the Assessing Officer (and not the Investigation Wing) to have reason to believe. Blind acceptance of the information furnished by the Investigation Wing cannot form reasons leading to the belief by the Assessing Officer of any escapement of income. Since the AO has acted on the basis of the borrowed satisfaction only the reassessment proceedings are void ab initio.

5.7. In the instant case, the AO received information that the assessee has received accommodation entries in the nature of share capital/capital gains. He has not verified the same before issuing the notice. The assessee has not received any amount by way of share capital or by way of capital gains. As already explained the assessee has carried out share trading transactions during the year and received the payment thereof by cheques. Such profit has been duly accounted, disclosed and assessed. Therefore the AO could not form a belief at the time of issue of notice that income to that extent has escaped assessment. Therefore the reassessment notice is invalid and void ab initio.

Reopening invalid in terms of proviso to section 147:

5.8. The present proceedings as stated above, were initiated vide impugned notice dated 30.3.2011, i.e., much after the expiry of four years from the end of the assessment year 2004-05, the year under consideration. The assessment was framed u/s 143(3) vide order dated 24.11.2006. It is submitted that the assessee has duly disclosed the income/profit in its accounts and the same was specifically reflected in the Profit and Loss Account. During the course of assessment proceedings, the AO enquired about the same and raised a specific query. The assessee has filed detailed explanations along with supporting documents. Thus, the assessee has disclosed fully and truly all material facts necessary for assessment both at the time of filing the return of income as well as during the course of assessment proceedings. It is therefore observed that the present proceedings are bad, in terms of the proviso to section 147.

5.9. Proviso to the section 147 of the Act places fetters on the powers of the Assessing Officer to initiate reassessment proceedings beyond the period of 4 years from the end of the relevant assessment year, where the assessment has been completed under section 143(3) of the Act unless the income has escaped assessment by reason of the failure of the appellant to disclose fully and truly all material facts necessary for assessment. The said proviso reads as under:

"Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year." 5.9. The Courts including the Hon'ble jurisdictional High Court, have consistently held reassessment proceedings initiated beyond four years from the end of the relevant assessment year, to be invalid in terms of the proviso to section 147 of the Act where there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.

5.10. In the present case, the proceedings under section 147 of the Act were initiated after the expiry of four years from the end of the assessment year 2004-05 without there being any failure on the part of the assessee to disclose fully and truly material facts necessary for assessment. That being so, the impugned reassessment proceedings have been initiated clearly beyond the period of limitation prescribed in proviso to section 147 of the Act, which is not permissible in law. The proceedings initiated are, therefore, clearly without jurisdiction, bad in law and void ab initio.

Reopening not sustainable being change of opinion: 5.11. The ld.AR submits that the impugned reassessment proceedings are without jurisdiction and bad in law since the proceedings have been initiated on a mere change of opinion. It is submitted that Assessee Company has duly disclosed the income/profit in its accounts and the same was specifically reflected in the Profit and Loss Account.

5.12. During the course of assessment proceedings, the AO enquired about the same and raised a specific query. The assessee has filed detailed explanations along with supporting documents as detailed earlier. The AO after full application of mind passed the order u/s 143(3). In such a case, the reassessment notice is bad.

The Supreme Court has in the case of Kelvinator of India in 320 ITR 561 has held that "the concept of change of opinion" on the part of Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Income-tax Act, 1961, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. After the amendment, the Assessing Officer has to have reason to believe that income has escaped assessment, but this does not imply that the Assessing Officer can reopen an assessment on mere change of opinion.

5.13. The ld. AR for the assessee has placed his reliance on the decision of the jurisdictional High Court in the case of CIT vs. Bhushan Capital and Credit Services Ltd., reported in (2013) 263 CTR 393, wherein it has been held as under:-

“Held: The amount had been declared in the return of income as capital gains and what the AO did was only to change the nomenclature from "capital gains" to "undisclosed income". The assessment has been reopened after a lapse of about eight years from the end of the relevant assessment year as noted by the Tribunal. If the assessment is sought to be reopened 14 after a period of four years from the end of the relevant assessment year, it is incumbent upon the AO, under the first proviso to s. 147, to show that the escapement of income was on account of failure of the assessee to file the return of income or to furnish fully and truly all material facts relating to the assessment. The assessee had declared the amount of Rs. 5,10,130 as capital gains in the return of income. There was thus no failure to disclose the income. Consequently, there is no escapement of income. The change of the nomenclature from "capital gains" to "undisclosed income" does not result in any escapement of income since the rate of tax is the same under both heads. In the relevant assessment year, there was no difference in the rate of tax applicable to capital gains. Therefore, neither. is there any escapement of income nor is there any under- assessment. It is not a case covered by special sub-cl. (ii) of cl. (c) of Expln. (2) below s. 147 which speeks of the income being assessed at too low a rate. There is no infirmity in the ultimate decision of the Tribunal that the reassessment was without jurisdiction. No substantial question of law arises.”

The order pronounced in the open court on 19.02.2016.