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Income Tax Appellate Tribunal, DELHI BENCH ‘SMC-2’, NEW DELHI
Before: SRI G.D. AGARWAL, HON’BLESRI C.M.GARG
This appeal by the assessee has been filed against the order of the CIT(A)- 6 Delhi dated 27.03.2015 passed in appeal no. 239/2014-15 for AY 2004-05.
The ld. Assessee’s Representative (AR) and the Ld. Departmental Representative (DR) agreed that the legal grounds no. 1 & 2 should be heard first which read as under :- “1. Whether the Ld. CIT(A) was justified by upholding order dt. 09.11.11 passed u/s 144 which is valid one on assumption of jurisdiction i.e. for recording of reasons, its approval as well as within the limitation.
2 Marathon Finlease Ltd. 2. Whether the Ld. CIT(A) was justified by upholding the assessment order served before disposed—off the preliminary objections dt. 16.11.11 for invoking of jurisdiction u/s 147.”
We have heard arguments of both the sides and carefully perused the materials placed on record before us. The Ld. AR pointed out from the reason recorded by the AO, available at pages 5 & 6 of assessee’s paper book, are merely a reproduction of vague information received from Director of Income Tax (Investigation) New Delhi. The Ld. AR further pointed out that the AO proceeded to make additions without verifying and examining the facts and details sent by the Investigation Wing & without application of mind in a mechanical manner. Therefore, the AO did not assume valid jurisdiction to initiate proceedings u/s 147 of the Act and for issuing notice u/s 148 of the Act. The Ld. AR placed his reliance on the recent decision of Hon’ble High Court of Delhi in the case of Pr. CIT vs. G & G Pharma dated 8.10.2015 in ITO no. 545/2015 wherein dismissing the appeal of the revenue, the tribunal order reported as 2015-TIOL-191-ITAT-Delhi has been upheld. The Ld. AR also placed reliance on the order of the Tribunal in the case of ACIT u/s Shri Devesh Kumar dated 31.10.2014 passed in for AY 2004-05 and vehemently pointed out that in the reasons recorded the AO has not even mentioned date of recording of reasons which shows action of the AO u/s 147 / 148 of the Act without application of mind and only on the basis of vague information.
Replying to the above, the Ld. DR strongly supported the action of the AO as well as impugned order and contended that there was detailed and factually correct information from DIT (Inv.) hence, the AO after recording satisfaction as per provisions of section 147/148 of the Act rightly proceeded to initiate proceedings u/s 147 of the Act and to issue valid notice u/s 148 of the 3 Marathon Finlease Ltd. Act under validly assumed jurisdiction hence, the same was correctly upheld by the CIT(A). No other argument has been placed before us by both the parties in this regard.
On careful consideration of above rival submissions of both the sides it is ample clear that the AO recorded reasons on receipt of certain information received from DIT (Inv.) which are available at pages 5 & 6 of assessee’s paper book and for the sake of completeness we are enclosing copy of the reasons recorded as Annexure A to this order. On bare reading of reasons recorded it is apparent that the AO proceeded to initiate and to issue notice u/s 147/148 of the Act solely on the basis of information received from the DIT (Investigation). In the first part of reasons recorded he mentions factual details in a tabular form then writes information so received has been gone through and he further jumped to a conclusion that said tabulated instrument are in the nature of accommodation entry and then he writes modus operandi for this transaction. In the last lines of para 3 on page 2 on the top the AO writes that he has reason to believe that an income has escaped assessment. This shows that the AO proceeded to take action u/s 147/148 of the Act solely by mentioning the details received from DIT(Inv.) and without any further verification, examination or any other exercise he proceeded to initiate re-assessment proceedings and notice u/s 147/148 of the Act. It is relevant to note that the AO has not mentioned nature of transaction which was effected for alleged accommodation entry and even without mentioning the date of recording of reasons.
At this juncture, we respectfully take cognizance of preposition laid down by Hon’ble Jurisdictional High Court in the case of Pr. CIT vs. G & G Pharmas (Supra) wherein their lordship held us follows : “7. Mr. Sawhney, has placed extensive reliance on the decision dated 21st March 2012 passed by this Court in of 2011 (CIT v. India Terminal Connector System Ltd.) where, according to Mr. Sawhney, in similar circumstances, the appeal of the Revenue was allowed and the matter was remanded to the ITAT for examination of the case on merits. He also relied upon the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income- tax Officer (1993) 203 ITR 456 SC. The main thrust of the submission of Mr. Sawhney is that, as was in the case of India Terminal Connector System (supra), in the present case as well, there was specific information regarding the name of the entry provider, the date on which the entry was taken, the cheque details as well as the amount credited to the account of the Assessee. He accordingly submitted that this by itself constituted sufficient material for the AO to form an opinion that the “assessee company has introduced his own unaccounted money in its bank account by way of accommodation entries”.
8. Mr. Kapil Goel, learned counsel for the Assessee, placed reliance on other decisions of this Court including CIT v. Pradeep Kumar Gupta (2008) 303 ITR 95; the decision dated 27th March 2015 in W.P.(C) No. 5330 of 2014 (Krown Agro Foods Pvt. Ltd. v. ACIT); the decision dated 4th August 2015 in of 2015 (CIT v. Shri Govind Kripa Builders P.Ltd.) and the decision dated 24th August 2015 in ITA No. 226 of 2015 (CIT v. Ashian Needles Pvt. Ltd.) 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.
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 analysing materials produced subsequent to the reopening will not rescue an inhenrently defective reopening order from invalidity.”
Furthermore, in the order dated 31.10.2014 in the case of DLIT vs. Shri Devesh Kumar (Supra) the ITAT Delhi “B” ( which was authored by one of Shri C. M. Garg, J.M.) it was held thus : “10. From bare reading of the copy of the reasons recorded by the AO for issuance of notice u/s 148 of the Act available on page no. 17 and 18, we observe that there is no mention of date therein. However, the details given are only with regard to name of the bank and its branch, address of the beneficiary, instrument no., date of transaction and amount is mentioned therein but in the operative part of the reasons recorded, there is no mention of the nature of transaction, much less to establish that the impugned transactions were in the nature of accommodation entries in the garb of gift. 11. At this juncture, we find it appropriate to consider the ratio of the decisions relied by both the parties in the case of Ambika Steels Ltd. (supra), the information was received by the AO directly from the Investigation Wing of the department which had conducted the search. It was not the case where the AO of the person searched had handed over the relevant information to the AO of the assessee. In this case, the assessment was reopened at the instance of the same AO who conducted search and on information received during the course of search of person other than the assessee, therefore, it was held that there was no question of any satisfaction having been recorded by the AO having jurisdiction of the case of person searched. 12. In the case of AGR Investment Ltd. (supra), the Hon’ble Jurisdictional High Court of Delhi observed that sufficiency of reason cannot be considered in the writ petition seeking acquiring of initiation of proceedings u/s 147 and 148 of the Act. Their lordships also observed that the assessee has a right to participate in the reassessment proceedings and to satisfy revenue authorities that there was no escapement of taxable income by the assessee. 13. In the case of Raymond Woollen Mills (supra), Hon’ble Apex Court considered the fact that there was a charge of under-valuation of closing stock against the assessee company, therefore, it was held that court can only consider whether there was a prima facie case for reassessment; sufficiency of material cannot be considered. 14. In the case of Rajesh Zhaveri (supra), Hon’ble Apex court held that formation of belief within subjective assessment of AO is required. In this case, the claim of the assessee towards bad debts was examined during the reassessment proceedings. In this case, the return of income was processed u/s 143(1) of the Act.
In the light of facts and circumstances of the present case, we respectfully hold that the benefit of the ratio of the above decisions are not available for the revenue in the present case as the AO proceeded to record reason to believe as required for issuance of notice u/s 148 of the Act in a mechanical manner only after mentioning detailed reason from Investigation Wing of the Department in a CD Form without applying its independent mind and even without mentioning the date of recording of reason to believe that the income has escaped assessment.
We further proceed to consider the ratio of the decisions relied by the ld. Counsel of the assessee in the recent judgment of Hon’ble Jurisdictional High Court of Delhi in the case of CIT vs Insecticides (India) Ltd., it was held that on the basis on which the AO has initiated proceedings u/s 147 of the Act was vague and uncertain and should not be construed to be sufficient and relevant material on the basis of which reasonable belief could be formed that income had escaped assessment, then notice of reassessment u/s 148 of the Act was not valid and was liable to be quashed. In this case, their lordships have also considered the decision of Hon’ble High Court of Delhi in the case of Signature Hotel (P) Ltd. (supra) wherein it was held that where the reasons did not satisfy the requirement of section 147 of the Act, then the reassessment proceedings cannot be held as valid and the same is liable to be quashed. 17. In the case of CIT vs. SFIL Stock Broking Ltd. (supra), speaking for the Jurisdictional High Court of Delhi, their lordships held that where the AO has not applied his mind to information to independently arrive at a belief that income had escaped assessment, then quashing of reassessment and entire proceedings thereunder is justified. 18. In the case of ITO vs On Exim (P) Ltd. (supra), ITAT Delhi ‘E’ Bench, it was held as under:- “13. However, the detail given is only with regard to name of the bank, ledger account number and amount. Even the nature of transactions is not given, much less to establish that the above transactions are in the nature of accommodation entries. It has been stated by the learned counsel at the time of hearing before us that the assessee has only sold the shares through M/s Aayushi Stock Brokers (P) Limited and the sale proceed has duly been considered while computing the income of the assessee for the assessment year under consideration. In view of the above, in our opinion, the ratio of the above decisions of Hon'ble Jurisdictional High Court would be squarely applicable and, respectfully following the same, we hold that the reasons did not satisfy the requirement of Section 147.” 19. In the light of aforesaid discussion, we are inclined to hold that in the extant case the AO proceeded to initiate proceedings u/s 147 of the Act and to issue notice u/s 148 of the Act on the basis of information received from Investigation Wing of the department in the form of a CD prepared by Shri Sanjay Shah and Shri Vishesh Prakash, ITOs of Unit V, New Delhi. Subsequently, the AO reproduced details gathered from the CD and without application of independent mind, held that the assessee was beneficiary of accommodation entries amounting to Rs.4,51,000. In the main part of reason to believe, there is no mentioning of nature of transaction to establish and fortify the fact that the impugned transactions were in the nature of accommodation entries. We also observe that there is no mentioning of date therein and it can safely be presumed that the AO had not examined the assessment record of the assessee which was processed u/s 143(1)(a) of the Act on 15.3.2005 for forming a belief that the income of the assessee had escaped assessment. 20. Under these facts and circumstances, we are in agreement with the observation and conclusion of the CIT(A) that there was no material on record to show that the AO had 8 Marathon Finlease Ltd. applied her independent mind in forming a belief which may result in the required reason to believe as per provisions of section 147 and 148 of the Act. We also held that the CIT(A) was right in following the ratio of the decision of apex court in the case of CIT vs Sun Engineering Works Pvt. Ltd. and the decision of Hon’ble Jurisdictional High Court of Vipin Khanna vs CIT (supra), Amrinder Singh Dheeman vs ITO (supra) which have been fully reelucidated and affirmed by subsequent decision of Delhi High Court in the case of Jai Bharati Maruti Ltd. Vs CIT (supra). In this situation, the CIT(A) was justified and reasonable in quashing the notice u/s 148 of the Act and entire reassessment proceedings conducted thereunder. Accordingly, ground no. 1 and 2 of the revenue being devoid of merits are dismissed.”
In the light of above noted prepositions, as we have already noted in the earlier part of this order, when we analyse the facts of the present case specially reasons recorded then it is clear that the AO has merely proceeded to initiate proceeding u/s 147 of the Act and to issue notice us/ 148 of the Act only on the basis of information received from DIT ( Inv.) with verifying and examining the same, without application of mind and even without mentioning the date of recording of reasons for taking action against the assessee. The AO in the operative part of the reason recorded mentioned that : “Information so received has been gone through. The above said instruments are in the nature of accommodation entry, which the assessee has taken after paying unaccounted cash to the accommodation entry giver, who is a known entry operator as per report of the Investigation Wing. In view of these facts, the alleged transaction is not bona fide one. Therefore, I have reason to believe that an income of Rs. 14,10,000/- has escaped assessment in the year 2004-05 due to failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment so far as this amount is concerned.”
The above noted operative part is unhelpful in understanding as to whether the AO applied his mind to the materials that he talks about particularly when he did not describe that what was the nature of transaction and even the AO has not put or mentioned any date in the reasons recorded which clearly shows non-application of mind and action taken in a mechanical and casual manner which does not clothe the AO with valid jurisdiction to issue notice u/s 148 of the Act. It is pertinent to mention that once from the details received from the DIT (Inv.) the dates on which alleged accommodation entries were provided
9 Marathon Finlease Ltd. is known to the AO, it would not have been difficult for the AO, if he had infact undertaken the exercise of verification of assessment records of the assessee to make a reference to the manner in which those disputed entries were provided or mentioned in the books of accounts of the assessee, which must have submitted along with respective return of income filed for AY 2004-05. In the event of examination of assessment records the AO could verify the stand of the assessee that the alleged amount received is the sale proceeds of shares which were held as stoke in trade as opening balance in the beginning of the financial period which was also taken into account in the sales and duty reflected and recorded in the P & L a/c. The basic requirement is that the AO must apply his mind to the materials in order to have reason to believe that the income of the assessee has escaped assessment and without forming a prima facie opinion, on the basis of such material that income has escaped assessment the AO can not assume valid jurisdiction to initiate proceedings and to issue notice u/s 147/148 of the Act.
The legal objection of the assessee is squarely covered in its favour by the decision of the Hon’ble Jurisdictional High Court in the case of Pr CIT vs. G & G Pharma (supra) and order of the Tribunal in the case of ACIT vs. Shri Devesh Kumar (supra) and thus we allow the same. Consequently, the notice dated 22/3.2011 issued u/s 148 of the Act and all subsequent proceedings conducted in pursuant thereto including reassessment order passed u/s 143(3) r.w.s. 147 of the Act are quashed. Accordingly ground no. 1 & 2 of the assessee are allowed.
Since by the earlier part of this order we have quashed notice u/s 148 of the Act and impugned reassessment order u/s 143(3) / 147 of the Act, the other grounds of the assessee on merits becomes academic and infructuous and we dismiss the same being infructuous. 12. In the result, appeal is allowed on legal grounds. Order Pronounced in the Court on 19/02/2011.