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Income Tax Appellate Tribunal, PUNE BENCH, PUNE
Before: SHRI R. K. PANDA & MS ASTHA CHANDRA
ACIT, Wardha Circle, Wardha M/s. Kapil Solvex Pvt. Ltd., Professor Colony, Vs. Near Gajanan Maharaj Road, Pusad, Yavatmal – 445204 PAN: AADCK3681P (Appellant) (Respondent) Assessee by : Shri Nikhil S Pathak Department by : Shri Ramnath P Murkunde Date of hearing : 17-09-2024 Date of pronouncement : 26-09-2024 O R D E R PER R.K. PANDA, VP :
This appeal filed by the Revenue is directed against the order dated 24.03.2017 of the CIT(A)-1, Aurangabad relating to assessment year 2009-10.
Facts of the case in brief, are that the assessee is a company engaged in the business of running a solvent extraction plant at Nanded. It uses soya bean seed as raw material and after crushing the seeds, oil (crude oil) is extracted by solvent extraction method. It filed its return of income on 28.12.2009 declaring total income at Rs.6,908/-. The same was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Subsequently, the Assessing Officer reopened the assessment in terms of provisions of section 147 of the Act by recording the following reasons: “Since a Substantial amount of money of Rs.3,64,00,000/- has been received in cash premium and there is no details in the return of income, justifying the premium received and also fact that the return has not been scrutinized, the nature, source and genuineness of the cash credits appearing as share premium required to be verified. Therefore, I have reason to believe that the income chargeable to tax has escaped assessment in the hand of the assessee for the A.Y.2009-10 in terms of the Provision of Section-147 of the 1.T Act, 1961 and proceeding U/s 147 of the LT Act hereby initiated in this case for the said year. I have therefore, issued Notice U/s 148 of the Income Tax Act. Sd/- ITO”
Accordingly, notice u/s 148 of the Act was issued and served on the assessee. During the course of assessment proceedings the Assessing Officer noted that the assessee is found to have received money by way of share application including the premium from six parties, the details of which are as under:
S. No. Name of the applicant No of shares Face value Premium Total amount in applied for in Rs. in Rs. Rs. 1 Alliance Intermediataries 27000 100 400 13500000 & network Pvt. Ltd. 2 Dynamic Import & 15000 100 400 7500000 Exports Pvt. Ltd. 3 Induja Traders Pvt. Ltd. 10000 100 400 5000000 4 I Max Multimedia Pvt. 32200 100 400 16100000 Ltd. 5 Mona Digital Equipments 5000 100 400 2500000 Ltd. 6 Vanquish Investment & 1800 100 400 900000 Leasing Pvt. Ltd. TOTAL 91000 45500000
The assessee furnished the confirmations and other relevant details during the course of assessment proceedings. It was submitted inter-alia, that the company has allotted the shares to the promoter group at the face value of Rs.100/- per share and to others @ Rs.500/- i.e. face value + premium of Rs.400/- per share. The investor companies are well aware of the plant and its future prospects and therefore bought the shares at premium. The assessee filed the details of such investors by giving their copy of share application, PAN number, copy of Memorandum & article of association of the companies, their Balance Sheets of the previous year 2007-08 to prove their identity, creditworthiness and the genuineness of the transactions. It was submitted that the entire amount has been received through proper banking channel. It was accordingly submitted that no addition is called for.
5. However, the Assessing Officer was not satisfied with the arguments advanced by the assessee and made addition of Rs.4,55,00,000/- to the total income of the assessee by observing as under: “24. In the case of the assessee, it is seen that the company is formed by local entrepreneurs. It has no relations with the share applicants discussed above. The assessee has been able to raise such huge funds from unknown persons by way of share application with KER OF Qremium itself is enough to reject the cash credits. 25. The assessee has furnished copies of the resolutions of the Board rev Directors of the applicant companies. Perusal of the same reveals that the so-called investments were made to earn profits. It is however seen that none of the investors has received returns on the investments till date. 26. Another question emerges that whether the assessee company could have found lucrative for Investment? Why prompted to these Investors to apply for the shares in an unknown, newly started company to invest huge amounts that's too on premium.
27. On enquiry with the assessee, it was informed that the assessee company's worth was calculated on Discounted Cash Flow (DCF) method and thus it was a very lucrative company to invest. Therefore, the applicants invested large amounts at the premium in assessee company.
28. It is however seen that the explanation of the assessee is for argument sake & far away from the reality. It has been accepted globally that DCF models have shortcomings. Small changes in Inputs can result in large changes in the value of a company. Investors must constantly second-guess valuations; the inputs that produce these valuations are always changing and are susceptible to error. Meaningful valuations depend on the user's ability to make solid cash flow projections. While forecasting cash flows more than a few years into the future is difficult, crafting results into eternity (which is a necessary Input) is near Impossible. A single, unexpected event can immediately make a DCF model obsolete. Investors shouldn't base a decision to buy a stock solely on discounted cash flow analysis it is a moving target, full of challenges. If the company fails to meet financial performance expectations, if one of its big customers jumps to a competitor, or if interest rates take an unexpected turn, the model's numbers have to be re-run. Any time expectations change, the DCF- generated value is going to change.
29. Surprisingly, none of the so-called investors have realized these facts & had invested huge amounts with the assessee which is an impossible proposition to accept. 30. Thus, for the reasons mentioned above in various paras, it is considered that the share application money along with the premium shown received by the assessee from these six applicants was assessee's own money earned from undisclosed sources & introduced in the guise of Share application at premium. 31. Therefore, these amounts are considered as unexplained cash credits u/s 68 of the Act. An addition of Rs.4,55,00,000/- is therefore made to the income of the assessee. [Addition: Rs. 4,55,00,000/-]
Before the CIT(A) the assessee, apart from challenging the addition on merit, challenged the validity of reopening of the assessment on the ground that the reasons for reopening the assessment were not provided to it and therefore, the re- assessment proceedings are invalid in law.
7. So far as merit of the case is concerned, it was submitted that the assessee fulfilled all the 3 ingredients in terms of section 68 by proving the identity and creditworthiness of the share applicants and the genuineness of the transactions. Relying on various decisions, it was argued that the addition u/s 68 is not in accordance with law. However, the CIT(A) while deleting the addition on merit, dismissed the grounds challenging the validity of re-assessment proceedings by observing as under:
I have duly considered the submissions of the appellant. The appellant company is engaged in the business of extraction of oil from Soya Seeds by solvent extraction plant. During the year under reference, its business operations had not commenced and plant & machinery was under erection. The AO noticed that the appellant company had received share application money including premium amounting to Rs.4,55,00,000/-. It also came to the notice of the AO that share application money including premium had been received from six corporate entities based at Mumbai. The AO was in his possession of information that the share application money & premium in question was in the nature of accommodation entries whereby its own undisclosed income had been routed through. The AO had duly recorded the reasons for re-opening and thereafter notice dated 30.03.2014 was issued and served on the appellant company. During the course of appellate proceedings, the counsel of the appellant has argued that reasons so recorded U/s 147 were not provided to the assessee company in spite of fact that it had requested the AO vide letters dated 07.04.2014 and 22.08.2014 However the AO had appraised the AR of the assessee about the reasons recorded U/s 147 of the Act. The assessment cannot be annulled on the ground that reasons for re-opening were not provided to the assessee as held by the Apex Court in the case of S. Naraynappa and Others vs. CIT (63 ITR 219). When the assessee knows the reasons for reopening, non communication of the reasons is not fatal. This Issue was examined at length by Honourable Delhi ITAT in the case of Gurinder Kaur (105 TTJ 198 & 288 ITR (AT) 207). The decision of Honourable Supreme Court in the case of G K N Driveshafts was also discussed elaborately therein. The observations of Honourable ITAT are reproduced as under: "To repeatedly insist that the AO should formally communicate the reasons recorded for reopening the assessment, even all the while being aware of such reasons, is nothing but a futile attempt to challenge the proceedings on technicalities which are not fatal to their validity, The Ld. Counsel for the assessee referred to the judgment of the Supreme Court in G.K.N. Driveshafts (India) Ltd. Vs. ITO and Others (259 ITR 19). A perusal of this judgment shows that the Supreme Court clarified that when a notice u/s 148 is issued, the proper course for the assessee is to file a return and then seek reasons for reopening the assessment, if he so desires. If such request is made, the AO is bound to furnish the reasons within a reasonable time. As against this judgment, the Ld. Sr. DR drew our attention to an earlier judgment of the Supreme Court rendered by a Bench of three Ld. Judges in the case of S. Naraynappa and Others vs. CIT (63 ITR 219) and submitted
that this judgment is valid for the proposition that the reasons for reopening the assessment need not be communicated to the assessee since they are administrative in character and not quasi-judicial and that this judgment has not been brought to the notice of the Supreme Court in the later judgment in case of GKN Driveshafts. In the light of the above judgment, there is no requirement in the Act that the AO has to communicate the reasons for reopening the assessment to the assessee. Even in the judgment of the Supreme Court in GKN Driveshafts (supra), it was observed that since the reasons for reasons for reopening the assessment have been disclosed in the proceedings before the court, the AO has to dispose of the assessee's petition by passing a speaking order before proceeding with the assessment. Therefore, non- communication of the reasons, even according to the judgment of the Supreme Court in GKN Driveshafts (supra), is not considered to be fatal to the validity of the reassessment proceedings. In the present case, we have already found that the assessee was aware of the reasons for reopening the assessment. Therefore it is not necessary for us to enter into the controversy as to whether the non-communication of the reasons is fatal to the validity of the reassessment proceedings or not. Even if it is to be held that the assessee cannot be said to be aware of the reasons for reopening the assessment, the earlier judgment of the Supreme Court which directly addresses the question would apply and on that basis the reassessment cannot be invalidated. It would be relevant to note that in Presidency Talkies Ltd Vs First Additional ITO (25 ITR 447). the Madras High Court held that there is no requirement in any of the provisions of the Act or any section that the reasons which induced the CIT to accord sanction to proceed u/s 34 must also be communicated to the assessee and "the requirement regarding communication of the reasons to the Commissioner is, in our opinion, intended to safeguard the Interests of the assessee against any hasty action on the part of the ITO u/s 34 or an action without any justification. it is not Intended that the reasons should be communicated to the assessee". This judgment has been approved by the Supreme Court in the case of S. Narayanappa (supra)". In the present case, I find that the appellant company was aware of the reasons for which notice U/s 148 of the Income Tax Act was issued to it. The department had Information in its possession that the appellant company had introduced share application money in its books of account through bogus/dummy companies. Therefore the reassessment in the case of appellant company was imminent. Moreover the appellant company had not raised any objection during the re assessment proceedings and therefore the AO was not required to pass any order disposing its objections. There is no infirmity in the action of the AO to re-open the case. In view of above facts, the action of the AO to issue notice U/s 148 is upheld and this ground of appeal is dismissed.”
8. Aggrieved with such order of CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds:
1. "Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was correct in accepting the creditworthiness of the investors on the basis of financial statements for A.Y. 2007-08 whereas the assessment year in question is A.Y. 2009-10 and the AO had specifically called for the same in the notice u/s 133(6) of the IT Act and the investors had failed to provide the financial statements for A.Y. 2009-10 in the assessment proceedings and thus failed to discharge the onus regarding the capacity of the creditors to advance such sum?" 2. "Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was correct in holding that the assessing officer could not enquire into the source of investment of the, share holders when the shareholders of the assessee company are in fact its owners and the AO was correct in enquiring about the source of investment by the owners in the company?"
3. Any other ground that may be raised at the time of hearing.
9. The Ld. Counsel for the assessee at the outset drew the attention of the Bench to the provisions of rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963 and submitted that he is supporting the order of the CIT(A) on the following new alternate plea: 1] The respondent company submits that the reasst. order passed u/s 147 is invalid since the reasons for reopening were not provided to the assessee. 2] The respondent company further submits that the reasons recorded for reopening the case are not correct and the reopening is on reason to suspect and not reason to believe and hence, the reopening u/s 148 is bad in law. 3] The respondent further submits that no approval u/s 151 has been brought on record and therefore, in the absence of any evidence that the approval was obtained before issue of notice u/s 148, the reopening u/s 148 is bad in law and the same may be declared null and void. The respondent would be grateful if the above new alternate plea is admitted.”
The Ld. Counsel for the assessee made three-fold arguments. He submitted that (a) the reasons for reopening were not provided to the assessee by the Assessing Officer during the course of assessment proceedings; (b) the reasons were recorded to verify the nature, source and genuineness of cash credits appearing as share premium; and (c) there were incorrect recording of fact i.e. the assessee has never received any cash as share premium and the amount was received through proper banking channel.
So far as the first issue is concerned i.e. reasons recorded for reopening the assessment were not provided by the Assessing Officer to the assessee the Ld. Counsel for the assessee drew the attention of the Bench to the same wherein the CIT(A) has categorically mentioned that the assessment cannot be annulled on the ground that the reasons for reopening of the assessment were not provided to the assessee. He has also given a finding that the Assessing Officer has not provided the reasons so recorded u/s 147 of the Act inspite of the fact that it had requested the Assessing Officer vide letters dated 07.04.2014 and 22.08.2014.
Referring to the decision of the Hon’ble Bombay High Court in the case of CIT vs. IDBI Ltd. (2016) 76 taxmann.com 227 (Bom), he submitted that the Hon’ble Bombay High Court in the said decision has held that where in reassessment, depreciation was disallowed to assessee without supplying assessee reasons recorded to issue re-opening notice, order of re-assessment would be without jurisdiction.
Referring to the decision of the Hon’ble Bombay High Court in the case of CIT vs. Videsh Sanchar Nigam Ltd. (2012) taxmann.com 53 (Bom), he submitted that the Hon’ble Bombay High Court in the said decision has held that where reasons recorded for reopening of assessment, though repeatedly asked by assessee, were furnished only after completion of assessment, reassessment order could not be upheld.
Referring to various other decisions, he submitted that where the Assessing Officer has passed the order without disposing of the objections raised by the assessee to the reopening of assessment, such re-assessment proceedings are held to be null and void. He submitted that in the instant case when the reasons were never supplied to the assessee, there is no question of raising the objections against reopening of the assessment and therefore, when the assessee is unable to object or raise objections against the re-assessment proceedings, there was no question of the Assessing Officer disposing of the objections and therefore, in absence of supply of the reasons, the re-assessment proceedings should be held as invalid.
So far as the issue that the Assessing Officer has reopened the assessment for the purpose of verification of identity and creditworthiness of the investors and genuineness of the transactions is concerned, the Ld. Counsel for the assessee referring to the decision of the Hon’ble Bombay High Court in the case of Nivi Trading Ltd. vs. Union of India (2015) 64 taxmann.com 92 (Bom) submitted that the Hon’ble High Court in the said decision has held that the reopening of assessment is invalid where the same was reopened only for the purpose of verification of certain details.
Referring to the decision of the Hon'ble Supreme Court in the case of PCIT vs. Sheetal Dushyant Chaturvedi (2022) 134 taxmann.com 328 (SC), he submitted that the Hon'ble Supreme Court dismissed the SLP filed by the Revenue against the Hon’ble Bombay High Court ruling that where reasons supplied by the Assessing Officer for reopening of assessee’s assessment only referred to a need to verify documents and reasons supplied by Assessing Officer did not show that income had escaped assessment, impugned initiation of re-assessment proceedings was unjustified.
Referring to the decision of the Hon’ble Bombay High Court in the case of Chandni J. Ahuja vs. Union of India (2024) 160 taxmann.com 404 (Bom), he submitted that the Hon’ble High Court in the said decision has held that where the Assessing Officer, upon receiving CIB information indicating significant share transactions by assessee, issued a notice under section 148 to reopen assessment, since reasons recorded showed that Assessing Officer only wanted to verify more details regarding share transaction, that could not substitute for reasons and would not justify reopening of assessments.
In his third plank of argument, the Ld. Counsel for the assessee submitted that the assessee has not received any share premium in cash and the entire premium received was through proper banking channel along with face value of the shares. Thus, the reasons recorded by the Assessing Officer are factually incorrect.
Referring to the decision of the Hon’ble Bombay High Court in the case of Gandhibag Sahakari Bank Ltd. vs. DCIT/ACIT (2023) 458 ITR 157 (Bom), he submitted that in that case, notice u/s 148 of the Act was issued and in the reasons recorded, it was stated that no assessment u/s 143(3) was completed while actually the assessment was completed u/s 143(3). The Hon’ble Bombay High Court held that the reopening is on gross incorrect facts and accordingly the notice u/s 148 of the Act was held to be invalid.
Referring to the decision of the Delhi Bench of the Tribunal in the case of DCIT vs. KLA Foods (India) Ltd. (2019) 108 taxmann.com 610 (Delhi-Trib), he submitted that in this case, the assessee had received share capital and share premium of Rs.2.20 crores. The case was reopened and in the reasons recorded it was stated that Rs.3.20 crores was escaped income. Further, the financial year mentioned in the reasons was also incorrect. The Delhi Bench of the Tribunal held that the reopening was on the basis of wrong facts and accordingly the same was held to be invalid.
Referring to the decision of the Hon’ble Bombay High Court in the case of Ankita A. Choksey vs ITO & Ors (2019) 411 ITR 207 (Bom), he submitted that in this case the assessee had declared the value of immovable property received on account of dissolution of the company. In the reasons recorded, it was stated that the assessee had received consideration on sale of property. The Hon’ble Bombay High Court has held that the reopening should be based on correct facts and since notice has been issued based on wrong facts, the reopening was held to be invalid. He accordingly submitted that the re-assessment proceedings should be held to be invalid being not in accordance with law.
So far as the merits of the case are concerned, the Ld. Counsel for the assessee heavily relied on the order of the Ld. CIT(A).
The Ld. DR on the other hand strongly opposed the order of the CIT(A) in accepting the creditworthiness of the investors on the basis of bank statements for assessment year 2007-08. He submitted that when in the impugned assessment year in 2009-10 and the investor companies failed to respond to the notices issued by the Assessing Officer u/s 133(6) of the Act for providing the financial statements for assessment year 2009-10, the assessee failed to discharge the onus cast on it in terms of section 68 of the Act i.e. the identity and creditworthiness of the investors and genuineness of the transaction. He submitted that the Ld. CIT(A) without considering the various findings given by the Assessing Officer deleted the addition, which is not correct.
So far as the validity of re-assessment proceedings is concerned, he submitted that the Assessing Officer has followed the due process of law and therefore, the same being in accordance with law, should be upheld and the alternate plea raised by the assessee should be dismissed.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case reopened the assessment u/s 147 of the Act by recording reasons, which have already been reproduced in the preceding paragraphs. A perusal of the same shows that the case of the assessee was reopened to verify the nature and source and genuineness of the cash credits appearing as share premium to the extent of Rs.3,64,00,000/-. We find the Ld. CIT(A) while upholding the validity of re-assessment proceedings deleted the addition on merit. The assessee while supporting the order of the CIT(A) deleting the addition on merit raised the alternate plea as per rule 27 of the Income Tax (Appellate Tribunal) Rules challenging the validity of re-assessment proceedings on the ground that such reopening of an assessment cannot be made for verification of the share premium account.
It is clear from a perusal of the reasons recorded that the same was reopened for further verification and not for taxing an amount which has escaped the assessment. We, therefore, find merit in the arguments advanced by the Ld. Counsel for the assessee that the reasons for reopening are ‘reason to suspect’ and not ‘reason to believe’ that the income has escaped the assessment and therefore, such notice for reopening u/s 148 of the Act and consequently re-assessment order passed u/s 147 r.w.s. 143(3) of the Act is invalid in law.
We find an identical issue had comp up before the Hon’ble Bombay High Court in the case of Nivi Trading Ltd. vs. Union of India (supra). In that case, the assessee had gifted certain shares held by it. In the reasons recorded, it was stated that the assessee has gifted shares without consideration and the said fact needs to be verified as per the provisions of section 47(iii). The Hon’ble High Court held that the reasons were recorded for certain verification to be carried out and there is no reference to the income which has escaped the assessment. Accordingly, it was held that such reopening is not valid. The relevant observations of the Hon’ble High Court read as under: “18) The Hon'ble Supreme Court thus held that section 147 authorises and permits the Assessing Officer to assess or reassess the income chargeable to tax, if he has reason to believe that income J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc chargeable to tax has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. Thus, at that stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issuance of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. The substantive satisfaction in that case of the Assessing Officer was therefore wrongly interfered with by the Gujarat High Court is the view taken by the Hon'ble Supreme Court. All these legal principles are undisputed. They go to show, as Mr. Gupta emphasises, that there should be a reason to believe that in the relevant assessment year income chargeable to tax has escaped assessment. We are of the view that in the present case, the reasons recorded fall short of this test. 19) There is no dispute that a return of income was filed by the Petitioner/Assessee. The return of income so filed could have been J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc subjected to verification and scrutiny and in terms of the applicable law and sections in the Income Tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit and reiterated by Mr. Gupta. It is too late now to urge that there was no assessment and therefore no question arises of reopening
thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea. The notice impugned in this case reads as under:- "NOTICE UNDER SECTION 148 OF THE INCOME TAX ACT, 1961 No. ITO 7(1)(1)/148/2013-14 Office of the Income Tax Officer, Ward 7(1)(1), Room No. 670, Aayakar Bhavan, M.K.Road, Mumbai - 400020 Date 24.01.2014 To, The Principal Officer, M/s. Nivi Trading Ltd. 4th Floor, Ready Money Terrace, 167, Dr. A. B. Road, Mumbai - 400018. PAN: AAACN2703L Whereas I have reason to believe that your income in respect of which you are assessable chargeable to tax for the A. Y. 2010-2011 has escaped assessment within the meaning of section 147 of the Income Tax Act, 1961. I, therefore, propose to assess for the said assessment year and I hereby require you to deliver to me within 30 days from the date of service of this notice, a return in the prescribed form of your Income in respect of which you are assessable for the said assessment year. (TANVI S SAVANT) Income Tax Officer 7(1)(1), Mumbai." 20) When this was objected to by the Petitioner/Assessee and sought the reasons, what the Petitioner was provided with are the reasons and which read as under:- "Reasons for reopening u/s. 147 in the case of M/S. NIVI TRADING LTD. A. Y. 2010-11 It is verified from the Return of Income filed by the assessee for A. Y. 2009-10 that it had shown LTCG from investments in shares amounting to Rs.1,54,81,620/- and had shown dividend of Rs.9,74,420/-. During the A. Y. 2010-11, assessee had shown LTCG of Rs.33,48,191/- and dividend income of Rs.14,44,763/- and shown Rs.1,21,33,429/- as gift. Hence, it is seen that assessee had gifted these shares without any consideration. This fact needs to be verified as per section 47(iii) of the I. T. Act. Also it has to be verified whether the value of these shares have been computed on the market rate as on the date of such transfer. Hence, I have reason to believe that income chargeable to tax amounting to Rs.1,21,33,429/- as per provision u/s. 147 of the Act has escaped assessment in this case for A. Y. 2010-11. Issue Notice u/s. 148 of the I. T. Act. Dated: 24/01/2014 (TANVI S. SAVANT)
Income-Tax Officer 7(1)(1), Mumbai." 21) In the light of this factual position, it would not be proper for us to permit the Revenue to take a contrary stand. We are of the opinion that in the present case, the contents of the notice as reproduced above and the reasons recorded, the objections and the order rejecting them are enough to turn down the first submission of Mr. Gupta. 22) Insofar as the second aspect is concerned and which has really arisen for our determination and consideration, we find that the return of income was filed. There was a processing and verification thereof. In the return of income and on the own showing of the Respondents, on its verification, the long term capital gains and dividend income in the sum came to be disclosed and equally another sum (Rs.1,21,33,429/-) as gift. The Revenue proceeds on the footing that these shares were gifted without consideration. It is this fact which it wants to verify and particularly whether the value of these shares has been computed on the market value. The Petitioner objected to this and pointed out that all the material facts were disclosed truly and fully. All the amounts, as reflecting in the return, were set out and with the explanations. This is nothing but a version given by the Petitioner that no income accrued or has arisen from the transfer of shares since that has been made voluntarily and without any consideration. The Assessee pointed out in its objections and on merits that the voluntary transfer of shares without any consideration would qualify as gift and it would be treated as exempt transfer. It relied upon clause (iii) of section 47 of the IT Act. Apart therefrom and without in any manner giving up its challenge to the jurisdiction of the Assessing Officer, it pointed out that there is no understatement of income or claim of loss, deduction allowance in the return of income. Thus, there is no question J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc of any income chargeable to tax escaping assessment. More so, when the amount of Rs.1,21,33,429/- had been added back while computing the total income. It is this stand of the Petitioner and which to our mind would fall within the parameters of the principles and emerging from a reading of the Judgment of this Court. In the case of Smt. Maniben Valji Shah (supra) this Court emphasised that the important words in section 147 of the IT Act are "has reason to believe" and they are stronger than the words "is satisfied". The belief entertained by the Income Tax Officer must not be arbitrary or irrational. It must be reasonable or in other words it must be based on reasons which are relevant and material. While the Court cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the Income Tax Officer in coming to the belief, but the Court can certainly examine whether the reasons are relevant and have a bearing on the matter in regard to which he is required to entertain the belief before he can issue notice under section 147(a). If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one properly instructed on the facts and law could reasonably entertain the belief, then, the exercise undertaken by the Income Tax Officer can be interfered with. 23) In the said case as well the notice was issued under the said provision for reopening of the assessment because the return of income showed certain income declared. However, a capital gain of the assessee revealed purchase of a flat, for which no details were filed along with the details of income, namely, the purchase agreement, source of funds and therefore, in absence thereof, the assessment was proposed to be reopened. It is in that regard that this Court has held as under:- "..... Having heard Shri Desai, learned senior counsel for the appellant, as well as Shri Bhujale, learned counsel for the respondent, it is an admitted position that the assessee had invested a sum of Rs.2,50,000 for the purpose of purchasing the flat and what was sought to be investigated was the source of income. A bare perusal of the aforesaid notice dated October 10, 1991, clearly indicates that the officer was wanting to know the details with regard to the source of funds with regard to purchase of the said flat for a sum of Rs.2,50,000/-. Obviously in the above, there is no question of the Assessing Officer having any basis to reasonably entertain the belief that any part of the income of the assessee had escaped assessment and that such escapement was by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts. ....." 24) Thus, if more details are sought or some verification is proposed that cannot be a substitute for the reasons and which led the Assessing Officer to believe that an income chargeable to tax has escaped assessment. 25) We are not in agreement with Mr. Gupta because the clear language of section 147 of the IT Act reveals that if the Assessing Officer J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc has reason to believe that any income has escaped assessment, then, he can resort to such power. While it is true, as Mr. Gupta argued, that sub-section (1) of section 148 of the IT Act enables issuance of notice before the assessment, reassessment or re-computation under section 147 of the IT Act, but that is dealing with the service of the notice. The principal condition for issuance of notice is to be found in section 147 of the IT Act and that is on the reason to belief that any income chargeable to tax has escaped assessment for any assessment year, then, the Assessing Officer may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be. In the present case, the Respondents do not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the Assessing Officer that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc in a position to sustain the impugned notice. Having reproduced the same and contents thereof being clear, it is not possible to agree with Mr. Gupta that this Court should not interfere at the threshold. We find additionally that in the affidavit in reply the Revenue has stated that the concept of gift prevails between two individual persons out of love and affection, which does not prevail in the case of companies. In the case of companies, the financial transaction exists to earn profit and the transaction of the so called gift made by the Assessee is only for the purpose of avoiding capital gains tax.
26) This is a stand taken in the affidavit in reply but what we find is that the gift without any consideration and as noted in the reasons recorded and supplied has not been termed as one which attracts any tax or which is chargeable to tax and therefore there is any income which has escaped assessment. In other words, the amount of Rs.1,21,33,429/- shown as gift has not been termed as an income and which is chargeable to tax and which has escaped assessment. All that is required from the Assessee is a verification and in terms of section 47(iii) of the IT Act and for enabling it, the Assessee was called upon to appear before the Assessing Officer. Thus, it is for verification of the value of these shares and whether the computation is on the market rate on the date of such transfer. This, to our mind, would not in any J.V.Salunke,PA WP.2314.2015.Oral Judgment.doc manner enable the Revenue/Respondents to resort to section 147 of the IT Act. In the view that we have taken above, it is not necessary to refer to other Judgments relied upon by Mr. Pardiwalla and which also reiterate the settled principle that the reasons ought to be recorded on the date of the issuance of the notice and which must disclose the requisite satisfaction. The reasons as recorded cannot then be substituted or supplemented by filing an affidavit in the Court. Thus, additional reasons cannot be supplied and on affidavit. We are of the view that it is not necessary to refer to this principle any further in the facts and circumstances of the present case.”
We find the Hon’ble Bombay High Court in the case of PCIT vs. Sheetal Dushyant Chaturvedi vide IT Appeal No.106/2017, order dated 26.02.2021 has held that where reasons supplied by the Assessing Officer for reopening of assessment of assessee only referred to a need to verify documents and reasons supplied by the Assessing Officer did not show that income of assessee had escaped assessment, impugned initiation of re-assessment proceedings was unjustified. The relevant observations of the Hon’ble High Court read as under: “5. We have heard the learned Counsel for the Parties. 6. As regards the question of law raised based on rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. The learned Counsel for the Appellant-Revenue relying on the decision of the Division Bench of this Court in the case of CIT v. Jamnadas Virji Shares & Stock Brokers (P) Ltd. [2012] 21 taxmann.com 27/[2013] 212 Taxman 120 (Mag) and submitted that it was not permissible for the Tribunal to entertain the additional ground of challenge regarding the legality of notice under sections 147 and 148 of the Income-tax Act. The leamed Counsel submitted that no specific challenge was raised and the Respondent-Assessee had submitted to the jurisdiction
It is not possible to accept the submission made by the Appellant-Revenue, as it is factually not correct. The Respondent Assessee had challenged the legality and jurisdiction in respect of notice under sections 147 and 148 of the Income-tax Act before the Assessing Officer as well as the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) had rejected the said ground and allowed the Appeal on merits. Rule 27 of the Income Tax (Appellate Tribunal) Rules permits the Respondent though may not have appeal to support the order on any of the grounds decided against the Respondent. Therefore, this ground cannot he accepted.
As regards the ground Nos. 1 and 2 are concerned, it is the contention of the Appellant-Revenue that before the Assessing Officer, all farts were considered and even the order disposing of Reasons give sufficient reasons and the information was received from investigation being pursuant to which notices were issued. The learned Counsel further submitted that the finding of the Tribunal that there was a change of opinion is perverse. The learned Counsel for the Respondent Assessee has drawn our attention to the Reasons, which have been reproduced in paragraph No. 8 of the impugned order.
As the Tribunal has rightly noted, the jurisdiction for the Assessing Officer to resort to section 147 of the Income Tax Act is crystallized in the Reasons supplied. The Tribunal has rightly, observed that the Reasons only referred to a need to verify the documents and there is no link between the statement that there is a reason to believe that income has escaped assessment with the rest of the Reasons supplied. It is not permissible, as rightly noted by the Tribunal, to add to the Reasons. The contention that there was an information received was not included in the Reasons. The Tribunal has followed the decision of the Jurisdictional High Court, dated 7 April 2015 in the case of Nivi Trading Ltd. v. Union of India [2015] 64 taxmann.com 92/375 ITR 308 (Bom.). If the Tribunal in these facts and circumstances has found that the reopening of assessment was without jurisdiction based on reading of the Reasons, it cannot be said that any perverse or illegal view has been taken by the Tribunal. No question of law arises. The Appeal is dismissed.”
We find the Hon'ble Supreme Court has dismissed the SLP filed by the Revenue against the above decision as reported in (2022) 134 taxmann.com 328 (SC). Similar view has been taken by the Hon’ble Bombay High Court in the case of Chandni J. Ahuja vs. Union of India (supra) where such re-assessment proceedings were quashed on the ground that the same were initiated to verify more details regarding the share transactions. The relevant observations of the Hon’ble High Court read as under:
“7. Since the admitted position is that the Assessing Officer does not have reason to believe but only reason to suspect, as held by this Court in Darpan P. Chandaliya v. Income Tax Officer 120231 155 taxmann.com 447/1795 Taxman 717 (Rom), reopening of assessment is not satisfactory In Darpan P Chandaliya (supra) a similar situation arose where also the Assessing Officer noted that he is seeking some information to examine the care of assessee. The Court held that, that cannot be stated to be founded on the belief that any income which is chargeable to tax has escaped assessment. Just because some information has been received does not entitle the Assessing Officer to reopen assessment. The reasons must be founded on the satisfaction of the Assessing Officer that income chargeable to tax has escaped assessment. Once that is not to be found, then, the impugned notice cannot be sustained. What we find is that there are no reasons to believe but, only reasons to suspect. Darpan P. Chandaliya (supra) was relied upon in Paranjape Schemes (Construction) Lid v. Deputy Commissioner of Income Tax [Writ Petition No. 1415 of 2022, dated 10-11-2022) where paragraph 4 reads as under: "4. In Darpan Chandliya v. Income Tax Officer, a similar situation arose where also the AO had noted that he is seeking some information to examine the case of assessee. The Court held that, that cannot be stated to be founded on the belief that any income which is chargeable to tax has escaped assessment. Just because some information has been received does not entitle Respondent to reopen assessment. The reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then the impugned notice cannot be sustained. The Court said, "what is found is that there are no reasons to believe but, only reasons to suspect. Hence, reopening of assessment is not satisfactory." Paragraph 8 of the said judgment reads as under "8. Moreover, the AO has noted in the reason to believe that he is seeking some information to examine the case of assessee, to enquire about these Rs.7,00,000/- In the judgment of this Court in the case of Nivi Trading Limited v. Union of India and Another, it is held that "If more details are sought or some verification is proposed, that cannot be a substitute for the reasons which led AO to believe that an income chargeable to tax has escaped assessment. The principal condition for issuance of notice is to be found in Section 147 of the Act and that is on the reason to believe that, any income chargeable to tax has escaped assessment for any assessment year, then, the AO may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment" In the case at hand, the AO does not say that any income chargeable to tax has escaped assessment. All that the AO desires is 'examination of certain details pertaining to the amount paid by Petitioner to Crown'. That cannot be stated to be founded on the belief that any income which is charge able to tax has escaped assessment and hence such verification is necessary. Just because some information has been received from the Investigation Wing, does not entitle Respondent to re-open assessment. The reasons must be founded on the satisfaction of AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, the impugned notice cannot be sustained. What we find is that there are no reasons to believe but, only reasons to suspect. Hence, re-opening of assessment is not satisfactory.
8. This Court in Nivi Trading Lid. v. Union of India [2015] 64 tasmann.com 92/375 ITR 308 (Bom)2015 SCC Online Bom. 4871 held if more details are sought or some verification is proposed that cannot be a substitute for the reasons and which led the Assessing Officer to believe that an income chargeable to tax has escaped assessment. 9 In the case at hand, the Assessing Officer does not say that any income has escaped assessment. All that the Assessing Officer desires is examination of certain details pertaining to the actual extent of escapement of income which can be established only after detailed investigation. Even in the reasons recorded, it says" In this case as per the CIB information you have entered into huge share transaction…. the value of the share transaction is …… it is necessary to verify the above aspect, it is necessary to reopen the case……” That cannot be stated to be founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. Just because some information has been received from CIB does not entitle the Assessing Officer to reopen assessment. The reasons must be founded on the satisfaction of the Assessing Officer that income chargeable to tax has escaped assessment. Once that is not to be found, then, the impugned notice cannot be sustained. As noted earlier, what we find is that there are no reasons to believe but only reasons to suspect. Hence, reopening of assessment is not satisfactory.”
The various other decisions relied on by the Ld. Counsel for the assessee also supports his case to the proposition that the re-assessment cannot be made to verify certain items.
In view of the above discussion, we hold that the re-assessment proceedings initiated by the Assessing Officer and upheld by the CIT(A) are not correct being not in accordance with law. We, therefore, quash the re-assessment proceedings and the consequential order passed by the Assessing Officer becomes null and void. Since the assessee succeeds on this legal ground, the grounds challenging the deletion of the addition on merit by the Revenue become academic in nature and accordingly, the same are not being adjudicated.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 26th September, 2024.