ACIT, CIRCLE-3(3), SURAT vs. SHRI RAVJIBHAI BECHARBHAI DHAMELIYA, SURAT

At the outset, we note that appeals are filed by the Revenue and appeals filed by the Assessee, both are barred by limitation by forty five days and fifty two days, respectively. The Learned DR for the Revenue, as well as, Learned Counsel for the assessee, both have argued on the same line stating that the delay are attributable to Covid 19 pandemic disease; therefore these small delay in filing appeals by Revenue and appeals by Assessee, should be condoned.

We have heard both the parties on this preliminary issue. We note that delay in filing appeals are as follows: (i) Revenue`s appeals are barred by limitation by 45 days. (ii) Assessee`s appeals are barred by limitation by 52 days. We note that above delay in filling the appeals by Revenue as well as, by the Assessee, are due to Covid 19 pandemic disease. We have examined that the delay in filing the these appeals fall in the period of Covid 19 pandemic and such delay have been condoned by the Hon’ble Supreme Court, vide suo moto Writ Petition No.3 of 2020. Therefore, respectfully following the binding judgment of the Hon’ble Supreme Court, in MA No.21 of 2022 in suo moto Writ Petition No.3 of 2020, dated 10.01.2022, we condone the delay in filing both these appeals and both these appeals, that is, (appeal by Revenue and Appeal by assessee) are admitted for hearing on merit. 4. Since, the issues involved in all the appeals are common and identical; therefore, these appeals have been heard together and are being disposed of by this consolidated order for the sake of convenience and 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya brevity. The facts as well as the grounds narrated in for AY.2010-11 have been taken into consideration for deciding all these appeals en masse. 5. Grounds of appeal

raised by the assessee in ‘lead case’ in ITA No.239/SRT/2019, are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in confirming the action of assessing officer in reopening assessment by issuing notice u/s 148 of the I.T. Act, 1961.

The above investigation made during the course of search and post search in the case of above group revealed that the assessee, proprietor of M/s Amrut Exports, was one of the beneficiaries of non-genuine purchase transactions and found to have availed accommodation entries of bogus purchases to the tune of Rs.29,78,10,891/-, during the financial year (F.Y.)

During the course of search proceedings, certain documents were also seized which contain names of different concerns along with the names of the directors, parties and proprietors shown in these concerns, PAN, bank account number and netting made in same handwriting. The consolidated notings in same handwriting indicate that these concerns are related to one person/group only goes to further strengthen the fact that the concerns are bogus concerns which actually does not deal in any trading of diamonds and were only providing accommodation entries to different parties for a fixed charge for facilitating such provisions. It has been also been noticed that the books of accounts of all these concerns are maintained in one register and on one computer. This further proves that all these concerns are managed and controlled by one person/group. On the basis of the statement of Shri Rajendra Sohanlal Jain, it has been confirmed that he along with Shri Surendra Jain had floated various paper entities through dummy partners/directors/proprietors of various entities of this group and consequential investigation carried out by the Investigation Wing, , Mumbai 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya revealed that actual importers of rough diamonds import part of their demand requirement through benami entities operators as above, which ensures benefit of suppression of turnover, profits and capital requirement of the former. The consignments are sent on credit by the suppliers in the names of these benami entities at the instance of the actual importers and on receipt of the imported consignments from customs, through, CHA (Customs House Agent), the consignment is handed over to the actual importer and the bogus stock is entered in the books of the benami entities and the same is not recorded in the books of the actual importer. On the basis of these benami entities, bogus sale bills are issued against non- existent against the bogus stock. Thus to summarize, such bogus entities were into business on paper only and simply facilitating bogus bills of sales and the overall affairs of their entities were managed by Shri Rajendra Sohanlal Jain and Shri Surender Jain with the help of their acquaintances and employees. Since the evidential and material facts found during the course of search and survey operations carried out in the case of Shri Rajendra Sohanlal Jain group prove giving of above mentioned accommodation sales entries, it is prima facie apparent that the assessee has utilized such bogus purchases to suppress the profits for the year to that extent. There is no other prudent use of bogus purchase bills. During the course of assessment proceedings, a show cause letter dated 13.07.2017 was issued and served upon the assessee. Relevant portion of the show cause notice is reproduced on page No.5 of the assessment order.

In response to the above show cause notice, the assessee has submitted reply on 28.07.2017. But, the assessee has failed to submit copy of final accounts/ audit report for A.Y. 2010-11 with complete postal addresses of the above concerns. Therefore, assessing officer noted that books result of the assessee is not reliable and is susceptible for the 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya manipulation at the will and wish of the assessee. In view of the above, Books result of the assessee's concern was not accepted by the assessing officer. The assessing officer further observed that the assessee has shown gross profit of Rs.10,50,26,004/- on total turnover of Rs.1,80,68,18,795/- i.e. 5.81% for the year under consideration against gross profit of Rs.8,16,75,381/- on total turnover of Rs.1,45,39,33,687/- i.e. 5.62% for the immediate preceding year to the year under consideration. In view of the aforesaid facts, material and evidence existing on records, the assessing officer was of the opinion that the transactions in respect of rough diamonds shown as purchased by the assessee from the 7 parties totaling to Rs.29,78,10,891/- are not genuine transactions. Therefore, amount of Rs.29,78,10,891/- claimed as purchases expenses were treated by the assessing officer as bogus purchases and the same were disallowed and added to total income of the assessee.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), who has restricted the bogus purchase addition from 100% to 5% of total bogus purchases, observing as follows: “6.2.18 In view of the above facts and discussion, it is evident and clear that the so called transactions through banking channels of purchase made from the concern of Rajendra Jain and others was a make believe arrangement through a series of transfer of unaccounted funds through multi layering to give it a look of a genuine transaction. The very facts remains that the whole arrangement of providing the bogus accommodation entries were established beyond doubt during the search proceedings as no evidence of any sales purchase of diamonds was found neither any stocks of the diamonds was founds. These evidences when confronted were admitted under section 132(4) of the Act by Rajhendra Jain and others himself. The income tax proceedings are not governed by the strict rules of evidences and are not required to prove the impossible. In the assessee’s own case for AY. 2007-08, 2008-09 and 2013-14 the CIT(A)-3, Surat vide his order dated 27.03.2015 in the Appeal No.CIT(A), Surat-3/10128/2015-16 has confirmed the disallowance by the restricting it to 5% of the total purchases following the decision of the Hon'ble Gujarat High Court in the case of M/s Mayank Diamond Pvt. Ltd. reported in 2014(1) TMI 812 (Guj.). In the decision of the Hon'ble ITAT Bench, Surat in the case of Deputy Commissioner of Income 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya Tax Circle 2(2) vs J. B. Brothers, Surat vide & Co. No.22/Ahd/2016 AY 2007-08 date of order 06.04.2018 and M/s Delux Diamonds, Surat vs Income Tax Officer, Ward 1(3)(1), Surat vide ITA No.1396/Ahd/2017 AY 2007-08 date of order 11.04.2018, restricted the addition to 5% of bogus purchases. Therefore, in the light of above facts and circumstances and considering the gross profit rate of 5% as the average rate of the industry and following the judicial pronouncement by the Co-ordinate Bench of Tribunals and the decision of Hon'ble jurisdictional High Gujarat High Court in the case of Mayank Diamond Pvt. Ltd. (Tax Appeal No.200 of 2003) dated 17.11.201; the addition is restricted to 5% of bogus purchases. The circumstantial evidences itself show that the purchases amounting to Rs.29,78,10,891/- were not genuine and therefore the AO is being directed to recalculate addition made by the AO @ 5% of the bogus purchases is upheld and the ground of appeal

On the other hand, Learned DR for the Revenue submitted that assessing officer (AO) was having sufficient material to form the "reason to 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya believe" at the time of re-opening of the assessment. Although, the “satisfaction note” by Commissioner of Income Tax for assessment year 2010-11, is in brief, yet it is as per the scheme of the Act. The approval for initiating proceedings under section 147 of the Act may be given by senior officer of the Income Tax Department. The AO on the basis of the information received from the Investigation Wing, has found that the assessee had obtained accommodation entries in form of bogus purchases. The Credible information was received by the AO from the Investigation Wing, regarding search and seizure action carried out in the case of Shri Pravin Kumar Jain group/Rajendra Jain/Bhanwarlal Jain/Gautam Jain and evidences found during it including the statements of various persons, it was found that they were engaged in systematic providing of accommodation entries. The AO has noted that the search has revealed that the assessee managed to have received bogus bills for purchases. This information was not available at the time of passing the original assessment order, hence, entire bogus purchases were allowed. Now, the AO got the new information that assessee was engaged in providing bogus purchase bills, therefore reassessment proceedings initiated by the assessing officer u/s 147/148 is valid for both the assessment years, 2010-11 and 2011-12.

We heard both sides in detail and also perused the records of the case including the paper book filed by the assesses running in to 223 pages for assessment year 2010-11 and 173 pages for assessment year 2011-12. The necessary facts of the case have already been discussed in paragraphs above. Since the assessee has challenged the reassessment proceedings under section 147/148 of the Act, therefore, it is appropriate to go through first the reasons recorded and satisfaction recorded etc, the by the assessing 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya officer, which are reproduced below for ready reference for assessment year 2010-11:

From the above ‘reasons recorded’, ‘satisfaction note’, and ‘approval’ given by the Principal Commissioner of Income Tax (PCIT), it seems to us that there are many defects and inconsistency/ arbitrariness in satisfaction note and approval given by PCIT. The Arbitrariness is the quality of being "determined by chance, whim, or impulse, and not by necessity, reason, or principle". It is also used to refer to a choice made 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya without any Principle or Act. Such Arbitrariness is not countenanced in the Income Tax Act proceedings. The following important defects, inconsistency and arbitrariness in the process of recording reasons are noticed by us, which are as follows: (i) The Additional Commissioner of Income Tax, Range-3(3), Surat, wrote a letter to the Principal Commissioner of Income Tax-3, on dated 27.03.2017, stating that a search and seizure action, in the group of Shri Rajendra Jain, Sanjay Jain etc, were carried out on 03.10.2013. Shri Ravjibhai Becharbhai Dhameliya ( Assessee under consideration) is one of the beneficiary of this group, therefore necessary sanction under section 151(1) of the Act, may be given. (ii) After this, form for recording the reasons for initiating proceedings under section 147 of the Income Tax Act, 1961, for obtaining the approval of the Commissioner of the Income-Tax, Surat-3, was prepared on 23.03.2017. (iii) Then after, the Principal Commissioner of Income Tax, Surat-3 recorded the ‘satisfaction’ stating as follows: “Yes, I am satisfied” We note that this ‘satisfaction’ note is given by the Principal Commissioner of Income Tax, without expressing as to how and why he is satisfied. (iv) The said “satisfaction” was to be recorded by the Additional Commissioner of Income Tax (Addl. CIT), instead of Commissioner of Income Tax (CIT). 25. From the above important defects, inconsistency and arbitrariness in the process of recording reasons, it is abundantly clear that process of recording reasons is itself wrong and not in accordance with law. We note 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya that the Additional Commissioner of Income Tax, Range-3(3), Surat, wrote a letter to the Principal Commissioner of Income Tax-3, on dated 27.03.2017, requesting the Principal Commissioner of Income Tax-3, for sanction under section 151(1) of the Act. Therefore, the reasons must be recorded by the assessing officer prior to 27.03.2017, however, in assessee`s case the reasons were recorded on 23.03.2017, which clearly shows non-application of mind and arbitrariness in the process of recording reasons, hence the reassessment proceedings initiated against the assessee by the Revenue authorities are not in accordance with law, hence bad in law and therefore liable to quash.

The Law is well settled that when the statute requires to do certain thing in certain way, the thing must be done in that way or not at all. Other methods or mode of performance are impliedly and necessarily forbidden. The aforesaid settled legal proposition is based on a legal maxim 'Expressio unius est exclusion alteris', meaning there by that if a statute provides for a thing to be done in a particular manner, then it has to be done in that manner and in no other manner and following of other course is not permissible. (Nazir Ahmed v. King Emperor AIR 1936 PC 253; Ram Phal Kundu v. Kamal Sharma [2004] 2 SCC 759 and Indian Bank's Association v. Devkala Consultancy Service AIR 2004 SC 2615). Similar view has been expressed in the Orissa Rural Housing Development Corpn. Ltd, 343 ITR 316(Orissa).

We note that Article 265 of the Constitution of India lays down that, “No tax shall be levied or collected except by authority of law”. The Hon’ble Supreme Court of India has held that the this provision under Article 265 of the Constitution of India is applicable not only for levy but also for the collection of taxes and the expression “assessment” within its 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya compass covers both the aspects carried out by the executive functionary. Chottabhai Vs. Union of India 1962 SCR Supl.2 1006. Therefore, it is required that whole of the process of taxation must follow the procedures which are valid under the law and must adhere to law i.e. substantive one as well as procedural one too. Therefore, in other words it is provided in the Constitution of India that every step should be taken to ensure that levy and collection of the taxes is strictly in accordance with law – not only substantive one but the procedural law, as well. In the assessee`s case under consideration, we noted above that there are non-application of mind and arbitrariness in the process of recording reasons, hence the reassessment proceedings initiated against the assessee by the Revenue authorities are not in accordance with law, so far procedural law, is concerned, hence reassessment proceedings should be quashed.

For assessment year 2011-12, the ‘reasons recorded’ and ‘satisfaction recorded’ and ‘approval’ etc, are reproduced below for ready reference: “FOR AY. 2011-12:

After going through the above ‘sanction letters’ ‘reasons recorded’ and ‘approval’, we noticed the following arbitrariness in the process of recording reasons: (i) From the above ‘sanction letters’ ‘reasons recorded’ and ‘approval’ it is clear that Income Tax Officer (HQ) on behalf of Principal Commissioner of Income Tax-3, issued letter to DCIT, Circle-3(3), on 30.03.2017, stating that sanction u/s 151 (1) of the Act has been accorded by the Principal Commissioner of Income Tax-3 Surat, for issue of notice under section 148 of the Act. In this letter, assessee`s name appears on serial number 3. The reasons recorded were not attached with this said letter dated 30.03.2017.

We also note that satisfaction recorded by the Principal Commissioner of Income Tax, stating “Ys, I am satisfied” is not in accordance with law, for this reliance can be placed on the judgment of the Coordinate Bench of ITAT Delhi in the case of Pioneer Town Planners Pvt. Ltd, in for Assessment Year, 2009-10, wherein it was held as follows:

So far as legal contention of the ld. AR on behalf of the assessee regarding non-application of mind by the AO, while recording reasons for reopening of assessment, is concerned from careful perusal and reading of the three pages of reasons recorded, we observe that in first four paras the AO has noted facts of the information received from DDIT (investigation), Faridabad, further, in para 6 modus operandi of entry providers has been noted thereafter, in para 7 & 8, it has been arisen that either during survey or post survey proceedings the assessee company has not submitted satisfactory explanation to prove identity, genuineness and creditworthiness of share capital/premium introducers and thus, the same is from paper companies of entry operator and then, he recorded satisfaction that the assessee company taken bogus/accommodation entries. Thereafter, the AO in last para 9 & 10, without applying mind to the information received from the Investigation Wing states/writes that he has reason to believe that the income has escaped assessment. The text and words used by the AO in the reasons recorded for reopening of assessment clearly show that the AO proceeded to initiatory assessment proceedings and reopening of assessment without having any valid satisfaction and only on the basis of borrowed satisfaction as there was no independent application of mind by the AO to the tangible material received from Investigation Wing which could form the valid basis and reason to believe that income has escaped assessment.

In view of decisions of Hon’ble High Court of Delhi in the cases of PCIT vs. Meenakshi Oversaes (supra), PCIT vs. G&G Pharma (I) Ltd. (supra) and decision in the case of PCIT vs. RMG Polyviny (I) Ltd. (supra), where information was received from investigation wing that assessee was beneficiary of accommodation entries but no further inquiry was undertaken by AO, said information could not be said to be tangible material per se and, thus, reassessment on said basis was not justified. In the case of Meenakshi Overseas (supra), their lordship speaking for the Hon'ble Jurisdictional High Court held that where the reasons recorded by the AO failed to demonstrate the link between the tangible material and the formation of the reasons to believe that income has escaped assessment then, indeed it is a borrowed satisfaction and the 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya conclusion of the AO based on reproduction of conclusion drawn in the investigation report cannot be held as valid reason to believe after application of mind. In this judgment their lordship also held that where nothing from the report of investigation wing is set out to enable the reader to appreciate how the conclusions flow there from then there is no independent application of mind by the AO to the tangible material which form the basis of the reasons to believe that income has escaped assessment.

In the present case, as we have noted above, the conclusion recorded by the AO in para 9 & 10 of the reasons is based on the information received from the director of investigation wing and the AO without making any effort to examine and discuss the material received from the Investigation Wing and without application of the mind to the same formed a reason to believe that income had escaped assessment. This shows that the AO proceeded to initiate reassessment proceedings on the basis of borrowed satisfaction without any application of mind and exercise on the information received from the Investigation Wing of the Department. Therefore, we have no hesitation to hold that the AO proceeded to initiate reassessment proceedings u/s. 147 of the Act and to issue notice u/s. 148 of the Act on the basis of borrowed satisfaction and without any application of mind and examination of the so called material and information received from the investigation wing to establish any nexus, even prima facie, with the such information. Therefore, in our considered opinion the initiation of reassessment proceedings u/s. 147 of the Act, notice u/s. 148 of the Act, reassessment proceedings and all consequent proceeding and orders, including impugned reassessment and first appellate order, are bad in law and thus, not sustainable and we hold so. Accordingly, on the basis of foregoing discussion, grounds No.2, 3, 4 and additional ground.”

Therefore, considering the above facts and circumstances and considering the arbitrariness in the process of recording reasons, we are of the view that the action of the Assessing Officer to reopen the assessment is null in the eyes of law and hence we are inclined to quash the initiation of reassessment proceedings being ab-initio void. Hence, in view of the reasons set out above, as also bearing in mind entirety of the case, we are of the considered view that the reasons recorded by the Assessing Officer, and processes of satisfaction by ld PCIT, as set out earlier, which were contained arbitrariness, in the process of recording reasons, and thus were not sufficient reasons for reopening the assessment proceedings. We, therefore, quash the reassessment proceedings. As the reassessment itself is 239 & 304/SRT/2019 & 122 & 124/SRT/2020 Ravjibhai Bechabhai Dhameliya quashed, all other issues on merits of the additions, in the impugned assessment proceedings, are rendered academic and infructuous.

In the result, assessee`s appeal for both the assessment years, that is, AYs2010-11 and 2011-12 (in and ITA No. 124/SRT/2020, are allowed, whereas appeals filed by the Revenue (in ITA No.304/SRT/2019 and , are dismissed.