M/S. C.L. AGGARWAL YARN INDUSTRIES PVT. LTD.,NEW DELHI vs. ITO, NEW DELHI

This is an appeal filed by the Assessee directed against the order of the Ld.Commissioner of Income Tax (Appeals)-VI dated 10.2.2014 pertaining to the Assessment Year (A.Y.) 2004-05.

2. The assessee has challenged the reopening of the assessment on the ground that the reasons recorded demonstrate that the Assessing Officer (AO) has not applied his mind independently to the material referred to by him while recording reasons for reopening. It was submitted that without forming a prima facie pinion, on the basis of such material, it is not correct on the part of the A.O. to record reasons and reopen the assessments.

3. After hearing rival contentions I hold as follows.

4. The reasons for reopening recorded by the A.O. are as follows.

“A Report on enquiries made by the Directorate of Income Tax (Investigation), New Delhi into accommodation entries given by entry operators has been received. This report was received in the Office of Commissioner of Income Tax, Delhi-I, New Delhi and was subsequently forwarded vide F. No. C1T- 1/2005-06/2132 dated 13.03.2006. These enquiries were initiated to probe into some bank account which were used to issue cheques to entry seekers or beneficiaries against cash paid by them to the entry operators. Such a camouflaged transaction came to light during the course of Survey in the case of M/s. Gurcharan Jewellers whose proprietor Ashok Kumar Chauhan had admitted to have taken cheques under the garb of gifts after giving cash to the entry operator. Probe was initiated into accounts which were used to provide these entries. These investigations revealing of many more bank accounts which were being used by the entry operators for the purpose of giving accommodation entries.

2.3. The operators gave the account holders amounts ranging from Rs .1000 to 2000 per month. These account holders were masons, plumbers, electricians, peons, drivers etc, whose earnings are not sufficient for a living. They earned normally Rs 3 to 5 thousand per month in their normal work and by working for the entry operators earned extra income of Rs 2 to 4 thousand per month. Their signatures were taken on blank gif: deeds, cheque books, share application money etc. In fact these persons signed all types of papers they were asked to sign. They were made directors of companies, partners of firms and proprietor of different concerns solely for operation of these accounts. Actually, many of them were not even aware of the tax implications etc. Their only concern was with the few thousand rupees given to them by the entry operators.

I therefore have reasons to believe that this amount of Rs. 7,00,000/- represents income of the assessee chargeable to tax which has escaped assessment for A. 2004-05.”

4.1. The Hon’ble Delhi High Court in the case of Principal Commissioner of Income Tax vs.G & G Pharma India Ltd. in vide order dt. 8.10.2015 at para 12 and 13 held as follows. “12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10 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 inherently defective reopening order from invalidity .”

4.2. Applying the propositions laid down in this case, to the facts of the case on hand, I hold that the reopening is bad in law as in this case the A.O. has not independently applied his mind to the information received so as to form an opinion that income chargeable to tax has escaped assessment in the case of the assessee. He has not stated as to how the material gathered by the Investigation Wing has nexus with the assessee. The report and the finding of the Investigations Wing have to be relied upon by the A.O. without any independent verification. Merely discussing the modus operandi will not lead the A.O. to form a reasonable belief that income chargeable to tax of the assessee has escaped assessment. Hence in my view the reopening of the assessment is bad in law.