NARMADA CONCAST PRIVATE LIMITED,BHAVNAGAR vs. THE DY. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), AHMEDABAD

Aggrieved against the assessment order, the assessee filed an appeal before Commissioner of Income Tax (Appeals.). Before Ld. CIT(A) assessee filed detailed submissions both on the validity of reopening of the assessment and merits of the case. The Ld. CIT(A)

Aggrieved against the same, the assessee is in appeal before us raising the following Grounds of Appeal:

Having regard to the facts and circumstances of the appellant's case, the Ld CIT (A) ought to have appreciated, in the present case that there was no justification for making addition uls. 68 for the following reasons- (a) The identity of the creditor was established in the facts of the case in as much as name and address of the creditor and PAN was available. (b) The genuineness of transaction is established in as much as the amount was received by banking channel and the details of the bank account of the creditor, their cheque number by which the amount was received was available. (c) The fact that the amount was received by banking channel established that the creditor has source for giving loan to the appellant and the appellant could not have details of such source. (d) This was the first year of incorporation of the appellant and in the circumstances, the appellant could not have generated any unaccounted funds which would result into source of loan received from the creditor. (e) Having regard to the facts and circumstances of the appellant's case, the Hon'ble ITAT may be pleased to delete the addition confirmed by the CIT (A) as above

The appellant craves leave to add to amend or to raise any further grounds of appeal as case may arise.

Ld. Counsel Shri Parimalsinh B. Parmar appearing for the assessee submitted before us a brief written submissions both on reopening of assessment and merits of the case and also two Paper Books containing various submissions filed before the Lower Authorities and the Ld. CIT(A). Ld. Counsel also filed a compilation of case laws in support of its arguments. Thus Ld. Counsel pleaded the reasons recorded by the Assessing Officer are absolutely vague, scanty and non-specific. The Assessing Officer merely relied upon investigation report of Banka Group supplied by the Investigation Wing of the Income Tax Department. There is no independent application of mind by the A.O. and no reason to believe was I.T.A No. 33/Ahd/2023 A.Y. 2013-14 Page No 6 recorded by the Assessing Officer before initiating the reassessment proceedings. Thus it is to be held that the reopening of assessment is merely on the basis of “borrowed satisfaction” which is not justified under the law. On merits of the case, the A.O. failed to consider that the above loan was repaid by the assessee in the Assessment Year 2018-19 that too before the date of search in the case of Banka Group. The very same Assessing Officer has accepted the repayment of loan in A.Y. 2018-19 while framing assessment. Thus no addition is to be made in the present Assessment Year 2013-14 on account of cash credit and relied upon Juri ictional High Court Judgment in the case of CIT vs

Per contra, Ld. Sr. D.R. Ms. Saumya Pandey Jain appearing for the Revenue supported the order passed by the Lower Authorities and submitted that the company KCPL has shown total income of Rs. 1162/- in the Assessment Year 2013-14 whereas loan given to the assessee was Rs.50,00,000/- through banking channel. Thus the assessee failed to prove creditworthiness of the creditor and genuineness of loan transaction as envisaged u/s. 68 of the Act. Similarly, the assessee has not filed the original return within the due date prescribed u/s. 139(1) of the Act and also filed the Return of Income nine months after the issuance of 148 notice. Therefore the assessee’s objection of reopening of assessment was clearly

We have given our thoughtful consideration and perused the materials available on record. To adjudicate the Juri ictional issue of reopening of assessment, it is necessary to reproduce the “reasons recorded” by the Assessing Officer which is running to three pages as follows:

Basis of forming reason to believe and details of escapement of income:

Applicability of the provisions of section 147/151 to the facts of the case: In the instant case, no return of income was filed for the year under consideration accordingly, in this case, no assessment was made and the only requirement to initiate proceeding u/s 147 of the Act is the reason to believe which has been recorded in above para 6. It is pertinent to mention here that in this case the assessee has chosen not to file return of income for the year under consideration although the total income of the assessee had exceeded the maximum amount which is not chargeable to tax as discussed above and the assessee was assessable under the Act. In view of the above, the provisions of clause (a) of explanation 2 to section 147 are applicable to facts of this case and the assessment year under consideration is deemed to be a case where income chargeable to tax has escaped assessment. In this case more than four years have lapsed form the end of assessment year under consideration. Hence, necessary sanction to issue notice u/s 148 is being obtained separately from the Pr. Commissioner of Income Tax as per the provisions of section 151 of the Act.”

On perusal of the above “reasons recorded” by the Assessing Officer makes it very clear that the he had reason to conclude that the assessee had entered into high value financial transactions of Rs. 1,00,00,224/- facilitating bogus accommodation entries during the year as reported in the investigation report of Banka Group. Thus the Assessing Officer though he recorded reason to conclude but accepted the report of the Investigation Wing of the Department in the case of Banka Group. The Assessing Officer has failed to verify the transaction recorded by the Investigation Wing which are double entries made for the same transactions of Rs. 20,00,056/- and Rs. 30,00,056/-. Though the A.O. records the unsecured loan of Rs. 50,00,000/- received by the assessee from M/s. KCPL, however upheld the double entry addition of Rs. 1,00,00,224/ as I.T.A No. 33/Ahd/2023 A.Y. 2013-14 Page No 11 the undisclosed income of the assessee. The Ld. A.O. failed to consider the repayment of above loan by the assessee during the assessment year 2018-19 which was not disputed, while framing the assessment order for the assessment year 2018-19 by the very same Assessing Officer. Thus in our considered view, the Ld. A.O. has simply accepted the information given by DGIT which is reproduced in the reasons recorded, he has not formulated “his own reason to belief” that any income chargeable to tax has escaped assessment. The Ld. A.O. ought to have seen the double entry of the loan transactions with bank entry details and then formulated “his own reason to belief” but simply followed the information given by DGIT, which is nothing but “borrowed satisfaction” and is against the provision of Section 147 of the Act.

The above view of ours are supported by the Hon’ble Juri ictional High Court Judgment in the case of Bharatkumar Nihalchand Shah vs ITO in SCA No. 5353 of 2022 vide judgment dated 07.03.2023 held as follows: “…6.6 On the basis of the propositions laid down in different decisions by the supreme court above referred and others, the following legal principles on the point in issue may be enlisted, (i) “Reasons” are of paramount importance. “Reasons” are heartbeat of every conclusion. It introduces clarity in any order. Without the reasons, the order is lifeless. (ii) The concept of reasoned judgment has become an indispensable part of basic rule of law and, in fact, is a mandatory requirement of procedural law. (iii) It is only clarity of thoughts that leads to proper reasoning, which becomes a foundation of a just and fair decision.

In light of the above discussion highlighting the indispensability of reasons in the order passed by any authority administrative, quasi judicial or judicial, when it comes to exercise of powers under sections 147 and 148 of the Income Tax Act, 1961, there has to be a greater thrust for necessity of recording reasons. The entire exercise of reopening hinges on the reasons recorded by the Assessing Officer. It is the ‘reasons’ which weigh with him.

1 When the concluded assessment is to be revisited with by the Assessing Officer, recording of reasons for exercise of such powers has to be viewed as vested rights for the assessee. While exercising powers under the Act to reopen the assessment, the Assessing Officer would harbour reasons to believe that on particular set of facts, the income had escaped assessment and tax was not paid in relation to the year under consideration.

2 All the reasons which hold good in the eye of and with the Assessing Officer must be made known to the assessee. Assessee has right to refute the reasons for reassessment by filling objections. Unless the Assessing Officer appropriately delineates and communicates the reasons for reassement, right of the assessee to file objections would remain an eye- wash.

3 Whether the reassessment powers are adverted to on objective basis, whether the element of assessment of income is noticed from the facts and whether formation of opinion by the Assessing Officer is based on some relevant facts or not, could be judged provided the reasons are properly recorded and the details are given with regard to reopening of assessment that the reasons to believe with the Assessing Officer must be reflected in recording of such reasons to be communicated to the assessee.

Similarly in the case of Surani Steel Tubes Ltd. vs Ito (2022) 156 taxmann.com 139, the Hon’ble Gujarat High Court held as follows: “…..

This Court has also taken into consideration the affidavit-in-reply filed by the Income-tax Officer, Ward -1. Gandhinagar. On appreciation of contents of the same, we could note that the entire base for reopening assessment is on the premise that there was "information" supplied by the Investigation Wing and the Assessing Officer has made cursorily reference to high value transaction of Rs.26,42,027/- as well as also referred to accommodation entry entered upon by the petitioner Company by way of bogus sales/purchases/ fictitious loans etc. Thus, it appears that the reasons for reopening of the assessment in the case of petitioner Company for annual assessment year 2014-15/2015-16 by the Assessing Officer is based on the borrowed satisfaction and the Assessing Officer has not applied his independent mind to arrive at the conclusion that there was failure on the part of the assessee to disclose fully and truly all material facts. In fact, the Assessing Officer is under obligation to arrive at such conclusion that the assessee has failed to disclose all material facts and has to form independent opinion resulting into "reason to believe with regard to escapement of income chargeable to tax in case of the petitioner. During the course of hearing, learned Senior Advocate for the Department has tried to improvise by referring to the original file of the Department to emphasize that there is tangible material on record to show that the petitioner Company has made purchase transaction of Rs.26,42,027/- and has availed accommodation entry by way of bogus sales/purchases/fictitious loans etc. with Disman Group of Company. In our opinion, in absence of specific details as regards particulars of nature of transaction basic details of information, clarity with regard to name of person with whom such transaction has been entered into, goes to the very root of the matter. The sole object of providing reasons for reopening of the assessment is to prima facie supply the relevant material to the assessee to meet with his case and at the same time, it reflects the basic ingredients of "reason to believe" for Assessing Officer to assume the juri iction under sections 147 and 148 of the Income-tax Act. At the same time, such non- recording of specific details lead us to belief that without proper application of mind, the Assessing Officer has solely and mechanically relying upon the information received from Investigation Wing, has issued impugned

Further the Juri ictional High Court in the case of Harikishan Sunderlal Virmani vs DCIT reported in (2017) 88 taxmann.com 548 held that the reopening of assessment not to be done on borrowed satisfaction by observing as follows: “On the basis of the information received from another agency, there cannot be any reassessment proceedings However, after considering the information/material received from other source, the Assessing Officers required to consider the material on record in case of the assessee and thereafter is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mechanically relying upon the information received from other source there cannot be any reassessment for the verification. The Assessing Officer reopened assessment beyond four years on the basis of information/data supplied by the office of the Principal Director of Income Tax (Investigation) that there appeared to be a deliberate change in the client code of assessee with the broker. Held that from the reasons recorded, it appeared that the impugned reopening proceedings were so the borrowed satisfaction. No independent opinion was formed. Even in the reasons recorded, there was no allegation that there was any failure on the part of the assessee in not disclosing truly and fully material facts necessary for assessment. Under the circumstances, the assumption of the juri iction to reopen the assessment beyond the period of four years in exercise of powers under section 147 was bad in law.”

Further the Juri ictional High court in the case of Varshaben I.T.A No. 33/Ahd/2023 A.Y. 2013-14 Page No 15 on the basis of information supplied by DGIT (Inv.) that assessee had made certain bogus purchases and, to said extent, income had escaped assessment observing as follows: “……13. On a plain reading of the reasons recorded, what emerges is that the Assessing Officer, on verification of the details available on record, has noticed that there were bogus purchases. However, there is no assertion as regards on the basis of which material on record he has come to such conclusion. A perusal of the order rejecting the objections raised by the petitioner, shows that the reopening is based, not upon the material on record, but on the basis of material received from an external source viz., the DGIT (Inv.), Mumbai, pursuant to inquiries made by him (the DGIT). Therefore, the material on the basis of which the Assessing Officer seeks to assume juri iction under section 147 of the Act, is the information received from an external source viz., from the DGIT and not the material on record as reflected in the reasons recorded. Under the circumstances, on the basis of the material on record, the Assessing Officer could not have formed the belief that income chargeable to tax has escaped assessment, inasmuch as, the formation of belief of the Assessing Officer is not based upon the details available on record, but on the material made available by the DGIT (Inv.), Mumbai which is an external source. Under the circumstances, it cannot be said that the requirements of section 147 of the Act are satisfied, inasmuch as, the belief of the Assessing Officer is not based upon the material on record, but on some other material from an external source which does not find reference in the reasons. As is clear on a plain reading of the reasons recorded, except for the assertion that there were bogus purchases, the Assessing Officer has not referred to any material on the basis of which he proceeded to invoke the provisions of section 147 of the Act. The assertion made by the Assessing Officer is a bare one, without any reference to the material on the basis of which he made such assertion. ………………………

In the aforesaid premises, the formation of belief that income has escaped assessment not being based upon record, it is evident that the substratum for reopening the assessment is not laid in the reasons recorded but on material extraneous thereto. Under the circumstances, the basic requirement for assumption of juri iction under section 147 of the Act for reopening the assessment is not satisfied in the present case. The impugned notice under section 148 of the Act, therefore, cannot be sustained.

For the foregoing reasons, the petitions succeed and are, accordingly, allowed. The impugned notices all dated 26th March, 2014 issued under section 148 of the Act are hereby quashed and set aside. Rule is made absolute accordingly with no order as to costs in each of the petitions.”

Ld. Sr. D.R. relied upon Juri ictional High Court Judgment in the case of Pavan Kishanchand Tulsiani vs Union of India reported in (2023) 146 taxmann.com 396 wherein admittedly the MoU as well as Sauda-Chitthi seized by the department, wherein unaccounted cash has been paid for purchase of two lands. Considering the facts of the above case, the Hon’ble High Court upheld the reopening of assessment is good in law, whereas in the present case the Assessing Officer has not formulated his own opinion and reason to believe that income has escaped assessment, but simply followed the DGIT information and reopened the assessment which is clearly distinguishable to the facts of the present case.

Thus we have no hesitation in holding that the reopening of assessment itself is bad in law for having not recorded independent “reason to believe” that income has escaped assessment. Therefore the entire reopening of assessment is liable to be quashed. Even on merits of the case, the Assessing Officer failed to consider the repayment of above loan to M/s. KCPL during the A.Y. 2018-19. Thus we have no hesitation in quashing the reassessment order passed by the Assessing Officer.

In the result, the appeal filed by the Assessee is hereby allowed.