HARAKCHAND K GADA,MUMBAI vs. ITO 16(2)(4), MUMBAI

आदेश / O R D E R PER JASON P. BOAZ , A.M. This appeal by the assessee is directed against the order of CIT(A)-27, Mumbai dated 27.01.2014 for A.Y. 2005-06. 2. The facts of the case, briefly, are as under: - 2.1 The assessee filed his return of income for A.Y. 2005-06 on 16.12.2005 declaring total income of `2,93,971/-. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’). From the details in the order of assessment for A.Y. 2005-06 dated 25.03.2013, the Assessing Officer (‘AO’) states that after the return was processed under section 143(1) of the Act,

2.2 Aggrieved by the order of assessment for A.Y. 2005-06 dated 25.03.2013, assessee preferred an appeal before the CIT(A)-27, Mumbai, who dismissed assessee’s appeal vide order dated 27.01.2014.

”1. Violation of principles of Natural Justice: 1.1 The learned CIT(A) erred in not giving any finding as regards ground Nos. I & 2 by observing that, grounds are of general in nature without appreciating that, the principle of Natural Justice was violated and evidences were used against the assessee without furnishing the copy, hence the order of the Assessing officer confirmed by CIT(A) is bad in law. 1.2 The Learned CIT(A) erred in confirming that the Assessing Officer, who failed to provide a copy of the statements of Shri Harakchand K. Gada Mr. Mukesh Choksi on the basis of which assessment was reopened and further an opportunity of cross examination, in spite of a specific request made by the Appellant in this behalf. Therefore, the assessment order dt. 25/03/2013 is against the principles of natural justice, and hence, bad in law.

3. Addition under section 69 of Rs. 47,07,185/- on alleged Accommodation Entries : 3.1 The Learned CIT(A) erred in confirming action of the Assessing Officer and failed to appreciate that the net transactions entered into by the Appellant were only of Rs.1,40,572/- and were duly supported by all supporting evidence, shown in balance sheet, hence addition of Rs.47,07,185/- may be deleted. 3.2 The Learned CIT(A) erred in treating Rs. 47,07,185/- as the unexplained investment of the Appellant without bringing any evidence to support of the same and the provisions of Shri Harakchand K. Gada Section 69 cannot be applied to the facts of the appellant, based on the statement of third party. 3.3 Without prejudice to above, the Learned CIT(A) failed to appreciate that the appellant has shown speculation profit of Rs.2,28,845/- and paid tax thereon hence addition of `47,07,185/- may be deleted.”

4.1.2 Before us, the learned A.R. for the assessee, took us through the paper book-1 (pages 1 to 54) filed by assessee. Our attention was drawn to page 6 thereof, wherein the AO, by letter dated 04.10.2012, had provided assessee the recorded reasons for reopening the assessment, in the case on hand for A.Y. 2005-06, as per assessee’s request vide letter dated 27.04.2012. The learned A.R. for the assessee pointed out that it was evident from the recording of reasons by AO, that they were made without application of mind as they are factually incorrect since the assessee did not enter into any transactions amounting to `29,95,981/- during the Shri Harakchand K. Gada relevant period, with the party cited in the reasons recorded by AO i.e. M/s. Gold Star Finvest Securities Pvt. Ltd. The learned A.R. for the assessee then took us through the order of assessment for A.Y. 2005-06 and brought to our notice that neither has any addition on account of escapement of income been made by AO on account of transactions by assessee with Gold Star Finvest Securities Ltd. nor is there a whisper in this regard in the order of assessment. The learned A.R. for the assessee contends that this established that the reasons recorded by AO for reopening the case on hand for A.Y. 2005-06 was made without any application of mind and being factually incorrect, and having no nexus with assessee’s case, the very basis of reasoning for initiating proceedings under section 147 of the Act being factually flawed, the consequent notice under section 148 is invalid and consequently the order of assessment for A.Y. 2005-06 being null and void requires to be cancelled.

4.1.3 The learned A.R. for the assessee further submitted that even though on appeal the above facts were placed before the learned CIT(A) in the grounds raised challenging the validity of reopening the assessment for A.Y. 2005-06 at B, 1 & 2 recorded at page 3 of the impugned order, the learned CIT(A) has not addressed/ considered or adjudicated on these grounds while dismissing assessee’s appeal. The learned A.R. for the assessee submitted that it is obligatory on the part of the AO to apply his mind in putting forth cogent and genuine reasons that are the basic postulate for formation of belief that any income of the assessee has escaped assessment for that assessment year in order to reopen the assessment under section 147 of the Act. It is submitted that since the reasons recorded by the AO have factually no nexus with the transactions, income or business of the assessee in the year under consideration and the same not Shri Harakchand K. Gada being considered for addition or discussed in the order of assessment, there was absolutely no basis for the AO to form a belief that income of assessee chargeable to tax had escaped assessment on account of assessee’s non-existent transaction with Gold Star Finvest Securities Pvt. Ltd. The learned A.R. for the assessee submitted that in these circumstances, the initiation of proceedings under section 147 of the Act is bad in law and therefore liable to be quashed as the reopening of assessment for A.Y. 2005-06 was bad in law. In support thereof, the learned A.R. for the assessee placed reliance on the decision of the Hon'ble Delhi High Court in the case of Sarthak Securities Co. P. Ltd. vs. ITO (2010) 329 ITR 110 (Del).

4.2 The learned D.R. for Revenue supported the orders of the authorities below. It was submitted that even though there was some variation in the reasons recorded by the AO, made available to assessee, vis-à-vis the facts and findings of the AO in the order of assessment, assessee had participated in the completion of assessment proceedings and therefore the reopening of the assessment was in order.

4.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited. The facts of the matter as emerge from the record are that there was a search and seizure action under section 132 of the Act on 26.10.2006 in the case of share broker M/s. Mahasagar Securities Pvt. Ltd. and its group concerns. Pursuant thereto, the AO initiated proceedings under section 147 of the Act in order to reopen the assessment for A.Y. 2005-06 which was processed under section 143(1) of the Act and issued notice under section 148 of the Act to assessee on 27.03.2012 (copy placed on pages 4 & 5 of paper book). The assessee, vide letter dated 27.04.2012, submitted that there was Shri Harakchand K. Gada no escapement of income and that the return of income for A.Y. 2005-06 filed on 17.12.2005 be treated as filed in response to the aforesaid notice issued under section 148 of the Act. The assessee also requested the AO to furnish the reasons recorded for reopening the assessment within reasonable time. In response thereto, the AO vide letter dated 04.10.2012 (copy placed at page 8 of the paper book), provided the assessee with the reasons recorded by him for reopening of the assessment for A.Y. 2005-06 and which were as under: -

“The assessee has obtained accommodation entries amounting to `47,07,185/- for F.Y. 2004-05 relevant to A.Y. 2005-06 from M/s. Gold Star Finvest Securities Pvt. Ltd. You are requested to file the details as per the reasons mentioned above.” 4.3.2 From the above, it is seen that the AO made available a copy of the reasons recorded by him for reopening the assessment by letter dated 27.10.2012. We find that the order of assessment concluded under section 143(3) r.w.s. 147 of the Act was passed vide order dated 25.03.2013. In this view of the matter, we find that the averment made by assessee in the ground No. 2.2 that the AO failed to provide it with a copy of the reasons recorded before completion of the order of assessment to be a factually incorrect allegation.

4.3.3 On an appreciation of the details on record we find that the reasons recorded by the AO and provided to assessee vide letter dated 04.10.2012 extracted at para 4.2.1 (supra) are at variance with the facts narrated in the order of assessment wherein the AO in para 1 on page 1 records: -

“….. during the year the assessee had taken the profit of `47,07,185/- in the shares, the transactions were carried out through M/s. Mahasagar Securities Pvt. Ltd. Since the taxable

Shri Harakchand K. Gada income of `2,93,971/- has escaped assessment for the reasons attributable to the assessee, the assessment was reopened by issue of notice under section 148 of the I.T. Act on 27.03.2012 ….” This variance in the reasons recorded by the AO as provided to the assessee vide letter dated 04.10.2012 and that recorded in the order of assessment, in our view, prevented the assessee from putting up any defence in respect of the reopening of assessment under section 147 of the Act. This has clearly violated the principles of natural justice as the AO proceeded on a different premise while finalizing the order of assessment dated 25.03.2013.

4.3.4 As contended by the learned A.R. for the assessee it is clearly evident that the reasons recorded by the AO and provided to the assessee vide letter dated 04.10.2012 (supra) were factually incorrect and had neither any bearing or nexus on the assessee’s assessment nor was it part of the facts considered or additions made by the AO while disposing off the case. There is not a mention of or examination of whether the assessee had entered into any transaction with M/s. Gold Star Finvest Securities Pvt. Ltd. This, in our view, establishes that there was no application of mind by the AO resulting in lack of cogent or genuine or factually correct reasons being recorded while initiating proceedings under section 147 of the Act as there was no nexus between the formation of belief by the AO and the facts of the case. The learned D.R., apart from supporting the orders of the authorities below, was not able to controvert the arguments put forth by the assessee and the factual errors in the reasons recorded by the AO for initiating the proceedings under section 147 of the Act in the case on hand for A.Y. 2005-06.

4.3.5 It is also a matter of record that though the assessee had raised grounds in this regard, which are recorded at B, 1 & 2 at Shri Harakchand K. Gada pages 3 of the impugned order, the learned CIT(A) has failed to consider and adjudicate the grounds raised by the assessee.

4.2.6 In the facts and circumstances of the case, on the issue of the reopening of assessment for A.Y. 2005-06 under section 147 of the Act, as discussed at paras 4.1 to 4.3.5 of this order (supra), we are of the view that formation of belief by the AO was a condition precedent as regards the escapement of tax pertaining to the relevant assessment year. Before proceeding to issue the notice under section 147 of the Act, the AO was required to form an opinion, the validity of which are supposed to sustain the formation of an opinion, which can be challenged. Though conclusive evidence is not requisite at the stage of formation of belief, it must be based on application of mind which a reasonable person would apply. In our view, the reasons recorded, as communicated to the assessee by letter dated 04.10.2012, does not remotely evidence independent application of mind as there is clearly no nexus, whatsoever, between the reasons recorded and the factual findings in the order of assessment. In these circumstances we hold that initiation of proceedings under section 147 of the Act is bad in law and consequently the notice issued under section 148 of the Act and the order of assessment for A.Y. 2005-06 dated 25.03.2013 is to be quashed. It is ordered accordingly.

Shri Harakchand K. Gada 6. The ground at Sl. No. 4 is general in nature and therefore no adjudication is called for thereon. 7. In the result, assessee’s appeal for A.Y. 2008-09 is allowed as indicated above.