Income Tax Reopening Sustained as Assessee Was Alleged Beneficiary of Accommodation Entries

Ankit Financial Services Ltd. Vs DCIT (Gujarat High Court)

The Gujarat High Court considered a petition challenging a notice issued under Section 148 of the Income Tax Act for reopening the assessment for Assessment Year (AY) 2010-11. The notice was issued within four years from the end of the relevant assessment year.

The petitioner, engaged in the business of investment and financing, had filed a return declaring nil income. The return was accepted under Section 143(1) of the Act. Subsequently, the Assessing Officer (AO) issued a notice under Section 148 on the ground that income chargeable to tax had escaped assessment. The reasons for reopening were supplied to the assessee, who filed objections contending that the reassessment proceedings were based on conjectures, borrowed information, and statements of persons with whom the assessee had no connection.

Initially, the petitioner challenged the notice on the ground of non-compliance with Section 151 of the Act, alleging that the requisite approval had not been obtained. However, the Revenue demonstrated that approval from the Commissioner had been obtained before issuance of the notice. The petitioner conceded that this ground did not survive.

The principal challenge thereafter was that the reopening was based solely on information received from the Principal Director of Income Tax (Investigation), Ahmedabad, and therefore represented “borrowed satisfaction” rather than an independent belief of the AO. The petitioner argued that there was no tangible material available with the AO and that the assessment could not be reopened merely on the basis of information gathered during a search conducted in the case of Shri Pravinkumar Jain.

The Revenue submitted that a search under Section 132 had been conducted in the case of Shri Pravinkumar Jain. The investigation allegedly revealed that he was engaged in providing accommodation entries such as unsecured loans, bogus share capital, share application money, and bogus sales and purchases through various entities. Information received by the AO indicated that the petitioner was one of the beneficiaries of such accommodation entries and had received bogus share application money through concerns allegedly operated by Shri Jain.

The Court observed that the original assessment had been processed only under Section 143(1), without any detailed inquiry or scrutiny. Therefore, there was no question of a change of opinion. The Court referred to the principles laid down by the Supreme Court in Rajesh Jhaveri Stock Brokers Pvt. Ltd., emphasizing that at the stage of issuing a reopening notice, the AO is only required to have a “reason to believe” that income has escaped assessment and not conclusive proof of escapement.

The Court held that the information received from the Investigation Wing constituted tangible material available to the AO. The findings of the investigation team, based on material recovered during the search, provided a basis for forming a prima facie belief that income chargeable to tax had escaped assessment. Since the petitioner was alleged to be a beneficiary of accommodation entries and the transactions had not been examined during the original processing under Section 143(1), the AO was justified in initiating reassessment proceedings.

The Court rejected the contention that the notice was based on borrowed satisfaction. It found that the AO had before him specific information from the Investigation Wing and had formed his own belief regarding escapement of income. The Court further held that sufficiency of the reasons or the correctness of the material could not be examined at the stage of testing the validity of a reopening notice.

Relying on the decisions of the Supreme Court and earlier Gujarat High Court judgments, the Court concluded that the reassessment proceedings were based on fresh, specific, and reliable information. The notice under Section 148 was therefore neither without jurisdiction nor contrary to Section 147 of the Act.

Accordingly, the petition was dismissed, the notice was upheld, and any interim relief granted earlier was vacated.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

1.0. By way of this petition under Article 226 of the Constitution of India, the petitioner has prayed for an appropriate writ, direction and order to quash and set aside the impugned notice under Section 148 of the Income Tax Act, by which, the Assessing Officer has sought to reopen the assessment for AY 2010­11, which has been issued as such within the period of four years from the date of relevant assessment year.

2.0. The facts leading to the present petition in nutshell are as under:

2.1. That the petitioner ­assessee is engaged in the business of investment and financing. The assessee filed return of income for AY 2010­11 declaring total income at Rs. NIL. The return was accepted as per Section 143(1)of the Act. That thereafter, the Assessing Officer has issued impugned notice under Section 148 of the Act to reopen the assessment for AY 2010­11 alleging inter alia that the income chargeable to tax for AY 2010­11 has escaped assessment within the meaning of Section 147 of the Act. That at the request of the assessee, the Assessing Officer has supplied the reasons recorded to reopen the assessment. That on receipt of the reasons recorded to reopen the assessment, the assessee submitted objection vide his communication dated 14.09.2016. It was submitted by the assessee that reassessment has been made on the basis of conjectures and surmises. It was also further submitted by the assessee that the assessee had no connection or relation with Shri Pravinkumar Jain and therefore, their submission cannot be relied upon. It was also contended on behalf of the assessee that the reasons for re­assessment outside information and therefore, it cannot be said to be opinion of the Assessing Officer for the escapement of the income. That thereafter, the Assessing Officer has passed an order overreaching the objection. Hence, petitioner­ assessee has preferred present Special Civil Application under Article 226 of the Constitution of India challenging the impugned notice under Section 148 of the Act and challenging the impugned reassessment proceedings.

3.0. Shri Hardik Vora, learned advocate has appeared on behalf of the petitioner and Ms. Mauna Bhatt, learned advocate has appeared on behalf of the revenue.

4.0. At the outset, it is required to be noted that when the petitioner was heard by the Division Bench of this Court on 14.11.2016 the only contention on behalf of the petitioner was with respect to non compliance of Section 151 of the Income Tax Act. However, considering the affidavit in reply filed on behalf of the revenue it has been categorically and clearly stated that in the present case there is a compliance of Section 151 of the Act and the impugned notice under Section 148 of the Act has been issued after an approval from the CIT­I, Ahmedabad was obtained under Section 151 of the Act on 01.09.2015. Therefore, the ground on which this Court issued the notice upon the respondent is not available to the petitioner. Shri Vora, learned advocate for the petitioner has also fairly conceded that ground which was initially canvassed with respect to non compliance of Section 151 of the Act does not survive and same is not available to the assessee.

4.1. However, thereafter Shri Vora, learned advocate for the petitioner has made other submissions on merits while challenging the impugned notice under Section 148 of the Act.

4.2. Shri Vora, learned advocate for the petitioner has submitted that in the facts and circumstances of the case impugned notice under Section 148 of the Act is absolutely bad in law.

4.3. It is vehemently submitted by Shri Vora, learned advocate for the petitioner that the impugned notice under Section 148 of the Act has been issued on the outside information furnished i.e. from Principal Director of Income Tax (Investigation), Ahmedabad and there is no true information of the Assessing Officer for escaping of the income. It is submitted that therefore, on the basis of borrowed satisfaction, the re­assessment proceedings are not permissible.

4.4. It is further submitted by Shri Vora, learned advocate for the petitioner that even otherwise solely on the basis of the material collected during the search conducted in the case of Shri Pravin Kumar Jain, concluded assessment in the case of the petitioner ­assessee cannot be reopened.

4.5. It is further submitted by Shri Vora, learned advocate for the petitioner that there is no tangible material with the Assessing Officer to prima facie come to the conclusion that there is an escapement of income chargeable to tax. It is submitted that in the present case the Assessing Officer while framing the original assessment, accepted the return of income filed by the assessee in toto and did not doubt any transaction. It is submitted that therefore, the impugned notice under Section 148 of the Act to reopen the assessment for AY 2010­11 cannot be sustained and same deserves to be quashed and set aside.

4.6. Shri Vora, learned advocate for the petitioner has heavily relied upon the decision of the Delhi High Court in the case of Commissioner of Income Tax, Central 1 vs. Indo Arab Air Services reported in (2015) 64 Taxmann. Com 257(Delhi).

Making above submissions and relying upon the decision, it is requested to allow the present petition.

5.0. Present petition is vehemently opposed by Ms. Mauna Bhatt, learned advocate for the revenue.

5.1. It is submitted that as such at the time of issuance of notice, learned counsel for the petitioner pressed only one ground i.e. with respect to non compliance of Section 151 of the Act. It is submitted that in the present case in fact there is total compliance of Section 151 of the Act and Assessing Officer has issued the impugned notice on 15.12.2015 after approval from the Principal Commissioner of Income Tax, Circle I, Ahmedabad on 01.09.2015. It is submitted that therefore, present petition deserves to be dismissed.

5.2. It is further submitted that in the present case Assessing Officer is justified in issuing the notice under Section 148 of the Act to reopen the assessment for AY 2010­11 as he has formed the opinion that the income chargeable to tax has escaped assessment.

5.3. It is submitted that in the present case original assessment was under Section 143(1) of the Act and therefore, Assessing Officer did not consider in detail and / or did not make any inquiry in detail and mechanically accepted the return of income. It is submitted that thereafter the Assessing Officer received a specific information from the Principal Director of Income Tax (Investigation), Ahmedabad and forwarded information that a search under Section 132 of the Income Tax Act was conducted in the case of one Shri Pravinkumar Jain and the search action has resulted in collection of evidence and other findings which conclusively prove that Shri Pravinkumar Jain is engaged in providing accommodation entries of various natures like unsecured loans, bogus share application / capital and bogus sales and purchases to the beneficiaries spread throughout India. The Assessing Officer further received the information that the present assessee – M/s. Ankit Services Pvt. Ltd is also one of the beneficiary of such accommodation entry and is engaged in bogus share application money from various bogus concerns operated by Shri Pravinkumar Jain. It is submitted that thereafter on the basis of such material and the information received the Assessing Officer after forming an opinion that the income chargeable to tax has escaped assessment has issued impugned notice under Section 148 of the Income Tax Act, which is as such within the period of four years.

5.3. Ms. Bhatt, learned advocate for the revenue has relied upon the decision of the Hon’ble Supreme Court in the case of Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers P Ltd. reported in 291 ITR 500 as well as decision of this Court in the case of Yogendrakumar Gupta vs. Income Tax Officer reported in 366 ITR 186 (Guj) has requested to dismiss the present petition.

5.4. Ms. Bhatt, learned advocate for the revenue has also relied upon the decision of the Division Bench of this Court in the case of Dishman Pharmaceuticals and Chemicals Limited vs. Deputy Commissioner of Income Tax (OSD) (No.1) reported in 346 ITR 228 on how reasons to be recorded. She has also produced before the Court the xerox copy of the relevant file and information received by the Assessing Officer from Shri Pravinkumar Jain on the basis of which the Assessing Officer has issued the impugned notice by forming an opinion that income chargeable to tax as escaped assessment.

Making above submissions, it is requested to dismiss the present petition.

6.0. Heard the learned advocates for the respective parties at length. At the outset, it is required to be noted that in the present petition the impugned notice under Section 148 of the Income Tax Act has been issued within the period of four years. Therefore, considering Section 147 of the Income Tax Act that on the basis of prima facie material available on record if the Assessing Officer has reason to believe that amount chargeable to tax has escaped assessment, reopening within the period of four years is permissible. At this stage, it is required to be noted that the original assessment was under Section 143(1) of the Act and Assessing Officer accepted the return of income without holding any further inquiry. Therefore, there is no question of any change of opinion by the subsequent Assessing Officer. The aforesaid decisions of the Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt Ltd. (supra) is required to be referred to.

6.1. It is required to be noted that at the initial stage, learned advocate for the petitioner made only one submission and challenged the impugned notice solely on the ground that there is non compliance of Section 151 of the Act and that the impugned notice has been issued by the Assessing Officer without any prior approval of the Commissioner. However, the same has no substance and same does not seem to be true. In the affidavit in reply, it is specifically stated that after obtaining approval from the Principal Director of Income Tax (Investigation), Ahmedabad, thereafter the Assessing Officer has issued the impugned notice. Therefore, the impugned notice is not required to be set aside on the aforesaid ground.

7.0. Now, so far as challenge to the impugned notice on the ground that the same is on the borrowed information and that Assessing Officer has not formed independent opinion and / or belief that the income chargeable to tax has escaped assessment is concerned, it is required to be noted that on the basis of information supplied by/ from the office of Principal Director of Income Tax (Investigation), Ahmedabad, the Assessing Officer has found that the petitioner­ assessee is the beneficiary of the accommodation entry provided by one Shri Pravinkumar Jain. The Assessing Officer was having with him finding of the investigation team based on the material recovered during search conducted of Shri Pravinkumar Jain Group. Under the circumstances, it cannot be said that there was no tangible material available with the Assessing Officer to prima facie form an opinion / belief that the income chargeable to tax has escaped assessment. The transaction of the assessee are required to be verified in detail, which were not ascertained in detail and / or which were not ascertained at all during the assessment proceedings, as original assessment is under Section 143(1) of the Act. The petitioner assessee is alleged to be the beneficiary of the accommodation entry given by Shri Pravinkumar Jain group concerns, therefore, the same are required to be verified in detail. Under the circumstances and in the facts and circumstances of the case, it cannot be said that there is non application of mind on the part of the assessee while issuing impugned notice under Section 148 of the Act.

7.1. In the case of Rajesh Jhaveri Stock Brokers Pvt Ltd (supra), the Hon’ble Supreme Court has observed that in case where assessment were finalized under Section 143(1) of the Income Tax Act, failure to take steps under Section 143(3) will not render the Assessing Officer powerless to initiate reassessment proceedings when intimation under Section 143(1) has been issued. In the said decision in para 16 to 18, the Hon’ble Supreme Court has further observed and held as under:

16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year 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. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is reason to believe, but not the established fact of escapement of income. At the stage of issue 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. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband  Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)] ; Raymond  Woollen Mills Ltd. v. ITO [ 1999 (236) ITR 34 (SC)].

17. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied firstly the Assessing Officer must have reason to believe that income profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso.

18. So long as the ingredients of section 147 are fulfilled, the Assessing Officer is free to initiate proceeding under section 147 and failure to take steps under section

7.2. At this stage, decision of the Division Bench of this Court in the case of Yogendrakumar Gupta (supra) is required to be referred to and consider. In the case before the Division Bench on the basis of information from CBI that loans accepted as genuine in original assessment were bogus, when the Assessing Officer initiated reassessment proceedings under Section 147 of the Act beyond four years, the Division Bench has observed that assumption of jurisdiction on the part of the Assessing Officer is based on fresh information, specific and reliable and otherwise sustainable under the law, challenge to reassessment proceedings warrant no interference and accordingly notice for reassessment was held to be valid. In the case before the Division Bench, it was the case on behalf of the assessee that at the time of original scrutiny assessment, specific query was raised with regard to unsecured loans and advances received from the company B and t hese being the transactions through the cheques and drafts, there would arise no question of the Assessing Officer not accepting such version of the assessee and not treating them as genuine loans and advances. The relevant observation of the Division Bench are in para 6 to 18. In para 19, the Division Bench has further observed that sufficiency of the reasons recorded by the Assessing Officer need not be gone into by this Court. It is further observed that the Assessing Officer when forms his belief on the basis of subsequent new and specific information that the income chargeable to tax has escaped assessment on account of omission on the part of the assessee to make full and true disclosure of primary facts, he may start reassessment proceedings as fresh facts revealed the non­disclosure full and true. Such facts were not previously disclosed or it can be said that if previously disclosed, they expose untruthfulness of facts revealed.

7.2.1. The Apex Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd.(supra) has held that at the stage of issuance of notice of reopening, the Assessing Officer must have a reason to believe and not the established fact of escapement of income in the following manner (headnote);

“The expression reason to believe in section 147 would mean cause or justification. If the Assessing Officer has cause or 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. What is required is reason to believe but not the established fact of escapement of income. At the stage of issue 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. This is so because the formation of belief is within the realm of subjective satisfaction of the Assessing Officer.

7.2.2. In the case of Raymond Woolen Mills Ltd. v. Income­tax Officer and others, reported in 236 ITR 34, the Court held that in determining whether commencement of reassessment proceedings was valid, it has only to be seen whether there was prima facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at such stage.

7.3. Considering the aforesaid decisions of the Hon’ble Apex Court as well as decision of the Division Bench of this Court and applying the same to the facts of the case on hand, it cannot be said that there was no material before the Assessing Officer to reopen the assessment. In the present case also the reassessment proceedings have been initiated by the Assessing Officer on the basis of material provided by the Principal Director of Income Tax (Investigation), Ahmedabad. It is also required to be noted that the genuineness of the various companies who made share applications are doubted. The assessee is alleged to have been engaged in bogus share applications from various bogus concerns operated by Shri Pravinkumar Jain. The assessee is the beneficiary of the said transactions of share application by those bogus concerns. In the wake of information received by the Assessing Officer, when Assessing Officer formed a belief that the investment made from the funding of such companies which are bogus, the Assessing Officer has rightly assumed the jurisdiction of initiating the reassessment proceedings. Assessing Officer, on the basis of information subsequently having come to his knowledge, recognized untruthfulness of the facts furnished earlier. In the present case, since both the necessary conditions to reopen the assessment have been duly fulfilled, sufficiency of the reasons is not to be gone into by this Court. Information furnished at the time of original assessment, when by subsequent information received from the Principal Director of Income Tax (Investigation), Ahmedabad, itself found to be controverted, the objection to the notice of reassessment under section 147 of the Act must fail. At this stage, para 20 of the decision in the case of Yogendrakumar Gupta (supra) is required to be referred to, which reads as under:

20. This Court has examined the belief of the Assessing Officer to a limited extent to inquiry as to whether there was sufficient material available on record for the Assessing Officer to form a requisite belief whether there was a live link existing of the material and the income chargeable to tax that escaped assessment. This does not appear to be the case where the Assessing Officer on vague or unspecific information initiated the proceedings of reassessment, without bothering to form his own belief in respect of such material. We need to notice that the Joint Director, CBI, Mumbai, intimated to the DIT (Investigation), Mumbai. A case is registered against Mr.Arun Dalmia, Harsh Dalmia and during the search at their residence and office premises, the substantial material indicated that 20 dummy companies of Mr.Arun Dalmia were engaged in money laundering and the income ­tax evasion. The said entities included Basant Marketing Pvt. Ltd. also. From the analysis of details furnished and the beneficiaries reflected, which are spread across the country, the CIT, Koklata, suspected the accommodation entry related to the assessment year 2006­07 as well, this information has been provided to Director General of Income­ tax, Kolkata, who in turn, communicated to the Chief Commissioner of Income­ tax, Ahmedabad. Further revelation of investigation as could be noticed from the record examined (file) deserves no reflection in this petition. Insistence on the part of the petitioner to provide any further material forming the part of investigation carried out against Dalmias also needs to meet with negation, as the law requires supply of information on which Assessing Officer recorded her satisfaction, without necessitating supply of any specific documents. The proceedings initiated under section 147 of the Act would not be rendered void on non­ supply of such document for which confidentiality is claimed at this stage, following the decision of the Delhi High Court in case of Acorus Unitech Wireless (P.) Ltd. (supra). Assumption of jurisdiction on the part of the Assessing Officer is since based on fresh information, specific and reliable and otherwise sustainable under the law, challenge to reassessment proceedings warrant no interference .

8.0. Now, so far as the decision of the Delhi High Court in the case of Indo Arab Air Services (Supra) relied upon by Shri Vora learned advocate for the petitioner is concerned, on considering the facts before the Delhi High Court and the findings recorded, we are of the opinion that the said decision shall not be applicable to the facts of the case on hand and same shall not be of any assistance to the petitioner ­assessee. On the contrary, the decision of the Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt Ltd (supra) and decision of the Division Bench of this Court in the case of Yogendrakumar Gupta (supra) shall be applicable with full force to the facts of the case on hand.

9.0. In view of the above and for the reasons stated above, it cannot be said that impugned notice issued under Section 148 of the Act is without jurisdiction and/ or contrary to Section 147 of the Act. Under the circumstances, present petition deserves to be dismissed and is accordingly dismissed. Notice discharged. Ad­interim relief if any, stands vacated forthwith.