Gold Finch Jewellery Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that addition solely on the basis of investigation wing report unsustainable as onus was discharged by the assessee as PAN card and bank statements were duly submitted
Facts- During the Course of survey proceedings, it was found that during the year under consideration the assessee has introduced share capital on fictitious name and in the name of companies and entities who was not having financial capabilities for such investment. During post survey inquiry, these entities had accepted the fact that they were only involved in providing accommodation entries. It was also noticed that they had made investment in shares on receipt of money from the assessee company.
These facts were recorded on oath u/s. 131 of the Act, 1961 and the persons categorically accepted in the statements recorded that they had received cash from Shri Mahendra Shah, Director of the assessee company for making investments in the assessee company i.e. M/s. Goldfinch Jewellery Ltd.
From the above, it is clear that the names of these entities were utilized by Shri Mahendra Shah, Director of the assessee company for introducing unaccounted income in the garb of share capital and share premium in M/s. Goldfinch Jewellery Ltd.
Therefore, after recording the reasons on 28.3.2011, a notice u/s.148 of the I.T. Act dtd. 29.3.2011 was issued and served upon the assessee company. CIT(A) confirmed the same. Being aggrieved, the assessee company has preferred the present appeal challenging reopening by AO.
Conclusion- Learned AO did not inquire from the return of income of the person whom shares were transferred. It is pertinent to note that copy of PAN Card was supplied to the AO alongwith computation of income. Bank statements from where investment had been made but learned AO did not examine abovesaid documents rather learned AO made addition solely on the basis of the Investigation Wing Report.
Held that we are of the considered view that learned AO has made addition on the basis of the borrowed satisfaction. He has not applied his mind and in our opinion, he ought to have done independent home work but in the present case no such exercise was done by the learned AO for the reason best known to him. Therefore, in our considered opinion, in such case, addition cannot be made.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Both appeals have been preferred by the assessee against the order of the Commissioner of Income Tax (Appeals)-2, Ahmedabad (‘CIT(A)’ in short) vide Appeal No. CIT(A)-VIII/ACIT Cir. 4/342/2011-12 and now CIT(A)-2/13/AC.Cir.4/2011-12, dated 24.02.2016 arising in the assessment order dated 22.12.2011 passed by the Assessing Officer (AO) under s. 143(3) r.w.s. 147 of the Income Tax Act, 1961 (the Act) concerning AY. 2006-07 & CIT(A)-4 vide Appeal No. CIT(A)-4/101/DCIT/Cir-4/16-17 (Old Appeal No. CIT(A)-2/37/DCIT/Cir-4/13-14) dated 07th October, 2016 arising in the assessment order dated 22.03.2013 passed by the AO under s.143(3) of the Act.
2. Since facts and issues involved in both appeals are similar and identical, therefore, both appeals were heard together and are disposed of by this common order for the sake of convenience.
3. First we take ITA No.1074/Ahd/2016 for A.Y. 2006-07.
4. The grounds of appeal raised by assessee read as under:
1. The learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing officer in issuing notice u/s.148 of the I. T. Act, 1961 which is illegal and bad in law.
2. The learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer in passing an order u/s.143(3) r.w.s.147 of the I.T.Act,1961 by issuing notice u/s. 148 of the Act, which is illegal and bad in law hence the same should be cancelled.
3. The learned Commissioner of Income Tax (Appeals) has erred in confirming the addition made by the Assessing Officer of Rs.50,00,000/-on account of Share allottment to Shital Securities Pvt. Ltd. of Rs.25,00,000/- and to Dhanvidhya Impex Pvt. Ltd. of Rs.25,00,000/-
4. The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs. 1,61,379/- made by the Assessing Officer out of depreciation claimed on two wheeler vehicles and Motor Car.
5. The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs.10,38,591/- made by the Assessing Officer @ 25% of labour charges claimed by the Appellant.
5. In this case, a survey operation u/s. 133 A of the Act was carried out by the Investigation wing i.e. DDIT(Inv), Unit-II(l), Ahmedabad on 29.03.2010. During the Course of survey proceedings, it was found that during the year under consideration the assessee has introduced share capital on fictitious name and in the name of companies and entities who was not having financial capabilities for such investment. During post survey inquiry, these entities had accepted the fact that they were only involved in providing accommodation entries. It was also noticed that they had made investment in shares on receipt of money from the assessee company. These facts were recorded on oath u/s. 131 of the Act, 1961 and the persons categorically accepted in the statements recorded that they had received cash from Shri Mahendra Shah, Director of the assessee company for making investments in the assessee company i.e. M/s. Goldfinch Jewellery Ltd. From the above, it is clear that the names of these entities were utilized by Shri Mahendra Shah, Director of the assessee company for introducing unaccounted income in the garb of share capital and share premium in M/s. Goldfinch Jewellery Ltd. In view of the above facts and circumstances of the case, it is clear that the assessee has not disclosed fully and truly all material facts related to this issue. Therefore, after recording the reasons on 28.3.2011, a notice u/s.148 of the I.T. Act dtd. 29.3.2011 was issued and served upon the assessee company. In response to the said notice, the assessee company vide its letter dtd. 1.4.2011 has submitted that the return filed on 19.12.2006 may be treated as return filed in response to notice issued u/s.148 of the Act. A notice u/s.143(2) of the Act dtd.27.07.2011 was issued and served to the assessee company. The assessee vide its letter dtd, 09.08.2011 has filed objection to re-opening of assessment. A detailed reply rejecting the objection of the assessee was given to the assessee company on 30.08.2011.
6. Thereafter, assessee filed its reply by stating that first ground of appeal challenges the legality of the reassessment proceedings u/s 148 of the Act. The copy of the reasons for reopening of the assessment u/s 147 of the Act dated 18.03.2011 were enclosed. It has been stared that during the course of survey operation carried out on 29.03.2010, it was found that there was capital introduction from alleged fictitious entities during the year under appeal. The financial capability have been questioned and it has also been stated that the inquiry conducted by the Investigation Wing led to the conclusion that the so called share applicants had admitted to the fact that they were providing accommodation entries only and the investments made by them in the shares of the appellant company was out of the cash received from Shri Mahendrabhai K. Shah, Director of the assessee company. Presuming that the assessee company was introducing unaccounted income in the garb of share capital and share premium it was concluded that assessee company had not disclosed fully and truly all material facts related to the issue and therefore, it was necessary to enquire about genuineness of the share capital which necessitated the re-opening of the assessment. Furthermore reference to the same alleged evasion of capital gains on the sale of assets has been made while proposing to reopen the assessment.
6.1 The assessee had filed the objections to the reopening of the assessment vide letter dated 09.08.2011. The same were filed on 19.08.2011. It was pointed out that the return was duly filed accompanied by the audited financial statements. The return was also processed and the order was passed u/s 143(1) of the Act. Therefore, the assessee company has disclosed complete particulars and other material facts and therefore cannot be held guilty of withholding information which could lead to the reopening of the assessment. It was also brought to the attention to the AO that the perusal of the reasons did not indicate anything whatsoever by which a conclusion could be reached that there was escapement of income chargeable to tax u/s 147 of the Act.
6.2 The reasons recorded for the reopening of the assessment clearly revealed that it was only on the basis of the survey operation u/s 133 A that reopening of the assessment have been made. It is only doubt and suspicions of the Investigation Wing that the capital introduced in the appellant company is fictitious. In fact, it has been stated in the reasons that statement u/s 131 of the Act were recorded by the DDIT (Inv.) Unit-II(I), Ahmedabad wherein it was deposed of having received cash from the director of the appellant company in lieu of share investments made. However, the reasons do not reveal the name of any such person whose statement is recorded. Furthermore, the statement if any, which has been recorded, the copies thereof have not been furnished to the appellant company. Since the copies of the statement not having been furnished and made available to the appellant company the entire exercise of reopening of the assessment is hi violation of the principles of natural justice and equity. This is on account of the fact that the appellant company has not been confronted with the evidences collected behind his back and relied upon by DDIT/AO. The above discussion would therefore, clearly reveal that the reopening of the assessment was undertaken on the basis of reason to believe on the part of Investigation wing and not the AO. Furthermore, complete information and other material facts has not been provided to the appellant company with regards the basis for under taking reassessment proceedings. Reliance is placed on the following judicial pronouncement in support of its contention.
i. CIT v Smt. Paramjit Kaur (2009) 311ITR 38 (P&H)
Section 147 empowers the Assessing Officer to assess or reassess income chargeable to tax if he has reasons to believe that the income for any assessment year has escaped assessment. The power conferred under this section is very wide, but at the same time, it cannot be stated to be a plenary power. The Assessing Officer can assume jurisdiction under the said provision, provided there is sufficient material before him. He cannot act on the basis of his whim and fancy, and the existence of material must be real. Further, there must be nexus between the material and escapement of income. The Assessing Officer must record reasons showing due application of mind before taking recourse to reassessment proceedings. The Assessing Officer can assume jurisdiction for reassessment proceedings, provided he has reasons to believe, but the same cannot be taken recourse to on the basis: of reasons to suspect. [Para 4] In the instant case, it was undisputed that the Assessing Officer had initiated reassessment proceedings on the basis of information received from the survey circle that the assessee had got prepared a demand draft which was not accounted for in the books of account of the assessee. But the Assessing Officer had not examined and corroborated the information received from the survey circle before recording his own satisfaction of escaped income and initiating reassessment proceedings. The Assessing Officer had, thus, acted only on the basis of suspicion and it could not be said that the same was based on belief that the income chargeable to tax had escaped assessment. The Assessing Officer has to act on the basis of ‘reasons to believe’ and not on ‘reasons to suspect’. The Tribunal had, thus, rightly concluded that the Assessing Officer had failed to incorporate the material and his satisfaction for reopening the assessment and, therefore, the issuance of notice under section 148 for reassessment proceedings was not valid. [Para 6]
ii. Jose Kuruvinakkunnel v ITO (2007) 14 SOT 462 (Coch.)
Section 147, read with sections 148 and 151, of the Income-tax Act, 1961 – Income escaping assessment – Non-disclosure of primary facts – Assessment years 1996-97 and 1997-98 – Whether reasonable belief contemplated under section 147 must be that of an honest and reasonable person based upon a reasonable ground but it should not be based on some suspicious and vague reasons – Held, yes – Whether section 147 does not contemplate making of roving and fishing enquiry in hope of searching escaped income – Held, yes – Assessing Officer completed original assessment of assessee under section 143(3) – Investigation wing carried out investigation against assessee on basis of an anonymous petition – On basis of report of investigation wing, Assessing Officer reopened assessment of assessee by issuing notice under section 148 after period of four years from end of relevant assessment year – Whether since there was no material before Assessing Officer for formation of belief that there was escapement of income by assessee and there was no failure on part of assessee to disclose fully and truly all material particulars in respect of his income, reassessment proceedings initiated under section 147 were without due authority of law and were liable to be cancelled -Held, yes – Whether since sanction under section 151 was given by Commissioner without recording reasons for his satisfaction, issue of notice under section 148 by Assessing Officer was without due authority of law as it suffered from serious legal infirmities – Held, yes – Whether therefore, reassessment framed by Assessing Officer was to be cancelled – Held, yes
Assessee contended in the above referred cases that the reopening of the assessment has been undertaken on the basis of the report of the Investigation wing. There is no independent satisfaction of the AO that there is escapement of income. Under such circumstances the reopening of the assessment is not justified. But learned AO did not agree with the contention of the assessee and made addition on the basis of aforesaid facts.
7. During the course of assessment proceedings, it is noticed that share capital of the assessee company is increased by amount of Rs.50,00,000/-. On verification, it is noticed that the shares were allotted to following persons:-
1. Shital Securities Pvt. Ltd. 25,00,000/-
2. Dhanvidhya Impex Pvt. Ltd. Rs. 25,00,000/-
Summons u/s.131 of the Act were issued to the above parties. Inspector of this office was deputed to serve the summons. In the case of M/s. Sheetal Security Finance Ltd., the Inspector vide his report dtd. 03.11.2011 had reported that on the address mentioned in summons, no such party was available. The assessee vide order sheet entry dtd. 03.11.2011 was asked to produce Executive Director of Sheetal Security Finance Ltd. on 16.11.2011 along with confirmation etc. In response to said, the assessee has not produced any person but vide letter dtd. 15.11.2011 has furnished the following.
1) Copy of PAN card of Sheetal Securities Finance Ltd.
2) Xerox copy of return of income of Sheetal Securities Finance Ltd. for A Y 2004-05.
3) Copy of application form for 50000 equity shares received from Sheetal Securities Finance Ltd.
4) Copy of application form for 100000 equity shares received from Sheetal Securities Finance Ltd.
5) Copy of application form for 100000 equity shares received from Sheetal Securities Finance Ltd.
6) Copy of the resolution passed by the Board of Directors of Sheetal Securities Finance Ltd.
7.1 In view of above facts, the assessee vide letter dtd. 8.12.2011 was again asked to produce Managing Director of Sheetal Securities Finance Ltd. along with identity proof, coy of acknowledgement of return of income along with computation of income and final accounts and evidences of payment made for shares. The assessee was also asked to show cause as to why amount of Rs.25,00,000/- should not be added to its income in case, if he failed to produce the Managing Director of Sheetal Securities Finance Ltd. In response to said show cause notice, the assessee vide its letter dtd. 10.12.2011 has furnished its reply, which is reproduced as under:-
1. It has been stated that the summons u/s 131 issued on the directors of Sheetal Securities Pvt. Ltd. come back unserved. We have also been requested to present the managing Directors of the aforesaid company. As regard enforcing the attendance of the company the same is not possible and you may directly issue the summons for his attendance. I have not authority whatsoever so as to compel him to attend your office, we are furnishing the latest address of the company as per the information downloaded from the company law site. With respect to the share application we have already furnished the following evidences vide letter dated 24.10.2011.
