Case Law Details
ACIT Vs Mohd. Ayub Mohd. Yaqub Perfumers Pvt. Ltd. (ITAT Lucknow)
The Income Tax Appellate Tribunal (ITAT), Lucknow Bench, has dismissed an appeal filed by the Assistant Commissioner of Income Tax (ACIT) against Mohd. Ayub Mohd. Yaqub Perfumers Pvt. Ltd. for the assessment year 2004-05. The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to annul the reassessment order, finding that the Assessing Officer (AO) lacked concrete evidence to establish a link between a seized third-party document and the assessee-company.
Case Origin: Third-Party Search and Ambiguous Entry
The dispute originated from a search operation conducted on Shri Sohanraj Mehta, a C&F agent of the RMD Gutkha group, in Bangalore. During this search, a statement of account was seized, which contained an entry of Rs. 50 lakhs against the name “Malik Kannauj.” The revenue interpreted this entry to mean that the amount was paid to Shri Abdul Malik, the Managing Director (MD) of Mohd. Ayub Mohd. Yaqub Perfumers Pvt. Ltd., located in Kannauj.
Based on this interpretation of the seized document, the AO formed a belief that income chargeable to tax had escaped assessment in the assessee-company’s hands, as this Rs. 50 lakhs was not reflected in its books of account. Consequently, a notice under Section 148 of the Income-tax Act, 1961, was issued, and the assessment was completed under Section 147 read with Section 144 of the Act. This resulted in an addition of Rs. 10.48 lakhs, representing the estimated profit on the alleged unaccounted sale of Rs. 50 lakhs.
Assessee’s Appeal to CIT(A) and Annulment of Assessment
Aggrieved by the AO’s order, Mohd. Ayub Mohd. Yaqub Perfumers Pvt. Ltd. filed an appeal before the CIT(A). The assessee argued that no document directly indicating payment of Rs. 50 lakhs to the company was found during the search. They characterized the seized document as a “dumb document,” containing only a debit entry in the name of “Malik Kannauj,” which lacked specific identification. Furthermore, the assessee pointed out that even in the statement of Shri Sohanraj Gupta (presumably Shri Sohanraj Mehta), there was no mention of Shri Abdul Malik, the director of the assessee-company.
The CIT(A), after reviewing the submissions, concluded that in the absence of any concrete evidence linking the assessee to the alleged receipt of Rs. 50 lakhs, the reopening of the assessment under Section 147 of the Act was not proper. Accordingly, the CIT(A) annulled the assessment order passed by the AO.
Revenue’s Appeal to ITAT and Tribunal’s Scrutiny
The revenue, dissatisfied with the CIT(A)’s decision, appealed to the ITAT, reiterating its contention that the CIT(A) erred in annulling the assessment. The revenue argued that the AO had sufficient reasons to believe that income had escaped assessment and that the order was based on “concrete facts and material available on records as well as various inquiries made and not on the basis of any conjuncture or surmises.”
During the hearing before the ITAT, a specific query was raised to the learned Departmental Representative (DR) regarding the evidence collected during or after the search that led the AO to believe income had escaped assessment in the assessee’s hands. The ITAT noted that the DR failed to provide a satisfactory answer.
The Tribunal meticulously perused the seized documents and confirmed the debit entry of Rs. 50 lakhs in the name of “Malik Kannauj.” However, the ITAT found that this entry did not conclusively indicate that the amount was given to the Managing Director of the assessee-company. The Tribunal observed, “There may be hundred of Malik in Kannauj but on the basis of this dumb document, the reopening of assessment in the hands of the assessee is not permissible.”
Furthermore, the ITAT examined the statement of Shri Sohanraj Gupta, the searched party, and found that he had nowhere deposed about the payment of Rs. 50 lakhs to the assessee-company. The Tribunal concluded that in the absence of any relevant material, the reopening of assessment in the hands of the assessee was not proper.
CIT(A)’s Detailed Reasoning Affirmed by ITAT
The ITAT specifically highlighted and endorsed the relevant observations made by the CIT(A) in his order, which provided a detailed rationale for annulling the assessment:
- Lack of Identity Link: The CIT(A) found no clear explanation as to how “MALIK Kannauj” in the seized document was interpreted as Shri Abdul Malik, MD of the appellant company. Shri Sohanraj Gupta’s statement did not mention any “Malik” in this context, and Shri Abdul Malik himself had denied such a transaction under oath before the ADIT(Inv), Kanpur.
- No Link to Assessee Company: Even assuming “Malik Kannauj” referred to Shri Abdul Malik, the CIT(A) stressed that there was no evidence or material linking that payment specifically to the assessee company.
- Borrowed Satisfaction and Conjecture: The CIT(A) criticized the AO for initiating reassessment solely based on an uncorroborated “information” from the ADIT (Inv), Kanpur, without independent verification. The CIT(A) emphasized the “trite law” that “reasons to believe” for reopening a case must be the AO’s own and “could not be formed at the dictates of others or on suspicion, conjectures or surmises.”
- Irrelevant Material: The CIT(A) concluded that the AO had no material before him that could genuinely link the alleged payment to the appellant company. The “reasons to believe” were recorded on “irrelevant material,” and “on the basis of such material, no prudent man could have formed the belief that income had escaped assessment in the hands of the appellant company.”
Judicial Precedent Supporting Annulment: The CIT(A) fortified its view by citing the Hon’ble Apex Court in CIT vs Daulat Ram Rawat Mull (87 ITR 349). This landmark Supreme Court judgment held that “there should, in our opinion, be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which the conclusion is based. The use of extraneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of facts.” The CIT(A) found that this principle was directly applicable, as the AO’s conclusion lacked a direct nexus with concrete primary facts.
ITAT’s Final Verdict
Finding no infirmity in the well-reasoned order of the CIT(A), the ITAT confirmed the annulment of the assessment. Consequently, the appeal filed by the revenue was dismissed. This decision reiterates the critical requirement for the tax authorities to possess concrete, relevant, and independently verifiable material to establish a “reason to believe” that income has escaped assessment, particularly when relying on third-party documents or statements. Mere suspicion, conjecture, or uncorroborated information, especially when the identity of the recipient is ambiguous, is insufficient to justify reopening an assessment.
FULL TEXT OF THE ORDER OF ITAT LUCKNOW
This appeal pertaining to assessment year 2004-05 is preferred by the Revenue against the order of the ld. CIT(A), inter alia, on following grounds:-
1. The Ld. CIT(A) has erred in law and on facts in allowing the appeal of the assessee, as he has concluded on the basis of his incomplete inquiry that Shri. Malik of Kannauj was not the same Shri Abdul Malik, MD of M/s S.M.D. Ayub Md. Yaqub (Perfumers) Pvt. Ltd., Ashok Nagar, Kannauj, whereas the AO has material in possession that Shri Malik is Shri Abdul Malik, MD of M/s S.M.D. Ayub Md. Yaqub (Perfumers) Pvt. Ltd., Ashok Nagar, Kannauj as Shri Malik was clearly referred as C/o M/s S.M.D. Ayub Md. Yaqub (Perfumers) Pvt. Ltd., Ashok Nagar Kannauj in the information received from Investigation Wing.
2. The Ld. CIT(A) has erred in law and on facts in annulling the assessment order without appreciating the fact that the A O had sufficient reasons in his possession to believe that the income chargeable to tax has escaped assessment.
3. The Ld. CIT(A) has erred in law and on facts in annulling the assessment order without appreciating the fact that the assessment order was passed by the AO on the basis of concrete facts and material available on records as well as various inquiries made and not on the basis of any conjuncture or surmises.
4. That the order of the Ld. CIT(A) being erroneous unjust and bad in law be vacated and the order of the Assessing Officer restored.
2. The facts in brief borne out from the record are that during the course of search conducted upon Shri. Sohanraj Mehta, C&F of RMD Gutkha group in Bangalore, statement of account was seized in which there was an entry of Rs.50 lakhs in the name of Malik Kannauj. This entry was interpreted by the Revenue as this amount was given to Shri. Abdul Malik, MD of the assessee-company. On the basis of seized documents, the Assessing Officer has formed a belief in the assessee’s case that the income chargeable to tax has escaped assessment, as this amount was not shown by the assessee in its books of account. Accordingly a notice under section 148 of the Income-tax Act, 1961 (hereinafter called in short “the Act”) was issued and assessment was completed under section 147 of the Act read with section 144 of the Act in the hands of the assessee, resulting into an addition of Rs.10.48 lakhs as profit on this unaccounted sale of Rs.50 lakhs.
3. An appeal was preferred before the ld. CIT(A) with the submission that no document indicating payment of Rs.50 lakhs to the assessee-company was found during the course of search. Only dumb documents were found in which there was a debit entry of Rs.50 lakhks in the name of Malik Kannauj. Even in the statement of Shri. Sohanraj Gupta, there was no mention of the Director of the assessee-company, Shri. Abdul Malik. Therefore, the ld. CIT(A) came to the conclusion that in the absence of any evidence involving the assessee to the alleged receipt of Rs.50 lakhs, reopening in the hands of the assessee under section 147 of the Act is not proper and he accordingly annulled the assessment.
4. Aggrieved the Revenue has preferred an appeal before the Tribunal and reiterated its contentions. During the course of hearing, a specific query was raised from the ld. D.R. as to what evidence they have collected during the course of search or thereafter, on the basis of which the Assessing Officer has formed a belief that the income chargeable to tax has escaped assessment in the hands of the assessee. No satisfactory answer was furnished by the ld. D.R. We have also carefully perused the seized documents and we find that there is a debit entry of Rs.50 lakhs in the name of Mlik Kannauj, but this entry does not indicate that the amount of Rs.50 lakhs was given to the Managing Director of the assessee. There may be hundred of Malik in Kannauj but on the basis of this dumb document, the reopening of assessment in the hands of the assessee is not permissible. Moreover, the searched party has also examined Shri. Sohanraj Gupta and the statement is also placed on record and at nowhere Shri. Sohanraj Gupta has deposed about payment of Rs.50 lakhs to the assessee. In the absence of any relevant material, the reopening of assessment in the hands of the assessee is not proper. The ld. CIT(A) has given valid reasons while holding that the reopening is bad. The relevant observations of the ld. CIT(A) are extracted hereunder:-
“5.1.6 From all the aforesaid correspondence, it is obvious that there is no clue as to how the identity of “MALIK Kannauj” as appearing in the seized document (supra) was interpreted as Shri Abdul Malik, MD of the appellant company. In the statement given by Shri Sohanraj Gupta, there is no mention of any Malik. Further, in his statement under oath before the ADIT(lnv), Kanpur, Shri Abdul Malik, the M.D. of the appellant company had denied such transaction. In these circumstances, I fail to understand as to how, the A.O. formed the belief that the entry in the name of “Malik Kannauj” (as appearing in the seized document) referred to Shri ‘Malik, M.D. of the appellant company. Further, even for argument sake if “Malik Kannauj” indeed referred to Shri Abdul Malik, the M.D. of the appellant company, there was no evidence/material on record which could link that payment to the assessee company. Just because the ADIT (Inv), Kanpur had informed the A.O. that the entry of paymen of Rs. 50 Lakhs (as mentioned in the seized document) to one “Malik Kannauj” related to the Appellant company (without any supporting in this regard), to same could not have been the basis for the A.O. to initiate the reassessment proceedings in the case of the appellant company. It is a trite law that the “reasons to believe” for reopening the case should be that of the A.O. alone and could not be formed at the dictates of others or on suspicion, conjectures or surmises.
5.1.7 In the instant case, in my considered view, the A.O. had no material before him which could link the said payment to the appellant company. The “reasons to believe” in the case have been recorded on irrelevant material. On the basis of such material, no prudent man could have formed the belief that income had escaped asstt. in the hands of the appellant company. Accordingly, I hold that the very assumption of jurisdiction by the A.O. under section 147 of the Act was illegal and, therefore, any asstt. framed pursuant to such illegality cannot be sustained. Thus, the whole asstt. framed u/s 147 is hereby annulled, While taking this view, I am fortified by the decisions of the Hon’ble Apex Court in fie case of CIT vs Daulat Ram Rawat Mull (87 ITR 349) wherein, it was held:
‘there should, in our opinion, be some direct nexus between the conclusion of fact arrived at by the authority concerned and the primary facts upon which the conclusion is based. The use of extraneous and irrelevant material in arriving at that conclusion would vitiate the conclusion of facts……………………. “
In the result, the appeal is allowed.”
5. Since we do not find any infirmity in the order of the ld. CIT(A), we confirm his order.
6. In the result, appeal of the Revenue is dismissed.
Order was pronounced in the open court on the date mentioned on the captioned page.
Author Bio
