Accommodation entry: Reassessment based on mere inquiry in case of 3rd party not justified

Full Text of the ITAT Order is as follows:-

This appeal filed by the assessee arises from the order of the CIT(A)- XI, New Delhi vide order dated 21/07/2014 for A.Y 2005-06.2. The assessee has raised various grounds of appeal. However, at the very outset, the ld. AR for the assessee pressed only the legal ground regarding reopening of the assessment and submitted that the proceedings u/s 147/148 of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’] have been initiated on third party opinion and without application of mind of the AO. The ld. AR relied on various decisions including the decision of the ITAT Delhi ‘D’ Bench in ITA No. 4033/DEL/2010 in the case of ACIT Vs. M/s Joneja Bright Steels Pvt. Ltd vide order dated 12.05.2017 for A.Y 2004-05 and ITA Nos. 5750 & 5751/DEL/2016 in the case of Basesar Properties Pvt Ltd Vs. ITO for A.Ys 2007-08 & 2008-09 order dated 18.08.2017.

3. Per contra, the ld. DR relied on the orders of the authorities below.

4. We have heard the rival submissions and have carefully perused the relevant material on record. There is no dispute to the fact that the department conducted inquiry in the case of third party where the name of the assessee was also written to have received accommodation entry and accordingly, the AO reached to a conclusion while recording reasons that the income of the assessee has escaped assessment and it is a fit case for initiation of proceedings u/s 148 of the Act and the case was selected for scrutiny and assessment was made by making necessary additions.

5. The CIT(A) confirmed the action of the AO.

6. After considering the rival submissions, we find that the present case in hand is squarely covered in favour of the assessee by the decision of the ITAT Delhi ‘D’ Bench in ITA 4033/DEL/2010 in the case of ACIT Vs. M/s Joneja Bright Steels Pvt. Ltd [supra]. The relevant operative part of the said order is reproduced herein below for ready reference:

“3. At the outset, learned counsel for the assessee, Dr. Rakesh Gupta, Advocate argued that the reasons recorded where the Assessing Officer has proceeded to reopen the assessment u/s. 147 on the basis of information received in the form of CD from the Additional Commissioner of Income Tax, Range-II, Faridabad where the assessee has been allotted as beneficiary of obtaining accommodation entries which pertained to the jurisdiction of the present Assessing Officer in the instant case and the Assessing Officer assumed that it is an unaccounted money of the assessee- company which were introduced as capital without paying any tax. The information with regard to such transactions are the part of the reasons recorded which in fact has involved duplicacy and with no application of mind where same instrument of the bank has been repeated twice as is evident from the reasons so recorded. In the circumstances and facts of the case in the absence of independent application of mind, the Assessing Officer does not acquire any jurisdiction to make the reassessment u/s. 147 of the Act. He relied upon the decision of various courts of law in this regard.

4. Learned DR on the other hand relied upon the decision of both the authorities below.

5. We have heard the rival contentions and perused the facts of the case. It is pertinent to reproduce the reasons recorded by the Assessing Officer which are as under:

“Reasons

A CD containing information in respect of accommodation entries received from Addl. Commissioner of Income-Tax, Range-II, Faridabad vide his letter No.JCIT/R-II/FBD/07- 08/774/394 dated 12.06.2007 and 1419 dated 22.02.2008. The CD also contained brief note on accommodation entries prepared by Sanjay Sharma and Vishesh Prakash, Income Tax Officers of Unit-V, New Delhi. The CD was opened and name of the assessee as beneficiary of obtaining accommodation entries was found which pertained to the jurisdiction of the undersigned as assessing officer in the instant case. The report in the case of the assessee is in the following format:-

the above information as per above report relates to ASSESSMENT YEAR 2004-05 in the status of company. the information reveals that the assessee was the beneficiary of the accommodation entries amounting to Rs. 1,05,00,000/- which was actually own unaccounted money of the company introduced as capital without paying any tax by way of approaching the entry operator concerns, who after receiving the cash equal to entry amount from the assessee, got prepared BANK INSTRUMENTS on the dates mentioned above (relevant for A. Y. 2004-05) in favour of assessee. This amount was duly credited to the assessee’s account with OBC Faridabad.

The report provides information of a big racket of money laundering activities of many assessee including the instant assessee under subject. I have reason to believe that income chargeable to tax of Rs. 1,05,00,000/- mentioned above has escaped assessment for ASSESSMENT YEAR 2004- 05 within the meaning of sec. 147 of the IT Act, 1961. I issue notice u/s. 148 on A. Y.2004-05 to assess income of Rs. 1,05,00,000/- and also any other income chargeable to tax which has escaped assessment and which comes to my notice subsequently in the course of the proceedings under section 147 subject to the provisions of section 148 to 153 of the IT Act, 1961.”

5.1 From the reasons so recorded, it is evident that Assessing Officer has proceeded to reopen the assessment u/s. 147 of the Act on the basis of information received from DIT(Investigation) and no independent application of mind has been framed in this regard, therefore, the AO does not acquire any jurisdiction to make the assessment / re-assessment u/s. 147/148 of the Act. The reliance is placed upon the decision of Hon’ble Delhi High Court in the case of Signature Hotels P. Ltd. vs. Income Tax Officer and Another, reported in (2011) 338 ITR 51 (Delhi). The relevant portion of the decision is reproduced herein under:

“Held, allowing the petition, that the reassessment proceedings were initiated on the basis of information received from the Director of Income Tax (Investigation) that the petitioner had introduced money amounting to Rs.5 lakhs during financial year 2002-03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, had a paid up capital of Rs. 90 lakhs and was incorporated in September, 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to be quashed.”

5.2 Reliance is also placed upon the decision of Hon’ble Delhi High Court in the case of Sarthak Securities Co. P. Ltd. Vs. ITO, reported in (2010) 329 ITR 110 (Del).

5.3 Further reliance is placed upon the decision of Hon’ble High Court of Delhi in the case of PCIT vs. G &G Pharma Ltd. in ITA No.545/2015 dated 8.10.2015 and also upon the decision of ITAT Chandigarh Bench in ITA no.849/CHD/2011 dated 05.01.2017. The relevant portion of the decision of the ITAT Chandigarh Bench (supra) is reproduced herein below:

“10.We have considered the rival submissions. It is well settled law that validity of re-assessment proceedings to be determined with reference to reasons recorded uls 148 of the LT. Act. Copy of the reasons as supplied by the Ld. DR dated 25.3.2010 are reproduced as under:-

“Name of the Assessee: Mis J.M. D. Astrological Consultancy Services (P)Ltd PAN No. : AABCJ 4419N Address: House No. 1456, Sector 4, Panchkula Assessment Year : 2008-09 The Information was received from Addl. DIT, UNIT-IV, New Delhi vide his office letter No. Addl, Dl’I'(Invl/Unit-

IV/Beneficiaries/2008-0917, dated 06-04-2009 in which it was mentioned that: A search u/ s 132 of the IT, Act, 1961 was conducted at the office premises of Shri Tarun Goyal, CA at 13/34, WEA, Arya Samaj Road, Karol Bagh, New Delhi by the Investigation Wing on 15-09-2008. During the course of search and later inquiries it was established that Sh. Tarun Goyal had floated nearly 90 Private Limited companies and firms for providing accommodation entries. The directors of these companies were his employees who worked in his office as peons, receptionists etc. All the documents were got signed from these employees. A number of Bank Accounts in various banks were opened in the names of these companies and his employees in which huge cash deposits were made. Later cheques were issued to various beneficiaries, disguising the whole transaction as genuine. Thus the network of companies run by Sh. Tarun Goyal are not carrying out any genuine activity and are in fact Sham companies. This is more apparent from activity fact that: a. All the companies are operating from the office of Sh. Tarun Goyal addressed at 13 /34, WEA, Arya Samaj Road, Karol Bagh, New Delhi and at his former office viz 203, Dhaka Chambers, 2069/3 9, Naiwala, Karol Bagh, New Delhi. b. The directors of the company are none but former and present employees of Sh. Tarun Goyal. Sh. Tarun Goyal has been using them for merely signing all the documents, bank cheques and also for transporting and exchanging cash and cheques in order to provide accommodation entries. c. At the time of serch on 15/9/2008 Tarun Goyal was recorded on oath. As per his statement, he has accepted that he provides accommodation entries and his various companies are used for this purpose. Sh. Tarun Goyal has also described the modus operandi for providing accommodation entries.

d. At the time of search on 15/9/2008, the statement on oath of the employees present at the premises of Sh. Tarun Goyal were recorded. These include Sh. Pramod Kunar, his peon; Sh. Harpreet Singh, Accountant. In their statements they stated that they were mere employees of Tarun Goyal and they were signing various documents related to many companies at his behest, as and when asked by Sh. Tarwi Goyal.

e. Later, more employees were traced namely, Ms. Usha and Ms. Ritu Saxena, former receptionists. In their statements recorded on oath, they have started that various bank accounts were opened in their names by Sh, Tarun Goyal, who himself operated these accounts and deposited cash in them. As such, they could not refuse the same as they were mere employees. All the passbooks, cheque- books, various important documents were in his total control. The statements of the auditors of various companies of Sh. Tarun Goyal were recorded on oath after summons were issued to them. The auditors of various companies run by Sh. Tarun Goyal have confirmed that they had no knowledge about the directors of the companies and all the audits were done at the instructions of Sh. Tarun Goyal. One of the auditors has stated that proper records for transactions and contracts of shares, held as investment or purchased or sold could never be verified. In most cases, share certificates, shares allotment advises and/or other related documents were not available for the auditor’s verification and it could not be verified/ ascertained whether the shares were actually allotted to the company and whether they were held in the name of the company.

g. During the course of search, it was revealed that all the passbooks, cheque books, PAN cards etc. were always in possession of Sh, Tarun Goyal. h. All the bank account opening forms are the handwriting of Sh. Tarun Goyal, and thus Sh. Tarun Goyal controlled and managed these companies as also operated all the bank accounts.

i All the books of accounts of all the companies have been retrieved from the computers/laptop of Sh. Tarun Goyalj. Sh. Tarun Soyal has given letters for the release of bank accounts of companies put under restraint after search. No such application was received from the so called directors of the companies.

k. Sh. Tarun Goyal appears in all the scrutiny assessments as well as appeals of his companies himself before various income tax authorities. From verification carried out in respective wards/circles where the above mentioned companies are assessed, it is evident that Sh. Tarun Goyal is appearing in all the income tax proceedings on behalf of all the companies. He is also not charging any fees for appearing in these cases A detailed list of the beneficiaries of accommodation entries has been prepared by the concerned ADIT (Inv.) for the assessment years 2004-05, 2005-06, 2007- 08,2008-09 and 2009- 10. This list was forwarded by the Addl.DIT (Inv.), New Delhi Unit IV along with the letter No.7 dated 06-04-2009. On perusal of this list it is seen that a company in the name and style of JMD Astrological Consultancy Service (P) Ltd. has received an accommodation entry of Rs. 21,00,000/- from three bogus companies run by Sh. Tarun Goyal. The PAN of the company is AABCJ4419N and the details of the registered office of the company was obtained from the website of Registrar of Company and following details were obtained:

1. Date of incorporation is 07-07-2004

2. The Registered office address is H. No, 1456 Sector-a, Panchkula, On perusal of records of this office, it is seen that the assessee has not filed their returns of income for any of the assessment years since the date of Therefore, it is evident that the assessee is non-filer and as such the income has escaped assessment within the meaning of explanation (ii) (a) of section 147 of the Income tax Act.

Moreover, in the light of above mentioned facts, it is clear that the assessee has taken accommodation entries of Rs .. 21.00 lacs in the assessment year 2008- 09. In the light of the above .recorded reasons. I have reason to believe that income of more than RS.2 1.00 lacs has escaped assessment for the A. Y. 2008-09 in the case of the assessee.”

11. The Ld. DR relied upon copy of the letter of the Addl. DIT (Inv.) New Delhi dated 6/8 April, 2009 addressed to CIT-I Panchkula Haryana intimating that search u/s 132 was conducted in the case of Shri Tarun Goel, Chartered Accountant on 15.9.2008. He was examined by the Investigation party on the same day and his statement was recorded, copy of which is also placed on record by the Ld. DR in which he has accepted that he has provided accommodation entries to various companies by creating number of private limited companies and firms. All his employees were involved in the same to provide bogus accommodation entries. The list of beneficiaries companies were attached with this letter and request was made to CIT -I Panchkula to transmit the same information to the respective Assessing officer of his charge so that further invigilation may be carried out by them and necessary action may be initiated against these beneficiaries. In the list / annexure of this letter for assessment year 2008-09, name of the assessee has been mentioned. Copy of the statement of Shri Tarun Goel is placed on record. However, in his statement there is no mention of name of the assessee company to whom he has allegedly provided any bogus accommodation entry. How the Additional DIT (Inv), New Delhi prepared the list of beneficiaries naming the assessee therein is not established. No basis is discussed as to how the list / annexure to the letter of ADIT (Inv.) was prepared. It is virtually a direction issued in the letter of Addl. DIT (Inv.) New Delhi to the Assessing officer to make further investigations so as to initiate action against the beneficiaries. The Assessing officer merely copied letter dated 6/8 April, 2009 in the reasons recorded u/s 148 of the LT. Act and on mere perusal of list of beneficiaries, recorded the reasons for reopening of the assessment u/s 148 of the Act against the assessee without conducting any inquiry or recording of satisfaction.

12. The information in list of beneficiary did not indicate escapement of any income. The Assessing officer did not examine and conduct any inquiry on this information provided by ADIT (Inv.) and did not verify the correctness of the same but accepted the information in mechanical The Assessing officer reproduced the same information in the reasons even without satisfying himself about the correctness or otherwise of the report and issued notice xx] s 148 was for escapement of income. There is no reference to any document except list of beneficiaries which could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The letters dated 6/8th April, 2009 may not pointer to escapement of any income particularly when in the statement of Shri Tarun Goel recorded by Investigating Wing and letter of ADIT (Inv.), New Delhi did not name the assessee for receiving any bogus accommodation entry.

13. The Assessing officer formed his belief that income chargeable to tax had escaped assessment because assessee did not file return of income. It is, therefore, apparent that fact of non-filling of return of income for assessment year under appeal had prompted the Assessing officer for arriving at the conclusion about escapement of income. However, the material on record showed that the assessee filed original return of income for assessment year under appeal in October 2008, copy of acknowledgement is filed at page 1 of the paper book and is also not disputed by the Ld. DR. The Assessing officer, therefore, recorded incorrect, irrelevant and non- existing reasons u/s 148 of the LT. Act. The reasons, therefore, are vitiated and liable to be quashed as would not showed even prima facie case that the Assessing officer has any reason to believe that income escaped assessment. It is not discernable as to whether Assessing officer has applied his mind to the report of the DIT (Inv.) New Delhi which is sole basis of recording of reasons for reopening of the assessment and independently arrived at a belief that income has escaped assessment, therefore, Assessing officer did not get jurisdiction to make re-assessment. There is, thus, no material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The re-assessment proceeding were invalid and are liable to be quashed.

13.1 The Hon’ble Delhi High Court in the case of CIT Vs. Atul Jan & Smt. Vaniti Jain [2008] 299 ITR 383(Delhi) held as under.–

“Held, dismissing the appeals, that the only information was that the assessee had taken a bogus entry of capital gains by paying cash along with some premium for taking a cheque for that amount. The information did not indicate the source of the capital gains which in this case were shares. There was no information which shares had been transferred and with whom the transaction had taken place. The Assessing Officer did not verify the correctness of the information received by him but merely accepted the truth of the vague information in a mechanical manner. The Assessing Officer had not even recorded his satisfaction about the correctness or otherwise of the information for issuing a notice under section 148. What had been recorded by the Assessing Officer as his “reasons to believe” was nothing more than a report given by him to the Commissioner. The submission of the report was not the same as recording of reasons to believe for issuing a notice. The Assessing Officer had clearly substituted form for substance and therefore the action of the Assessing Officer was not sustainable.”

13.2 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Smt. Paramjit Kaur [2009] 311 ITR 38(P&H) held as under:-

“Held, that the Assessing Officer had not examined 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 it was based on belief that the income chargeable to tax had escaped income. The Assessing Officer had to act on the basis of “reasons to believe” and not on “reasons to suspect”. The Tribunal 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 of the Act for reassessment proceedings was not valid.”

13.3 The Hon’ble Delhi High Court in the case of CIT Vs. Sfil Stock Broking Limited [20 10] 325 ITR 285 (Delhi) held as under:-

“Held, dismissing the appeal, that the first sentence of the reasons recorded by the Assessing Officer was mere information received from the Deputy Director of Income-tax (Investigation). The second sentence was a direction given by the same Deputy Director of Income-tax (Investigation) to issue a notice under section 148 and the third sentence again comprised a direction given by the Additional Commissioner of Income-tax to initiate proceedings under section 148 in respect of cases pertaining to the relevant ward. The Assessing Officer referred to the information and the two directions as reasons on the basis of which he was proceeding to issue notice under section 148 . These could not be the reasons for proceeding under section 147/148 of the Act. As the first part was only an information and the second and the third parts of the reasons were mere directions, it was not at all discernible as to whether the Assessing Officer had applied his mind to the information and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment. There was no substantial question of law for consideration.

13.4 The Hon’ble Delhi High Court in the case of Sarthak Securities Co. P. Ltd. [20 10] 329 ITR 110 (Delhi) held as under:-

“Held, allowing the petition, that the formation of belief was a condition precedent as regards the escapement of the tax pertaining to the assessment year by the Assessing Officer. The Assessing Officer was required to form an opinion before he proceeded to issue a notice. The validity of reasons, which were supposed to sustain the formation of an opinion, was challenge able. The reasons to believe were required to be recorded by the Assessing Officer. Once the ingredients of section 147 were fulfilled, the Assessing Officer was competent in law to initiate the proceedings under section 147. The Assessing Officer was aware of the existence of the four companies with whom the assessee had entered into transaction.

Both the orders showed that the Assessing Officer was made aware of the situation by the investigation wing and there was no mention that these companies were fictitious companies. Neither the reasons in the initial notice nor the communication providing reasons remotely indicated independent application of mind. Though conclusive proof was not germane at this stage the formation of belief must be on the base or foundation or platform of prudence which a reasonable person was required to apply. From the perusal of the reasons recorded and the order of rejection of objections, the names of the companies were available with the authority and their existence was not disputed. The assessee in its objections had stated that the companies had bank accounts and payments were made to the assessee through banking channel. The identity of the companies was not disputed. Under these circumstances, the initiation of proceedings under section 147 and issuance of notice under section 148 of the Act were to be quashed.”

13.5 The Hon’ble Delhi High Court in the case of Signature Hotels P. Ltd. Vs. ITO and Another [201 1] 338 ITR 51(Delhi) held as under:-

“Held, allowing the petition, that the reassessment proceedings were initiated on the basis of information received from the Director of Income- tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lakhs during financial year 2002 -03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income. Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, had a paid-up capital of Rs. 90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September, 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to be quashed.” 13.6 The Hon’ble Gujarat High Court in the case of Sagar Enterprises v Assistant Commissioner in [2002] 257 ITR 335 (Gujarat) held as under :-

“Held, that it was apparent that the fact of non- filing of the return for the assessment year 1991- 92 had weighed with the respondent for arriving at the satisfaction about the failure on the part of the assessee and escapement of assessment of income. However, the material on record showed that the return had been filed. In such circumstances, it could not be said with certainty as to which fact would have weighed with the officer concerned and once it was shown that an irrelevant fact had been taken into consideration, to what extent the decision was vitiated would be difficult to say. Moreover the Income-tax Officer had stated that the payment which was stated to be undisclosed income relevant for the assessment year 1991-92 could have been made during the financial year 1990-91 relevant to the assessment year 1991-92 and hence, “to cover up that probability, protective addition was made in the assessment year 1992-93″. The first appellate authority decided the appeal for the assessment year 1992-93 on January, 1996, and the reasons had been recorded thereafter on August 18, 1997. The notice of reassessment was not valid and was liable to be quashed.”

13.7 The Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Atlas Cycles Ltd. [1989] 180 ITR 319 (P&H) has held as under:-

“Held, (i) that the Tribunal was right in cancelling the reassessment as both the grounds on which the reassessment notice was issued were not found to exist, and, therefore, the Income-tax Officer did not get jurisdiction to make a reassessment .”

14. Considering the facts and circumstances of the case and in the light of the above discussion and the case laws referred to above, we are of the view that the reopening of the assessment is not valid in this case. We accordingly set aside the orders of the authorities below and quash the proceedings u/s. 148 of the LT. Act.

15. In the result all the additions made in the re-assessment order are deleted. Since we have quashed the reopening of the assessee u/s 148 of the LT. Act, we do not propose to decide the issue on the merit because it is left for academic discussion only.

16. In the result appeal of the assessee is allowed.”

7. Thus under the facts and circumstances of the case and in view of the decision of ITAT in M/s Joneja Bright Steel P. Ltd [supra], we find that the AO does not acquire jurisdiction to initiate proceedings u/s 147/148 of the Act and accordingly, the assessment so made is directed to be Quashed.  Thus the legal ground raised by the assessee is allowed.

8. In the result, the appeal of the assessee is allowed.

The order is pronounced in the open court on 10.11.2017.