prpri “Borrowed Satisfaction” for “Reason to believe” for reopening “Borrowed Satisfaction” for “Reason to believe” for reopening U/s 148 of I.Tax Act 1961

Kalyan Nath
Additional Commissioner of Income
Tax,Range -13,

More than 25 year of experience as an officer of Income Tax Department in various departments including Investigation, Central, Corporate, TDS and Transfer Pricing charges. Regular visiting faculty of DTRTI, Kolkata and Visiting Sr. DR of ITAT, Kolkata. Received appreciation letters for Contribution in TDS as well as DTRTI, Kolkata. He Was Member of contributors for “Investigation Manual” and TPO manual on “Financial Transactions”

Executive Summary

Many a time reassessment proceedings are quashed or additions made in such proceedings are deleted by the Appellate Authorities much to the dismay of the Assessing Officers. One prime reason for such adverse appellate orders are on the ground of ‘borrowed satisfaction’ in much as the drafting of recorded reason to initiate the proceedings does not bring out satisfaction of the Assessing Officer himself . Rather , the recorded reason shows complete reliance on reports of the Investigation Wing of the Department and the like. This article seeks to analyse where the Assessing Officers go wrong by juxtaposing the cases which have been confirmed by the courts and the cases where the department has failed. The revenue favourable cases of AGR Investment Ltd. v. Additional Commissioner of Income Tax and Highgain Finvest (P) Limited, both of Delhi High Court have been taken up in detail . The article has also contains a list of cases from which the Assessing Officers may derive a few learning points in the matter of recording of proper reasons for proceedings under section 147 of the Income Act,1961. The illustrations and the actionable steps to be taken by the Assessing Officers are expected to guide them and remove the scourge of ‘borrowed satisfaction’ to a great extent.

1.1. The Assessing Officers receive a lot of information on bogus loan/credit /purchase and other useful information from the directorate of investigation as well as from other agencies.

1.2. While taking action on such information the Sec 148 is utilised to reopen the cases. Unfortunately most of the cases are struck down by the Honble ITAT or High Courts for improper drafting of Satisfaction Note (i.e. Reason to Believe) . The Assessing Officers, due to lack of time or knowledge ,simply quote the information received from the third party agency and conclude that “Income has escaped assessment”.

1.3.1. In the case of Principal Commissioner of Income Tax Vs Meenakshi Overseas Pvt Ltd (Delhi High Court) Appeal Number : ITA 692/2016 , the Hon’ble Delhi High court beautifully explained the lacuna of the reason recorded by the Assessing Officers . This order of Hon’ble Delhi high court order is against the department. But Assessing Officers can take guidelines for drafting the foolproof “reason to believe”

1.3.2. In this case the reason recorded is quoted below.

“Reasons for the belief that income has escaped assessment”:

In this case, information has been received from the Director of Income Tax, (Investigation) New Delhi that the Assessee has received amount of Rs. 5,00,000/- as follows:

Beneficiary‟s Name – Meenakshi Overseas P. Ltd.

Beneficiary Bank Name – State Bank of Hyderabad

Beneficiary Bank Branch – Karol Bagh

Value of entre taken – 500,000

Instrument no. by which entry taken – 8628

Date on which entry taken – 31.03.2004

Name of A/c Holder of entry giving account – Shubham

Electronic & Electric

Bank from which entry given – SBH

Branch of entry given bank – KB

A/c No. Entry giving account – 50038

Information so received has been gone through. The above said instruments are in the nature of accommodation entry, which the Assessee has taken after paying unaccounted cash to the accommodation entry given, who is a known entry operator as per the report of the Investigation Wing. In view of these facts, the alleged transaction is not the bonafide one. Therefore, I have reason to believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004- 05 due to failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment so far as this amount is concerned. Therefore, this case is fit for issuing notice under Section 148 of the Income Tax Act, 1961 . In this case the assessment was made under Section 143 (1) not under Section 143 (3) of the IT Act, 1961.

I am therefore, satisfied that the said income, on account of accommodation entry worth Rs. 5,00,000 received by the Assessee has escaped assessment and accordingly after recording the above said reasons as laid down under the provisions of Section 148 (2) of the Income Tax Act, 1961 under Section 148 is being issued.”

1.3.3. The Hon’ble Court observed that

“Perusing the reasons for re-opening of the assessment in the present case, the ITAT came to the conclusion that it was apparent that the Assessing Officer proceeded to send a notice under Section 147/148 of the Act “solely on the basis of information received from the DIT(I).” After writing about information received, the Assessing Officer “jumped to the conclusion that said tabulated instrument are in the nature of accommodation entry.” This was done without further verification, examination or any other exercise. The ITAT also noted that the Assessing Officer “has not mentioned nature of transaction which was effected for alleged accommodation entry and even without mentioning the date of recording of reasons.” Following the decision of this Court in Commissioner of Income Tax v. G&G Pharma (2015) 384 ITR 147 (Del.), the ITAT held that the Assessing Officer had not applied his mind at the time of initiating the proceedings of reassessment under Section 147 of the Act. The ground Nos. 1(a) to 1(d) of the Assessee‟s appeal were, accordingly, allowed.”

1.3.4. Thereafter, hearing the both the parties the Hon’ble court pointed out that ..

“19. A perusal of the reasons as recorded by the Assessing Officer reveals that there are three parts to it. In the first part, the Assessing Officer has reproduced the precise information he has received from the Investigation Wing of the Revenue. This information is in the form of details of the amount of credit received, the payer, the payee, their respective banks, and the cheque number. This information by itself cannot be said to be tangible material.

20. Coming to the second part, this tells us what the Assessing Officer did with the information so received. He says: “The information so received has been gone through.” One would have expected him to point out what he found when he went through the information. In other words, what in such information led him to form the belief that income escaped assessment. But this is absent. He straight away records the conclusion that “the above said instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given (sic giver)”. The Assessing Officer adds that the said accommodation was “a known entry operator” the source being “the report of the Investigation Wing”.

21. The third and last part contains the conclusion drawn by the Assessing Officer that in view of these facts, “the alleged transaction is not the bonafide one. Therefore, I have reason to be believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004-05 due to the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment… ”

22. As rightly pointed out by the ITAT, the ‘reasons to believe’ are not in fact reasons but only conclusions, one after the other. The expression ‘accommodation entry’ is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the Assessee on his paying

“unaccounted cash” is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.

23. Thus, the crucial link between the information made available to the Assessing Officer and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

24. The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the Assessing Officer that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of Section 147 (1) of the Act.

25. At this stage it requires to be noted that since the original assessment was processed under Section 143 (1) of the Act, and not Section 143 (3) of the Act, the proviso to Section 147 will not apply. In other words, even though the reopening in the present case was after the expiry of four years from the end of the relevant AY, it was not necessary for the Assessing Officer to show that there was any failure to disclose fully or truly all material facts necessary for the assessment.

26. The first part of Section 147 (1) of the Act requires the Assessing Officer to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The Assessing Officer being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre-condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment.

27. Each case obviously turns on its own facts and no two cases are identical. However, there have been a large number of cases explaining the legal requirement that requires to be satisfied by the Assessing Officer for a valid assumption of jurisdiction under Section 147 of the Act to reopen a past assessment.”

1.4. It is evident that that the major mistake in writing the ‘reasons to believe’ was that, it was not in fact reasons but only conclusions, one after the other as mentioned by the Hon’ble High Court .The Hon’ble court also observed that the Assessing Officer has made no effort to set out the portion of the investigation report which contains the information specific to the Assessee. Also the Assessing Officer did not examine the return already filed to ascertain if the entry had been disclosed therein. Therefore it is imperative that the Assessing Officer must bring out the connection of investigation report and “reason to believe”.

1.5. Interestingly, the Hon’ble High Court also discussed few cases, where the recording of reason were properly done by the Assessing Officer .

1.5.1. The case of AGR Investment Ltd. v. Additional Commissioner of Income Tax reported in (2011) 336 ITR 146 (Del.) can be cited as the first example. The following extract is relevant:

“29.1 The above decision can be contrasted with the decision in AGR Investment v. Additional Commissioner of Income Tax (supra), where the ‘reasons to believe’ read as under:

“Certain investigations were carried out by the Directorate of Investigation, Jhandewalan, New Delhi in respect of the bogus/accommodation entries provided by certain individuals/companies. The name of the assessee figures as one of the beneficiaries of these alleged bogus transactions given by the Directorate after making the necessary enquiries. In the said information, it has been inter-alia reported as under:

“Entries are broadly taken for two purposes:

1. To plough back unaccounted black money for the purpose of business or for personal needs such as purchase of assets etc., in the form of gifts, share application money, loans etc.

2. To inflate expense in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes.

It has been revealed that the following entries have been received by the assessee: “

29.2 The details of six entries were then set out in the above ‘reasons’. These included name of the beneficiary, the beneficiary’s bank, value of the entry taken, instrument number, date, name of the account in which entry was taken and the account from where the entry was given the details of those banks. The reasons then recorded:

“The transactions involving Rs. 27,00,000/-, mentioned in the manner above, constitutes fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income/income from other sources of the assessee company, which has not been offered to tax by the assessee till its return filed.

On the basis of this new information, I have reason to believe that the income of Rs. 27,00,000/- has escaped assessment as defined by section 147 of the Income Tax Act. Therefore, this is a fit case for the issuance of the notice under section 148.”

29.3 The Court was not inclined to interfere in the above circumstances in exercise of its writ jurisdiction to quash the proceedings. A careful perusal of the above reasons reveals that the Assessing Officer does not merely reproduce the information but takes the effort of revealing what is contained in the investigation report specific to the Assessee. Importantly he notes that the information obtained was ‘fresh’ and had not been offered by the Assessee till its return pursuant to the notice issued to it was filed. This is a crucial factor that went into the formation of the belief.”

1.5.2. The case of Commissioner of Income Tax, New Delhi v. Highgain Finvest (P) Limited (2007) 164 Taxman 142 (Del) .may serve as a second example. The relevant extract is reproduced below:

“30.1 In Commissioner of Income Tax, New Delhi v. Highgain Finvest (P) Limited (2007) 164 Taxman 142 (Del) relied upon by Mr. Chaudhary, the reasons to believe read as under:

“It has been informed by the Additional Director of Income Tax (Investigation), Unit VII, New Delhi vide letter No. 138 dated 8th April 2003 that this company was involved in the giving and taking bogus entries/ transactions during the financial year 1996-97, as per the deposition made before them by Shri Sanjay Rastogi, CA during a survey operation conducted at his office premises by the Investigation Wing. The particulars of some of the transaction of this nature are as under:

Date – 18.11.96

Particulars of cheque – 305002

Debit Amt. Credit Amt – 5,00,000

Through the Bank Account No. CA 4266 of M/s. Mehram Exports Pvt. Ltd. in the PNB, New Rohtak Road, New Delhi.

Note: It is noted that there might be more such entries apart from the above.

The return of income for the assessment year 1997-98 was filed by the Assessee on 4th March 1998 which was accepted under Section 143 (1) at the declared income of Rs. 4,200. In view of these facts, I have reason to believe that the amount of such transactions particularly that of Rs. 5,00,000 (as mentioned above) has escaped the assessment within the meaning of the proviso to Section 147 and clause ( b ) t o the Explanation 2 of this section. Submitted to the Additional CIT, Range -12, New Delhi for approval to issue notice under Section 148 for the assessment year 1997-98, if approved.”

30.2 The Assessing Officer was not merely reproducing the information received from the investigation but took the effort of referring to the deposition made during the survey by the Chartered Accountant that the Assessee company was involved in the giving and taking of bogus entries. The Assessing Officer thus indicated what the tangible material was which enabled him to form the reasons to believe that income has escaped assessment. It was in those circumstances that in the case, the Court came to the conclusion that there was prima facie material for the Assessing Officer to come to the conclusion that the Assessee had not made a full and true disclosure of all the material facts relevant for the assessment.”

1.5.3. At the same time , the Hon’ble High court discussed few other cases where ,the Assessing Officer failed to record the reason to believe as per law . Two such discussions are reproduced below.“34. Recently in Agya Ram v. CIT (supra), it was emphasized that the reasons to believe “should have a link with an objective fact in the form of information or materials on record…” It was further emphasized that “mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments.”“35. In the decision of this Court dated 16th March 2016 in W.P. (C) No. 9659 of 2015 (Rajiv Agarwal v. CIT) it was emphasized that “even in cases where the ASSESSING OFFICER comes across certain unverified information, it is necessary for him to take further steps, make inquiries and garner further material and if such material indicates that income of an Assessee has escaped assessment, form a belief that income of the Assessee has escaped assessment.”

1.5.4. Similarly, in the case of CIT v. Indo Arab Air Services (2016) 130 DTR 78/ 283 CTR 92 (Delhi)(HC) it was held that …

“mere information that huge cash deposits were made in the bank accounts could not give the Assessing Officer prima facie belief that income has escaped assessment. The Assessing Officer is required to form prima facie opinion based on tangible material which provides the nexus or the link having reason to believe that income has escaped assessment. The Assessing Officer was also required to examine whether the cash deposits were disclosed in the return of income to form an opinion that income has escaped assessment.

The power to reopen an assessment is conditional on the formation of a reason to believe that income chargeable to tax has escaped assessment. The power is not akin to a review. The existence of tangible material is necessary to ensure against an arbitrary exercise of power”.

1.5.5. In the case of PCIT v. Paramount Communication P. Ltd. (2017) 392 ITR 444,79 409 1.5.5. (Delhi) (HC), the Hon’ble high court confirmed reopening based on material outside the record . The relevant paragraphs are reproduced:

“8. As far as AY 2004-05 is concerned, this Court is of the opinion that in the reference to the bogus purchase made by the assessee from M/s. Kashish Impex Pvt. Ltd. and the information received for the period 17.09.2002 to 20.05.2005 and the amount of bogus purchase for the period under consideration amounted to Rs. 1.64 crores was entirely based upon the information received from the Directorate of Revenue Intelligence (DRI) Regional Unit at Jaipur. This in turn was based upon information given by the Central Excise Department. While it is true that the court is conscious that the reassessment notice should not have been routinely issued, at the same time, the nature of power is wide enough that when there an escapement of income and the Revenue has information ruling that this escapement is also relatable to suppression of material facts (which could include false claims), the power to reopen concluded assessment can validly be exercised. The consideration which ought to weigh with the Revenue and are considered valid are the existence of tangible material or information – in the light of the judgment in CIT v. Kelvinator of India [2010] 320 ITR 561 (SC).

9. Having regard to the contents of the notice for AY 2003-04, the court is unable to agree with the findings of the ITAT. It constitutes reference to tangible material “outside” the record, i.e. information based upon the investigation of the Commissioner of Central Excise with respect to the purchases made by the assesses. However, as far as the second issue is concerned, the Court is of the opinion that even the rectified order does not address the issues squarely. Thus, arguendo such arguments could be validly raised. At the same time, the court notices that for both AYs 2004-05 and 2005-06, the note discloses the source of the information, i.e. DRI Local Unit at Jaipur, sending information based upon the Commissioner of Central Excise’s investigations. To require the Revenue to disclose further details regarding the nature of documents or contents thereof would be virtually rewriting the conditions in section 147. After all, Section 147 merely authorises the issuance of notice to reopen with conditions. If the Court were to dictate the manner and contents of what is to be written, the statutory conditions would be added as it were. In this context, it needs to be emphasized that the court would interpret the statute as they stand in their own terms, but at the same time being conscious of the rights of the citizens. So viewed, Kelvinator of India (supra) strikes just balance. To add further conditions to the nature of discussion/reasons that the officer authorising the notice would have to discuss in the note or decision would be beyond the purview of the Courts and would not be justified. For the above reasons, this Court is of the opinion that the impugned order – and the consequential order of 05.01.17 cannot be sustained. They are accordingly set aside.”.

1.5.6. It may be noted that SLP against this order was dismissed on 14th July 2017 (84 300(SC)) .

2. The Assessing Officers may further refer to the following cases (in favour of revenue) for better understanding of reopening based on information from outside the record :

Choksi Vachharaj Makanji & Co. V. ACIT (2016) 76 17 (Guj) (HC)

Aravali Infrapower Ltd. v. DCIT (2017) 390 ITR 456 (Delhi) (HC)
Aradhna Estate Pvt. Ltd. v. DCIT (2018) 404 ITR 105 (Guj) (HC)
Rajnish Jain. v. CIT (2018) 402 ITR 12 (All) (HC)
Trans Corporate Advisory Services (P.) Ltd. V ACIT (2017) 77 21 (Mad) (HC)
Jayant Security & Finance Ltd. v. ACIT (2018) 254 Taxman 81 (Guj. ) (HC)
Ankit Agrochem (P. ) Ltd. v. JCIT (2018) 253 Taxman 141 (Raj) (HC)
Virbhadra Singh v. Dy. CIT (2017) 291 CTR 439 (HP) (HC)

3. A thorough analysis of the above case laws and following the standard operating procedure circulated by the CBDT (247/140/2017-A &PC-1 dated 10.01.2018 ) in the matter of reassessment will go a long way in making the reassessment cases sustainable at least on technical grounds.

Source- CBDT Taxalogue Magazine Jul – Oct 19 | Volume 1 | Issue 1

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July 2021