Fore initiation of Reassessment AO need not conduct inquiry & nor required to verify information, only nexus between Information & Belief required

ITAT DELHI BENCH ‘B’

Income-tax Officer

Versus

Contel Medicare Systems (P.) Ltd.

IT APPEAL NO. 3642 (DELHI) OF 2011
[ASSESSMENT YEAR 2001-02]

OCTOBER  31, 2011

ORDER

K.D. Ranjan, Accountant Member 

This appeal by the Revenue for the assessment year 2001-02 arises out of the order of the learned Commissioner of Income-tax (Appeals)-IV, New Delhi.

2. The ground of appeal raised by the Revenue reads as follows :

“The learned Commissioner of Income-tax (Appeals) has erred on the facts and in law in invalidating notice issued under section 148 of the Income-tax Act ignoring that the case was reopened under section 147 of the Income-tax Act on the basis of information received from the investigation wing. Reliance is placed on the decisions in ITO v. Smt. Gurinder Kaur [2007] 288 ITR (AT) 207 (Delhi) ; Badri Vishal Aggarwal v. Deputy CIT [2007] 14 SOT 42 (Delhi) (URO) ; and Ambica Steels Ltd. v. Deputy CIT [2008] 305 ITR (AT) 149 (Delhi).”

3. The only issue for consideration relates to reopening of assessment under section 147 of the Act. The facts of the case stated in brief are that the assessee filed the return of income on October 29, 2001 admitting taxable income of Rs. 2,65,753. The return of income was processed under section 143(1) of the Act. Subsequently, an information was received from the investigation wing, New Delhi, that certain persons called beneficiaries, have resorted to money-laundering by giving unaccounted cash to persons called entry operators and in turn taking from them cheques/demand drafts in the garb of share application money or sale proceeds of non-existent goods thereby ploughing back their undeclared cash into accounts/ business. The Assessing Officer after recording reasons issued notice under section 147 of the Act on March 27, 2008 to which the assessee did not file return of income. The Assessing Officer issued notice under section 142(1) on July 24, 2008, in response thereto, the assessee filed letter dated August 14, 2008 stating that the assessee had already filed return vide acknowledgement number 319 on October 29, 2001. The assessee was again specifically asked to file the return under section 148. The assessee then vide letter dated November 17, 2008 filed the return of income under section 148 of the Act. The assessee asked the copy of reasons recorded which were provided. The assessee filed certain objections, which were also disposed of by the Assessing Officer as mentioned in the assessment order.

4. During the relevant previous year, the assessee received share application money of Rs. 20,00,000. The Assessing Officer after detailed discussion added the amount of Rs. 20,00,000 as undisclosed income on the ground that the assessee could not discharge its onus to prove the genuineness of transactions and creditworthiness of the share applicants.

5. Before the learned Commissioner of Income-tax (Appeals) the assessee challenged the assessment on issue of notice under section 147 of the Act and also on merits. It was submitted before the learned Commissioner of Income-tax (Appeals) that the Assessing Officer while recording the reasons relating only to three share applicants, which were supplied to the assessee, but copies of documents relied upon by the Assessing Officer was not provided even till completion of assessment. During the course of appellate proceedings, the assessee filed paper book, which was referred to by the learned Commissioner of Income-tax (Appeals) for his comments. After reminders the Assessing Officer took the stand that the case was reopened under section 148 of the Act because there was reason to belief that income had escaped assessment to the tune of Rs. 16,00,000. It was also submitted that from the perusal of reasons recorded by the Assessing Officer it was clear that reference had been made to survey proceedings in the case of one M/s. Gurcharan Jewellers and thereafter he had discussed the modus operandi utilised by the assessee to plough money. It was further stated that the assessee had no connection whatsoever with M/s. Gurcharan Jewellers. The Assessing Officer had blindly relied upon the information received from the investigation wing of the Department without making any independent enquiry regarding information received by him. It was also alleged that the Assessing Officer did not apply his mind independently before reopening the assessment. The learned Commissioner of Income-tax (Appeals) in order to examine the contention of the assessee that the Assessing Officer had not applied his mind independently and proceeded to reopen the assessment on the report of the investigation wing, observed that paragraphs 1 to 3 of reasons recorded were general in nature wherein certain allegations had been mentioned. In paragraph 3 the gist of investigation made by the investigation wing had been summarised. In paragraph 4 it is stated that the assessee had credits in the bank account of Shri Parmanand Garg, Shri Ashok Kumar Singhal and Shri Brahm Dutt. Even though not mentioned, this was an allegation made by the investigation wing in its report, which gave the Assessing Officer the reasons to believe that an amount had escaped assessment. The learned Commissioner of Income-tax (Appeals) after discussing the decisions of the hon’ble Delhi High Court in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317 ; CITv. Atul Jain [2008] 299 ITR 383 (Delhi); and CIT v. Vardhman Estates Ltd. [2007] 165 Taxman 473 (Delhi) has held that the Assessing Officer while reopening assessment did not independently make an enquiry on the veracity of the report filed by the investigation wing, which had been forwarded to him by the office of the learned Commissioner of Income-tax. The statements relied upon by him were general in nature. The return of income, as originally filed by the assessee, if any, has not been perused by the Assessing Officer. Still he has decided to initiate proceedings under section 147 of the Act. The learned Commissioner of Income-tax (Appeals) relied on the decision of the hon’ble Delhi High Court in the case of CIT v. SFIL Stock Broking Ltd. [2010] 325 ITR 285 (Delhi) wherein it has been held that mere information received by the Deputy Director, Income-tax Investigation and directions of the senior officers to initiate proceedings under section 147 cannot constitute valid reasons for initiating reassessment proceedings in the absence of anything to show that the Assessing Officer has independently applied his mind to arrive at a belief that income had escaped assessment. The learned Commissioner of Income-tax (Appeals) relying upon the decision of the hon’ble Delhi High Court has held that reassessment proceedings initiated under section 147 of the Act were bad in law. He accordingly declared the assessment as void.

6. Before us the learned senior Departmental representative submitted that the Assessing Officer on receipt of information from investigation wing has recorded reasons by applying his mind. Specific instances have been given suggesting that the assessee had routed its money in the name of three persons in the garb of share application. Sufficiency of reasons cannot be challenged by the assessee. The Assessing Officer had, therefore, applied his mind while reopening the assessment. On the other hand, the learned authorised representative for the assessee submitted that there is no application of mind while recording the reasons. It is not discernible from the reasons recorded by the Assessing Officer. Therefore, the learned Commissioner of Income-tax (Appeals) is justified in cancelling the reopening of assessment. The learned authorised representative of the assessee relied on the decision of the hon’ble Delhi High Court in the case of Signature Hotels (P.) Ltd. v. ITO [2011] 338 ITR 51 to support his contention.

7. We have heard both parties and gone through the material available on record. The Assessing Officer had recorded detailed reasons on receipt of information from the investigation wing of the Department. It is a fact the Assessing Officer had not conducted any inquiry to verify information received by him before issue of notice under section 148 of the Act. The learned Commissioner of Income-tax (Appeals) has cancelled the assessment on the ground that the Assessing Officer before issue of notice under section 148 had neither conducted inquiry nor verified information with the return of income and hence it was a case of non-application of the mind. In the case of Signature Hotels (P.) Ltd. (supra) the hon’ble Delhi High Court has held that the first sentence of reasons states that information had been received from the Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs. 5,00,000 during the financial year 2002-03 as per details given in the annexure. The last sentence records that as per information, the amount received was nothing but an accommodation entry and the assessee was beneficiary. Under these circumstances the hon’ble Delhi High Court had held that the aforesaid reasons do not satisfy the requirement of section 148 of the Act. The reasons and the information referred to was extremely scanty and vague. There was no reference to any document or statement, except annexure. Annexure could not be regarded as material or evidence that prima facie could show or establish nexus or link with escapement of income. Annexure was not a pointer and did not indicate the escapement of income. Further it was apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The reasons recorded reflect that the Assessing Officer did not independently apply his mind to the information received from the Director of Income-tax (Investigation) and arrived at a belief whether or not any income had escaped assessment. Under these circumstances the hon’ble Delhi High Court quashed the proceedings initiated under section 68 of the Act. We have gone through the decision of the hon’ble Delhi High Court carefully. In this case the reasons recorded by the Assessing Officer for the approval of the learned Commissioner of Income-tax and the approval accorded by the learned Commissioner are reproduced as below (page 56) :

“11. Reasons for the belief that income has escaped assessment. – Information is received from the Director of Income-tax (Investigation-1), New Delhi that the assessee has introduced money amounting to Rs. 5,00,000 during the financial year 2002-03 relating to the assessment year 2003-04. Details are contained in annexure. As per the information amount received is nothing but accommodation entry and the assessee is a beneficiary.”

8. On the basis of the aforesaid reasons, the Commissioner, Income-tax gave approval recording as under :

“Yes, I am satisfied on the reasons recorded by the Assessing Officer for approval and issue of notice under section 148 of the Income-tax Act, 1961.”

9. We may also like to reproduce the annexure received by the Assessing Officer on the basis of which the abovementioned reasons were recorded in the case of Signature Hotels (P.) Ltd. (supra) :

“13. Annexure attached to the said pro forma placed on record of the petitioner reads as under :

10. From the information contained in annexure and reasons recorded by the Assessing Officer as above, the hon’ble Delhi High Court had concluded that there was no live nexus between the reasons recorded and information that income of Rs. 5,00,000 had escaped assessment. Also there was non-application of mind.

11. However, in the case before us the Assessing Officer has recorded the following reasons :

“Reasons for issuing notice under section 148 in the case of M/s. Contel Medicare Systems P. Ltd. for the assessment year 2001-02.

A report on enquiries made by the Directorate of Income-tax (Investigation), New Delhi into accommodation entries given by entry operators has been received. This report was received in the office of the Commissioner of Income-tax, Delhi-1, New Delhi and was subsequently forwarded vide F. No. CIT-1/2005-06/2132 dated March 13, 2006. These enquiries were initiated to probe into some bank account which were used to issue cheques to entry seekers of beneficiaries against cash paid by them to the entry operators. Such a camouflaged transaction came to light during the course of survey in the case of M/s. Gurcharan Jewellers whose proprietor Shri Ashok Kumar Chauhan had admitted to have taken cheques under the garb of gifts after giving cash to the entry operator. Probe was initiated into the accounts which were used to provide these entries. These investigations led to revealing of many more bank accounts which were being used by the entry operators for the purpose of giving accommodation entries.

2. Extensive enquiries were made into numerous such bank accounts, the account holders, the persons operating these accounts and the persons for whom such account holders were working. These enquiries revealed, inter alia, the following :

2.1 Entries were being broadly taken for two purposes :

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.

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

2.2 The assessee who had unaccounted money (called as entry takers or beneficiaries) and wanted to introduce the same in the books of accounts without paying tax, approached another person (called as entry operator) and handed over the cash (plus commission) and had taken cheques/DDs/POs. The cash was being deposited by the entry operator in a bank account either in his own name or in the name of relative/friends or other persons hired by him, for the purpose of opening bank account. In most of these bank accounts the introducer was the main entry operator and the cash deposit slips and other instruments were filled by him. The other persons (in whose name the account is opened) only used to sign the blank cheque book and hand over the same to the main entry operator. The entry operator then used to issue cheques/DDs/POs in the name of the beneficiary from the same account (in which the cash is deposited) or another account in which funds were transferred through clearing in two or more stages. The beneficiary in turn deposited these instruments in his bank accounts and the money came to his regular books of account in the form of gift, share application money, loan, etc. through banking channels.

2.3 The operators gave the account holders amounts ranging from Rs. 1000 to Rs. 2000 per month. These account holders were masons, plumbers, electricians, peons, drivers, etc. whose earnings are not sufficient for a living. They earned normally Rs. 3 to 5 thousand per month in their normal work and by working for the entry operators earned extra income of Rs. 2 to 4 thousand per month. Their signatures were taken on blank gift deeds, cheque books, share application money, etc. In fact, these persons signed all types of papers they were asked to sign. They were made directors of companies, partners of firms and proprietor of different concerns solely for operation of these accounts. Actually, many of them were not even aware of the tax implications, etc. Their only concern was with the few thousand rupees given to them by the entry operators.

3. Summing up, the report as a result of these extensive enquiries carried out by the Director of Income-tax (Investigation), New Delhi has assailed genuineness of transactions, whether shown by beneficiaries as inflow of share capital or receipt of gifts of consideration for sale-purchase. It has also dealt a body blow to the creditworthiness of the person/persons controlling the concerns who have given these credit entries/share capital/gifts/sale consideration as they have been seen to be men of no means.

4. In the instant case of the assessee, M/s. Contel Medicare Systems P. Ltd. the following credits have been shown in the bank account of the assessee-company :

In view of the findings of the investigation report in these cases have been proved to be men/parties of no creditworthiness. The statements on oath and the orders of admission clearly show that these transaction are non genuine. Therefore aforesaid credit entries are squarely hit by section 68 of the Income-tax Act. I, therefore, have reasons to believe that this amount of Rs. 1,60,000 represents income of the assessee chargeable to tax which has escaped assessment for the assessment year 2001-02.”

12. From the perusal of the reasons recorded by the Assessing Officer, it is seen that in paragraph 1 the Assessing Officer has mentioned about the receipt of report from the office of the Commissioner of Income-tax indicating that enquiries were initiated by the Directorate of Income-tax (Investigation) to probe into bank account which were used by entry operators for the purpose issue of cheques to beneficiaries against cash paid by them. In paragraph 2 the Assessing Officer has mentioned the outcome of enquiries conducted by the investigation wing. In paragraph 3 the Assessing Officer has summed up the result of enquiries conducted by investigation wing of the Department indicating the non-genuineness of the share capital or receipt of gifts or consideration for sale/purchase. In paragraph 4, the Assessing Officer has given details of credit entries appearing in the bank account of the assessee coming from the account of three persons. The Assessing Officer on the basis of the report given by the investigation wing has come to the conclusion that the entries were squarely hit by section 68 of the Act. There is no dispute about the fact that the Assessing Officer had not conducted independent enquiries after receipt of information. However, he has analysed the report received from the investigation wing to come to a conclusion that transactions were not genuine. The reasons recorded in the case of the present assessee are exhaustive as against the scanty reasons recorded in the case of Signature Hotels (P.) Ltd. (supra). This is not the case in the present appeal. Therefore, in our considered opinion, the Assessing Officer had applied his mind while recording the reasons for reopening of the assessment under section 147 of the Act. Moreover, the information is specific giving the details of the branch, the name of the account holder and the date of cheque and cheque number. The hon’ble Supreme Court in the case of Phool Chand Bajrang Lal v. ITO [1993] 203 ITR 456 has held as under (headnote) :

“Since the belief is that of the Income-tax Officer, the sufficiency of reasons for forming the belief is not for the court to judge, but it is open to an assessee to establish that there in fact existed no belief or that the belief was not a bona fide one or was based on vague, irrelevant and non-specific information. To that limited extent, the court may look into the conclusion arrived at by the Income-tax Officer and examine whether there was any material available on record from which the requisite belief could be formed by the Income-tax Officer and further whether that material had any rational connection with or a live link for the formation of the requisite belief.

It would be immaterial whether the Income-tax Officer, at the time of making the original assessment, could or could not have found by further enquiry or investigation, whether the transaction was genuine or not if, on the basis of subsequent information, the Income-tax Officer arrives at a conclusion, after satisfying the twin conditions prescribed in section 147(a) that the assessee had not made a full and true disclosure of the material facts at the time of original assessment and therefore, income chargeable to tax had escaped assessment.” (page 477-E-H)

13. From the decision of the hon’ble Supreme Court in the case of Phool Chand Bajrang Lal (supra) it is clear that sufficiency of reasons for forming the belief cannot be judged by the court. From the reasons recorded, the learned authorised representative of the assessee has not pointed out as to why the belief formed by the Assessing Officer was not bona fide or was based on vague, irrelevant and non-specific information. As mentioned above, a specific information was received by the Assessing Officer through the office of the Commissioner of Income-tax that the assessee had received amount of Rs. 1,60,000 from three persons through bank accounts. Under the law, there is no requirement that the Assessing Officer should verify the information before forming the belief that income had in fact escaped assessment and only then he can resort to proceedings under section 148 of the Act. What is to be seen is whether there is nexus with the information and formation of belief by the Assessing Officer while issuing notice under section 148 of the Act. In the case before us, the Assessing Officer had recorded detailed reasons in order to arrive at the conclusion that the provisions of section 68 are applicable and thus resulted in escapement of income. We find that there is nexus between the specific information and reasons recorded by the Assessing Officer. Therefore, in our considered opinion, the Assessing Officer is justified in reopening the assessment. The learned Commissioner of Income-tax (Appeals), therefore, in our considered opinion is wrong in holding that there is no nexus between the information received and the reasons recorded by the Assessing Officer. We, therefore, uphold the reopening of assessment.

14. The learned Commissioner of Income-tax (Appeals) has decided the appeal on assumption of jurisdiction under section 147 of the Act. Since the assessee has challenged the additions on merits, which have not been decided by the learned Commissioner of Income-tax (Appeals) in view of the fact that he had held the assessment void due to lack of jurisdiction. We, therefore, set aside the matter to the file of the Commissioner of Income-tax (Appeals) with the direction to decide the appeal on merits, after affording the assessee a reasonable opportunity of being heard.

15. We order accordingly.

16. In the result, the appeal filed by the Revenue is allowed in terms indicated as above.