Case Law Details
CASE LAWS DETAILS
DECIDED BY: ITAT, DELHI BENCH `D’, NEW DELHI,
IN THE CASE OF: ITO Vs. Lakshya Exim Pvt. Ltd., APPEAL NO: ITA No. 2328/Del/2008, DECIDED ON April 16, 2010
RELEVANT PARAGRAPH
17. Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. It is also well settled that words “reason to believe” used in section 147 of the Act are stronger than the words “is satisfied”. The belief entertained by the AO for the purpose of initiating proceedings u/s. 147 of the Act must not be arbitrary or irrational. It must be reasonable. In other words, it must be based on reasons, which are relevant and material as held by the Hon’ble Supreme Court in the case of Ganga Saran and Sons Pvt. Ltd. vs. ITO (1981) 130 ITR 1. It is also well settled that the Court, of course, cannot investigate into the adequacy or sufficiency of the reasons which have weighed with the AO in coming to the belief, but the Court can certainly examine whether reasons are relevant and have a bearing on the matters in regard to which he is required to entertain a belief before he can issue notice u/s. 147/148 of the Act. If there is no rational or intelligible nexus or link between the reason to believe, so that, on such reasons, no one properly instructed on fact and law could reasonably entertain the belief, the conclusion would be inescapable that the AO could not have reason to believe that any part of the assessee’s income had escaped assessment, and the notice issued by him would be liable to be struck down as invalid.
18. Similarly, in the case of ITO & Others vs. Lakhmani Mewal Das (1976) 103 ITR 437 (SC), the Hon’ble Apex Court of the land has held that the reasons for the formation of the belief contemplated by the section 147 of the Act for reopening of the assessment must have rational connections or relevant bearing on the formation of belief. Rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the AO and the formation of his belief that there has been escapement of the income of the assessee in the particular year. It was further held therein that it is not doubt true that Court cannot go into the sufficiency or adequacy of the material and substitutes its own opinion for that of the AO on the point as to whether action should be initiated for reopening the assessment. At the same time, it is to be borne in mind that it is not any and every material, howsoever, vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. Action u/s. 147 of the Act can not, therefore, be taken for reopening the assessment if the information is wholly vague, indefinite, far-fetched or remote. The reason for formation of the belief must be held in good faith and should not be mere pretence. The existent of the belief can be challenged by the assessee, but not the sufficiency of the reasons for the belief. Thus, the expression “reason to believe” does not mean purely subjective satisfaction on the part of the AO. It is open to Court to examine whether the reasons for the formation of the belief have a rational connection with or relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the AO in starting the proceedings u/s. 147 of the Act in respect of income escaping assessment is open to challenge in Court of law.
19. Similarly, in the case of Raymond Woollen Mills vs. ITO (1999) 236 ITR 34 (SC), the Hon’ble Suprme Court has held that the Court can only consider whether there was a prima facie cause for reopening the assessment, and sufficiency of material cannot be considered at the stage of issuing the notice u/s. 148 of the Act. In determining whether commencement and reassessment proceedings was valid, it has only to be seen whether there was prima facie some material on the basis of which the department could reopen the case, and the sufficiency and correctness of the material is not a thing to be considered at that stage.
20. Applying the decision in the case of Raymond Woollen Mills vs. ITO (supra), and another, and in the case of Selected Dalurband Coal Co. Pvt. Ltd. (1996) 217 ITR 597 (SC), the Hon’ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) has considered the scope and meaning of the words “reason to believe” used in section 147 of the Act, and, thus, held and observed as under:
“Section 147 authorizes and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income has escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. ITO [1991] 191 ITR 662, for initiation of action u/s. 147 (a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceedings is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only issue whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the material would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO vs. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. vs. ITO [1999] 236 ITR 34 (SC)”.
21. In the case of CIT vs. (1) Atul Jain, and (2) Smt. Vinita Jain (supra), the Hon’ble Delhi High Court has reiterated that there must be “reason to believe” warranting the issuance of a notice of reassessment by the AO. If there are no reasons, then the entire foundation for initiating proceedings is bad and the notice initiating proceedings must be quashed. Mere satisfaction of the AO for issuance of a notice is not enough, there must be reasons on record which led him to believe that a notice should be issued. After a foundation based on information is set-up, there must still be some reasons, which warrant the holding of a belief so as to necessitate the issuance of a notice u/s. 148 of the Act. In this case, the Hon’ble Delhi High Court has applied the ratio of the decisions of Hon’ble Supreme Court in the case of Chhugamal Rajpal vs. Chaliha (SP) (1971) 79 ITR 663. In the case of Chhugamal Rajpal vs. Chaliha (supra), the reassessment proceedings were struck down by the Hon’ble Supreme Court on the ground that in the reasons recorded by him, the AO had vaguely referred to certain communications that he had received; he did not mention the facts contained in those communications except that from those communications: “it appears that these persons (alleged creditors) are name lenders and the transactions are bogus”; he did not come to any prima facie conclusion that the referred transactions are not genuine; he appeared to have a vague feeling that the referred transactions may be bogus transactions, and, finally, his conclusions was to the effect that a proper investigation regarding the loans is necessary.
22. In the case of CIT vs. (i) Atul Jain, and (ii) Smt. Smita Jain (supra), the Hon’ble Delhi High Court has also made a reference to the decision of Hon’ble Supreme Court in the case of Ganga Saran Das & Sons vs. ITO (supra), and its own decision in the case of United Electrical Co. Pvt. Ltd. vs. CIT (2002) 258 ITR 317 and in the case of Bawa Abhai Singh vs. Deputy CIT (2002) 253 ITR 53 (Del.), wherein it was observed that “reason to believe” postulates the foundation based on information and a belief based on reasons.
23. The expression “information” must be something more than a mere rumour or gossip or a hunch as so observed by the Division Bench of Delhi High Court in the case of L. R. Gupta vs. Union of India (1992) 194 ITR 32. Of course, this was in the context of section 132 of the Act but as held in United Electrical Co. Ltd. (supra), the logic is equally applicable to a case u/s. 147 of the Act.
24. From the aforesaid decisions, we may note the following proposition to decide the question as to whether the reasons recorded by the AO are sufficient to initiate proceedings u/s. 147 of the Act:
(i) Formation of the required opinion and the belief by the AO is a condition precedent to exercise jurisdiction to initiate proceedings u/s. 147 of the Act. The fulfillment of this condition is not a mere formality, but it is mandatory. The failure to fulfill that condition would vitiate the entire proceedings.
(ii) The reasons for the formation of the required belief must have rational connection with or relevant bearing on the formation of belief. The rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the AO and the formation of the belief that there has been escapement of income of the assessee from the assessment in the particular year.
(iii) It is not any and every material, howsoever, vague and indefinite or distant, remote or far-fetched, which would warrant the formation of the belief relating to the escapement of income of the assessment.
(iv) If there is no rational and intelligible nexus between the reasons and the belief, so that, on such reasons, no one can properly instructed on facts and law could reasonably entertain a belief, the conclusion would be inescapable that the AO could not have reason to believe. In such a case, the notice issued by him would be liable to be struck down as invalid.
25. In other words, it is well settled that “reason to believe” u/s. 147 must be held in good faith and should have rational connection and relevant bearing on the formation of the belief and it should not be extraneous or irrelevant. However, it is also equally true that the sufficiency of the material could not be gone into, but relevancy certainly be gone into.
26. In the present case, the contention of the ld. Sr. Counsel for the assessee is that there exit no direct nexus or live link between the material coming to the notice of the AO and the formation of his belief that there has been escapement of income of the assessee from assessment in the year under consideration. The ld. counsel for the assessee has submitted that there is no rational or intelligible nexus between the reasons and the beliefs entertained by the AO that income of the assessee in the nature of bogus loans/share capital has escaped assessment. He further contended that the material relied upon by the AO are extraneous or irrelevant for entertaining a belief that income has escaped assessment in as much as no loan or share capital has ever been introduced by the assessee in the books of accounts of the year under consideration, and that fact or position would be clear from the assessment order itself where the AO has made the alleged addition on account of sale receipts of cotton knitted fabric sold to M/s. Vivek Leafin Pvt. Ltd, and no addition on account of any bogus loan or share capital has been made.
27. On the other hand, the ld. DR submitted that the reasons recorded by the AO are specifically related to transaction between the assessee and M/s. Vivek Leafin Pvt. Ltd., suggesting that a bogus entry or transaction has been generated by way of availing accommodation entries, and, therefore, on the facts of the present case, it is established that there was a live link or a direct nexus between the material which suggested escapement of income and the information on the basis of which a belief could be entertained that income has escaped assessment. He further contended that at the stage of issuing notice u/s. 148 of the Act, it is not necessary to establish conclusively that income had actually been escaped assessment, and at that stage, sufficiency or the correctness of the material is not a thing to be considered.
28. We have carefully perused the reasons recorded by the AO for entertaining a belief that income had escaped assessment within the meaning of section 147 of the Act. The reasons so recorded by the AO has already been reproduced in para 5 above of this order. On perusal of the reasons recorded by the AO, it is clear that the AO proceeded to initiate proceedings u/s. 147 of the Act, on the following assumptions:
(i)That during the course of investigation and the search and seizure operation against Shri P.K. Ruia and his group companies, it was gathered that a large number of companies were floated and bogus entries were given to number of beneficiaries by charging commission and, in turn, beneficiaries paid cash to obtain the bogus entries of loans.
(ii)One of such beneficiaries, is the present assessee company, and in view of the transactions between the assessee company and M/s. Vivek Leafin Pvt. Ltd., the assessee company has been showing bogus loans/share capital, which resulted in the escapement of the assessee’s income from assessment to that extent.
29. It is, thus, clear that the AO has initiated proceedings u/s. 147 of the Act, after entertaining a belief that income of the assessee, which has been shown as bogus loans/share capital, has escaped assessment to the extent of amount of loans/share capital mentioned in the reasons recorded. In other words, the AO has initiated the proceedings u/s. 147 of the Act on assumptions that the assessee had raised bogus loans/share capital resulting into escapement of assessee’s income. However, on perusal of the assessment order and the basis on which the addition of Rs. 10,52,62,889/ -and Rs. 10,52,629/-has been made, it is seen that the addition has been made on account of receipts of sale of fabrics sold by the assessee to M/s. Vivek Leafin Pvt. Ltd. From the details of the transactions between M/s. Vivek Leafin Pvt. Ltd. and the assessee, it is clear that the assessee company had neither raised any loans nor any share capital, and no addition on account of any bogus loans/share capital allegedly raised by the assessee from M/s. Vivek Leafin Pvt. Ltd., has been even made in the assessment order. It is, thus, beyond any doubt that the nature of the transaction referred to in the information supplied by DCIT, CC – VI, Kolkata, to DCIT, Circle – 4(1), New Delhi, and referred to in the reasons recorded by the AO in entertaining a belief required u/s. 147 of the Act has not been actually looked into and verified but it is found to be non-existent. The information supplied by DCIT, CC – VI, Kolkata, that assessee company has obtained bogus loans/share capital from M/s. Vivek Leafin Pvt. Ltd., a dummy company of Shri P.K. Ruia, is not based on facts found during the search. Thus, the AO’s belief that the income of the assessee company, in the nature of bogus loans/share capital, has escaped assessment to that extent is not based on any relevant material found during the course of the search conducted against Shri P.K. Ruia and his group companies. This, thus, makes it clear that the proceedings u/s. 147 has been initiated by the AO on non-existent ground or fact in as much as there is no material on record to entertain a belief that the assessee had bogus loans/share capital from companies controlled by Shri P.K. Ruia, and thus, there exist no direct nexus or live link between the material found during the course of the search relating to the present assessee and the belief entertained by the AO that the assessee had raised bogus and credits during the year under consideration, which resulted into escapement of income. We find that the AO has entertained a belief merely on the basis of unfounded and non-existent information supplied by DCIT, CC-6, Kolkata, that the assessee had raised bogus loans/share capital from group of companies controlled by Shri Ruia without making any effort to satisfy himself as to whether the information received from the office of the DCIT, CC – 6, Kolkata, that the assessee had raised loans/share capital is based on some relevant material or not. We find that the proceedings u/s. 147 of the Act have been initiated by the AO in a mechanical manner and on vague grounds and without application of mind. We, therefore, hold that the initiation of proceedings made by the AO u/s. 147 of the Act are purely based on mere suspicion and non-existent ground or fact, having no nexus or live link between the nature of the transaction between the assessee and M/s. Vivek Leafin Pvt. Ltd. and the formation of belief by the AO.
30. There is no quarrel in accepting the contention of the DR that sufficiency or correctness of the material is not a thing to be considered at the stage of issuing notice u/s. 148 of the Act, but the department should show some relevant material to form a prima facie belief on the part of the AO that the assessee’s income has escaped assessment for the reasons that the assessee has obtained certain bogus loans/share capital. In the present case as already observed above, no material or basis was available before the AO on the basis which he could prima facie reasonably entertain the belief said that income in the nature of bogus loans/share capital had escaped assessment. As discussed above, the allegation regarding raising a bogus loans/share capital by the assessee is undoubtedly found to be incorrect, and baseless. Therefore, it cannot be said that there are some prima facie material available on record on the basis of which anyone properly instructed on fact and law could reasonably entertained a belief that any part of the income of the assessee has escaped assessment within the meaning of section 147 of the Act. Therefore, the decisions relied upon by the ld. DR gives no assistance to the department rather they support the assessee’s case that the reasons recorded by the AO are irrelevant and have no bearing on the matters in regard to which the AO was required to entertain a belief that income has escaped assessment. We, therefore, hold that the belief entertained by the AO that the assessee has raised bogus loans/share capital and to that extent the assessee’s income has escaped assessment, is arbitrary or unreasonable being based on irrelevant and non-existent material. We further hold that there is no rational or intelligible nexus between reasons and the belief so that, on such reasons, any one can properly instructed on facts and law could reasonably entertain a belief that the assessee had raised bogus loans and share capital and the assessee’s income to that extent has escaped assessment.
31. In support of the view we have taken above, we may rely upon the decision of Hon’ble High Court of Delhi in the case of CIT vs. Rainee Singh (supra), where it was found that very basis for initiating proceedings u/s. 147 was on wrong premise as it was neither factually correct that M/s. Rathi Isapaat Ltd. was loss making company and on the other hand, it was also established that payment was received by M/s. Rathi Ispaat Ltd. for services rendered by it to the assessee, which was shown as income in its return and duly taxed by Income Tax Department. In that case, the AO proceeded to initiate proceedings u/s. 147 of the Act on the assumption that the assessee has diverted her income amounting to Rs. 6.30 crores by way of showing the bogus payment to M/s. Rathi Ispaat Ltd., which was a loss making company, but that assumption of the AO was found to be non-existent and factually incorrect. Similarly, in the case before us, the very basis for initiating proceedings u/s. 147 against the present assessee that the assessee raised bogus loans/share capital from group companies controlled by Shri Pawan Kumar Ruia, is factually incorrect and based on wrong premises and nonexistent material. Therefore, aforesaid decision of Hon’ble Delhi High Court is squarely applies to the present case. Similarly, the decision of Hon’ble Delhi High Court in the case of CIT vs. (1) Atul Jain, and (2) Smt. Vinita Jain (2008) 299 ITR 383 (Del.) also supports the assessee’s case, as in that case the AO entertained a belief that income had escaped assessment only on the basis of information that the assessee had taken a bogus entry of capital gain by putting cash along with some premium for taking a cheque for that amount, but that information did not indicate the source of the capital gains and there was no information which shares has been transferred and with whom the transaction has taken place, and, further, the AO did not verify the correctness of the information received by him but merely accepted the truth of the vague information in mechanical manner. In those circumstances, the action of the AO in initiating proceedings u/s. 147 was found to be not sustainable. Similarly, in the present case, there is no information on record that the assessee has actually taken loans/share capital from the alleged companies. But, on contrary this basis has been found to be incorrect in as much as the amount received by the company M/s. Vivek Leafin Pvt. Ltd. is on account of receipt towards sale of cotton knitted fabrics sold by the assessee to M/s. Vivek Leafin Pvt. Ltd.
32. For the reasons aforesaid, we, therefore, hold that the action of the AO in assuming the power conferred u/s. 147 of the Act is without jurisdiction, and is, thus, liable to be cancelled. Resultantly, the assessment order made by the AO after invoking his jurisdiction u/s. 147 of the Act is cancelled being void, bad in law and without jurisdiction.
