ITAT Mumbai Quashes Reassessment for Borrowed Satisfaction Based on Investigation Wing Information

Nihita Financial Services Private Limited Vs ITO (ITAT Mumbai)

BORROWED INFORMATION CANNOT BECOME “REASON TO BELIEVE” WITHOUT AO APPLYING HIS OWN MIND—REASSESSMENT U/S 147 QUASHED

The assessee-company filed its return of income declaring a loss of ₹7,09,13,068. Subsequently, the AO received information from the office of the Principal Director of Income Tax (Investigation)-2, Mumbai, alleging that one Shri Satish C. Shah was a leading accommodation-entry provider operating from Ahmedabad.

According to the Investigation Wing, Shri Shah controlled several companies through which accommodation entries in the nature of share capital, share premium, share application money, unsecured loans, long-term capital gains & short-term capital gains were provided.

The information identified the assessee as one of the beneficiaries of such entries. It alleged that the assessee received an aggregate amount of ₹1.30 crore from Sanguine Media Ltd. & Shri Ganesh Spinners Ltd. through four RTGS transactions during FY 2010-11.

Based on this information, the AO recorded reasons, reopened the assessment u/s 147 by issuing notice u/s 148 & ultimately made an addition u/s 68. Curiously, though the information referred to alleged entries of ₹1.30 crore, the reassessment order treated ₹1.38 crore as unexplained cash credit.

The CIT(A) confirmed the addition & dismissed the assessee’s appeal.

Assessee’s Challenge

Before the Tribunal, the assessee challenged the very validity of the reassessment proceedings. It was argued that the recorded reasons merely reproduced the information received from the Investigation Wing. The AO had neither examined the underlying material nor independently verified the assessee’s alleged involvement in the accommodation-entry transactions.

The assessee submitted that there was no live link or rational nexus between any material independently examined by the AO & the belief that income chargeable to tax had escaped assessment. The belief was therefore founded entirely on borrowed satisfaction.

The assessee also pointed out that, through a letter dated 29 February 2016, it had specifically requested the AO to provide a copy of the Investigation Wing’s report & the material relied upon for reopening the assessment. Despite that request, neither the report nor the supporting material was furnished.

Reliance was placed on the Bombay High Court decisions in Shodiman Investments (P) Ltd. & Tata Capital Financial Services Ltd.

The Department contended that the Investigation Wing’s information was specific & credible. It contained the names of the entry-providing entities, transaction amounts, dates & mode of payment. According to the Department, this material was sufficient to reopen the assessment.

ITAT’s Findings

The Tribunal examined the reasons recorded by the AO. The reasons stated that information had been received from the Investigation Wing identifying Shri Satish C. Shah as an entry provider & the assessee as a beneficiary of accommodation entries amounting to ₹1.30 crore. A table containing the names of the two companies, transaction dates, amounts & RTGS as the mode of payment was reproduced.

However, beyond reproducing these particulars, the reasons contained no independent analysis by the AO. They did not disclose whether the AO examined the assessee’s return, books of account, bank statements or financial records before concluding that the transactions represented escaped income.

The Tribunal observed that the AO had merely referred to information “said to have been received” from the Investigation Wing. He did not examine the material forming the basis of that information or explain how the assessee had been identified as a beneficiary. The reasons consequently lacked a discernible nexus between material personally examined by the AO & the belief formed by him.

The absence of application of mind became more apparent from a significant factual discrepancy. The person identified in the recorded reasons as the alleged entry operator was Shri Satish C. Shah, whereas the assessment order described that very person as Shri Shirish C. Shah. When the entire foundation of reopening rested upon the alleged activities of this person, the AO’s failure to record even his name correctly & consistently showed that the information had not been independently scrutinised.

Following Shodiman Investments (P) Ltd., the Tribunal held that the statutory “reason to believe” must be that of the AO himself. Information received from an Investigation Wing may provide a starting point, but the AO must independently examine it, connect it with the assessee’s case & record his own satisfaction. Information may trigger an inquiry; it cannot automatically substitute the AO’s jurisdictional belief.

The Tribunal also referred to Tata Capital Financial Services Ltd., which held that where recorded reasons refer to another document, report or letter, such material must be supplied to the assessee so that effective objections can be filed. In the present case, the Investigation Wing’s report & supporting material were not furnished despite the assessee’s specific request.

Decision

The Tribunal held that the reopening was founded upon borrowed satisfaction, unsupported by independent verification or application of mind. These defects went to the root of the AO’s jurisdiction u/s 147.

The reassessment proceedings were accordingly declared bad in law & quashed. Consequently, the addition u/s 68 became academic & was not adjudicated on merits. The assessee’s appeal was allowed.

Key Takeaway

An Investigation Wing report is merely information—not the AO’s “reason to believe.” Unless the AO independently examines the material, establishes the assessee’s specific connection & supplies the relied-upon documents when requested, reopening u/s 147 cannot survive. Borrowed intelligence cannot confer borrowed jurisdiction.

Cases Discussed

• Shodiman Investments (P) Ltd. — Bombay High Court, 422 ITR 337 (Bom.)
• Tata Capital Financial Services Limited — Bombay High Court, 443 ITR 127 (Bom.)

FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, MUMBAI

1. This appeal has been filed by the assessee against the order passed by the learned Commissioner of Income Tax (Appeals), confirming the addition made by the Assessing Officer under section 68 of the Income Tax Act, 1961 for the assessment year 2011 12, arising out of proceedings reopened under section 147 of the Act.

2. The brief facts of the case are that the assessee filed its return of income on 29.09.2011 declaring a total loss of Rs. 7,09,13,068/-. Subsequently, on the basis of information received from the office of the Principal Director of Income Tax (Investigation) 2, Mumbai, the Assessing Officer formed a belief that income chargeable to tax had escaped assessment within the meaning of section 147 of the Act, and accordingly issued notice under section 148 of the Act. The information received indicated that one Shri Satish C. Shah was one of the leading entry providers operating in Ahmedabad, engaged in providing accommodation entries in the nature of share capital, share premium, share application money, unsecured loans, long term capital gains and short term capital gains, among others. On perusal of the data forwarded by the Investigation Wing, it was noticed that the assessee, M/s Nihita Financial Services Pvt. Ltd., was one of the beneficiaries of such accommodation entries, having received amounts through companies stated to be controlled by the said entry operator, namely Sanguine Media Ltd. and Shri Ganesh Spinners Ltd., aggregating to Rs. 1,30,00,000/- during the financial year 2010 11, entered through four transactions of Rs. 15,00,000/-, Rs. 15,00,000/-, Rs. 50,00,000/- and Rs. 50,00,000/- respectively, all routed through RTGS.

3. On the strength of the said information, the Assessing Officer recorded reasons and reopened the assessment under section 147 by issue of notice under section 148 of the Act. In the course of reassessment proceedings, the Assessing Officer treated the entire amount, computed at Rs. 1,38,00,000/-, as unexplained cash credit and added the same to the total income of the assessee under section 68 of the Act, holding that the assessee had failed to establish the genuineness of the transaction.

4. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the learned CIT(A). The learned CIT(A), after considering the submissions made by the assessee, confirmed the addition made by the Assessing Officer and dismissed the appeal. The assessee, being aggrieved, has now come up in appeal before this Tribunal.

6. At the outset, the learned counsel for the assessee assailed the validity of the reassessment proceedings. It was submitted that the reasons for reopening the assessment were furnished to the assessee by letter dated 15.01.2016, a copy of which is placed at page 14 of the paper book. It was contended that a bare perusal of the reasons so recorded would show that the Assessing Officer had merely referred to the information received from the Investigation Wing without any independent application of mind, and that there was no live link or direct nexus between the material available with the Assessing Officer and the belief formed by him that income had escaped assessment. It was submitted that the reasons recorded proceed entirely on borrowed satisfaction, without the Assessing Officer having examined or verified the information for himself before forming the requisite belief, and that reopening founded on such reasons cannot be sustained in law.

7. Per contra, the learned Departmental Representative (“ld.DR”) supported the orders of the authorities below and submitted that the information received from the Investigation Wing was specific, credible and corroborated by details of the entities through which the accommodation entries were routed, together with the dates and modes of payment, and that the Assessing Officer had duly applied his mind to the said information before recording reasons and reopening the assessment. It was further submitted that the addition made under section 68 was fully justified, as the assessee had failed to discharge the onus placed upon it to establish the genuineness of the transactions in question, notwithstanding the accommodation entry provider having been independently identified by the Investigation Wing as an entry operator.

8. We have considered the rival submissions and perused the record. In Shodiman Investments (P) Ltd reported in 422 ITR 337 (Bom), the Hon’ble Jurisdictional High Court of Bombay was concerned with a case where the Assessing Officer had issued a reassessment notice solely on the basis of information received from the Investigation Wing that a particular entity had entered into suspicious transactions, without the Assessing Officer himself examining the material or recording any independent satisfaction. The Hon’ble Court held that such a course amounted to a clear breach of the settled position in law, inasmuch as the reason to believe required for reopening an assessment has to be that of the Assessing Officer himself, arrived at on his own satisfaction, and cannot rest on the borrowed satisfaction of the Investigation Wing. The facts of the present case are materially similar, in that the reasons recorded proceed entirely on the strength of information forwarded by the office of the Principal Director of Income Tax (Investigation) 2, Mumbai regarding the alleged entry provider, without anything on record to show that the Assessing Officer examined that information for himself or considered the assessee’s specific involvement before forming the belief that income chargeable to tax had escaped assessment. Reliance was also placed on behalf of the assessee on Tata Capital Financial Services Limited reported in 443 ITR 127 (Bom), to the extent it holds that where the reasons recorded make a reference to any other document, letter or report, such document, letter or report ought to be furnished to the assessee along with the reasons, so as to place the assessee in a position to raise effective objections. It was pointed out that in the present case, despite a specific letter dated 29.02.2016 addressed to the Assessing Officer, available at page No.16 of the paper book, requesting a copy of the Investigation Wing report and the material relied upon in forming the reason to believe, the same was never furnished to the assessee.

9. The reasons recorded by the Assessing Officer, as extracted in the letter dated 15.01.2016 communicating the reasons for reopening, read verbatim as under,

As per Information is received from Pr. Director of Income Tax (Inv.)-2, Mumbai, vide letter No. DIT(Inv.)-2/Information/SCS/2014-15 dated 16.02.2015, it was informed that Shri Satish C Shah (SCS) is one of the leading entry providers operating in Ahmedabad, providing accommodation entries like share capital, share premium, share application money, unsecured loans, long term capital gains and short term capital gains etc. In this respect, the entry wise data of the beneficiaries, was also forwarded and on perusal of that it reveals that assessee M/s Nihita Financial Services Pvt. Ltd. PAN: AACCN6367Q has taken accommodation entries amounting to Rs.1,30,00,000/- during F.Y. 2010-11.

As per the information, the following transactions were entered into as under,

In view of the above facts, I have reason to believe that income chargeable to tax amounting to Rs.1,30,00,000/- has escaped assessment, within the meaning of provision of section 147 of the I.T. Act. Therefore, the assessment is reopened and notice u/s 148 of the I.T. Act. is issued.

10. On a plain reading of the above, it is evident that the Assessing Officer has not imported or reproduced the underlying report of the Investigation Wing, but has merely referred to and relied upon the information said to have been communicated by the Principal Director of Income Tax (Investigation) 2, Mumbai regarding the said entry provider, without examining the material on the basis of which that information was furnished to him, and without recording any independent reasoning of his own as to how the assessee came to be identified as a beneficiary, beyond setting out the bare particulars of the amount, the parties and the dates in the table extracted above. The reasons nowhere disclose that the Assessing Officer verified the said information for himself or applied his mind independently to the material said to be available, before forming the belief that income chargeable to tax had escaped assessment. There is, therefore, no nexus, established by the Assessing Officer through his own reasoning, between any material examined by him and the belief so formed, the reasons resting entirely on a bare reference to information said to have been received, rather than on any examination carried out by the Assessing Officer himself. We also find, and it has been rightly pointed out on behalf of the assessee, that the person referred to in the reasons as the entry provider is described as Shri Satish C. Shah, whereas the very same person is referred to in the assessment order as Shri Shirish C. Shah.

This discrepancy in the name of the person on whose alleged activities the entire edifice of reopening rests further demonstrates the absence of any independent application of mind by the Assessing Officer to the material said to be relied upon by him.

11. Such infirmities go to the root of the jurisdiction assumed by the Assessing Officer under section 147 of the Act. Reason to believe, within the meaning of that section, must be that of the Assessing Officer himself, formed on an independent appraisal of the material available and a discernible nexus between that material and the belief so formed, and not a borrowed satisfaction founded merely on a reference to information received from the Investigation Wing, without the Assessing Officer having examined or verified the underlying material himself. Where the reasons recorded disclose no more than a bare reference to information received, without the Assessing Officer having examined the material underlying that information or the assessee’s specific involvement, without furnishing to the assessee the report or material referred to therein despite a specific request in that regard, and where even the identity of the person said to have provided the accommodation entries has not been recorded correctly and consistently, it cannot be said that the Assessing Officer had, in the eye of law, any reason to believe that income chargeable to tax had escaped assessment. The reassessment proceedings initiated under section 147 of the Act are accordingly held to be bad in law and are quashed.

12. Since we have quashed the reassessment proceedings on the jurisdictional ground itself, the second ground raised by the assessee, pertaining to the merits of the addition made under section 68 of the Act, has become academic and does not require adjudication. We accordingly refrain from expressing any opinion on the merits of the said addition, the same being left open.

13. In the result, the appeal filed by the assessee is allowed. The order of the learned CIT(A) upholding the assessment framed in pursuance of the notice issued under section 148 of the Act is set aside, and the reassessment order itself is quashed for want of valid assumption of jurisdiction under section 147 of the Act. In the result, the appeal of the assessee is allowed.

Order pronounced in the open Court on 08.09.2026.