Vijay Kumar Agarwal Vs ITO (ITAT Jaipur)
Conclusion: Merely saying that `loan had been advanced’ or `ITR had not been filed’, without disclosing the reasons, which led AO to hold such a belief , did not confer valid jurisdiction on the AO to take action under section 147 and 148.
Held: AO had received an information from ITO, Jaipur that during the course of assessment proceedings in the case of Smt. Pooja for AY 2011-12 it was found that Shri Vijay had given unsecured loan and as per AST System it had been found that Shri Vijay had not filed his return of income for AY 2010-11 and 2011-12, therefore, he had reasons to believe that the income had escaped assessment for the A.Y. 2011-12 within the meaning of Section 147. It was held that the information was received by AO from another AO, however, the said information was neither verified nor subjected to any independent examination by AO of assessee and while recording reasons, there was no transaction specific valid material available with AO to form his belief with regard to escapement of income by assessee. Thus, reopening notice could be issued by AO. on his own satisfaction and not on borrowed satisfaction of another AO/Investigating Agency. Merely saying that `loan had been advanced’ or `ITR had not been filed’, without disclosing the reasons, which led AO to hold such a belief, did not confer valid jurisdiction on the AO to take action u/s 147 and 148. Tribunal held that reopening proceedings initiated by AO were uncalled for and without jurisdiction, therefore, Tribunal quashed the same.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
This is an appeal filed by the assessee against the order of ld.CIT(A), Ajmer dated 27/12/2018 for the A.Y. 2011-12 in the matter of order passed U/s 143(3) read with Section 147 of the Income Tax Act, 1961 (in short, the Act), wherein following grounds have been taken.
“1. The Learned C.I.T. (A) has erred for not considering the issue for validity of issue notice U/s 148 of I.T. Act, 1961, while there was no escapement of income on part of assessee.
The initiation of proceedings was only on behest of I.T.O. Ward 3(2), who has intimated to A.O. for advancement of loan Rs.53,95,000/- given by assessee to Pooja Agarwal, while concern A.O. has accepted said loan in her hands after detailed examination. Hence initiation of proceedings merely on the reason that income to extent of loan given has escaped assessment is not justified.
2. The Learned I.T. (A) has erred in confirming addition of Rs.51,28,143/- made on account of alleged un-explained expenditure in executing contract, while assessee has satisfactory explained nature of work and payments. Hence addition made is not justified.
3. The Learned I.T. (A) has erred in disallowing claim of 80C Rs.10,000/- in spite of evidence available at (APB-20-21).
The assessee has also taken additional ground, which reads as under:
Additional Ground No. 1 B
Ld. Assessing Officer erred in law by making addition on some other grounds, while not making any addition in the assessment order on the primary issue which led to the reopening of assessment.
Ld. AO did not have valid jurisdiction to make addition on some other grounds not forming part of the reasons recorded u/s 148(2), if no addition is made on the primary / basic issue, for which the reopening was initiated.
Additional Ground No. 1C
Ld. Joint CIT, Range-4, Jaipur has merely mentioned –Yes’ at Serial No.
12 in the printed form for seeking his satisfaction u/s 151 on reopening reasons, which signifies non-application of mind on the reasons recorded by Ld. AO, and approval granted in a mechanical manner. In absence of satisfaction, the notice u/s 148 is without valid approval, rendering the whole proceedings invalid and void.
Additional Ground No. 2A
That in the facts and circumstances of the case, the Ld Commissioner of Income Tax (Appeals) is not justified in upholding the addition of the sum of Rs. 5128143/-, being 92% of turnover, as an unexplained expenditure under the Income Tax Act, 1961.”
2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
3. Since the additional grounds raised by the assessee are legal in nature, therefore, these additional grounds 1, 1B and 1C are interrelated and interconnected and relates to challenging the order of the ld. CIT(A) in upholding the validity of reopening of reassessment proceedings as well as issuance of notice U/s 148 of the Act, therefore, we have decided to adjudicate these grounds by the present consolidated order.
4. At the outset, the ld AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and also relied on the written submissions filed before the Bench and the same is reproduced below:
“1.1 REOPENING WAS BASED ON BORROWED SATISFACTION:
1.1.1 The information received (on 14/07/2014) from the another AO of same ranking, was neither verified nor subjected to any independent examination by the Ld. Assessing Officer and he simply `copy-paste’ this information in the reasons recorded u/s 147. While recording the reasons, there was no transaction specific valid material available with the Ld. Assessing Officer to form his belief for escapement. Such an approach of Ld. AO is a clear breach of the settled position of law that re-opening notice has to be issued by the Assessing Officer on his own satisfaction and not on borrowed satisfaction of another AO/ Investigating Authority.
1.1.2 Above submission of appellant, also finds the support from the fact that even at the time of recording reasons and forming a belief, the Assessing Officer was not sure about the nature of escapement, if any. Ld. Assessing Officer has mentioned in the reasons:
“…… In the course of assessment Proceedings in the case of Smt. Pooja Agarwal for AY 2011-12, it was found that Shri Vijay Kumar Agarwal had given total unsecured loan of Rs. 71,45,000/- ( Rs. 17,50,000/- in AY 2010-11 & Rs. 53,95,000/- in AY 2011-12),”,
Whereas, the addition in the assessment order has been made for `Unexplained Expenditure’ in executing contract works met from undisclosed sources of income.
Above sequence of events leading to notice u/s 147, are a clear case of a `Borrowed Satisfaction’, instead of forming own independent satisfaction by the Ld. AO while recording the reasons. Thus, the reopening u/s 147 was solely based on hearsay, surmises & assumptions of Ld. AO.
1.2 `CAUSE–EFFECT’ LINK IN THE MATERIAL AVAILABLE AND REASONS RECORDED IS MISSING
1.2.1 Reasons to believe cannot be reasons to suspect. There must be a direct nexus between the material coming to the notice of the assessing officer and the formation of the belief therefrom for escapement of income.
1.2.2 Threadbare Analysis of the recorded reasons reveals that reasons have two parts to it:
(a) First Part: Ld. AO has reproduced the precise information which he has received from the ITO, Ward 3(2),
i) This information is in the form of details of the amount lent by assessee to Pooja Agarwal.
ii) Reasons further mention “As per AST system, it has been found that Shri Vijay Kumar Agarwal has not filed his return of income”
(b) Coming to the second part of reasons, this tells us what the Assessing Officer did with the information so received. He says:
“Looking to the facts mentioned above, I have reason to believe that the income to the extent of Rs. 53,95,000/- has escaped assessment for the A.Y. within the meaning of section of 147”
Only on the basis of above two facts i.e. a) Giving Loans and b) not filing ITR, Ld. Assessing Officer had jumped to the automatic conclusion that Loans given, per se, to Pooja Agarwal are in the nature of escaped income of assessee.
1.2.3 a) `Giving Loan’ need not necessarily come from the income or escaped income. Sources of the funds may be out of exempt income g. past savings, loans taken, gifts, liquidation of investment or sale of property, inheritance of asset etc.
b) Similarly, `Giving Loan’ cannot compel one to file his ITR Section 139 lays down various cases where ITR filing is mandatory but `Giving Loan’ is not one of them.
Reasons recorded by Ld. AO proceeds on the fallacious assumption that the `Loan to Pooja Agarwal’ constitute undisclosed income, and overlooks the fact that the sources of deposit need not necessarily be income of the assessee.
1.2.4 The ‘reason to believe’ as recorded by Ld. AO are not in fact reasons, but only conclusions, leaving the reader to guess for the material on basis of which the belief of escapement is
There has to be some kind of a cause and effect relationship between reasons recorded and the income escaping assessment. Ld. AO was expected to point out what he found when he went through the information/examination. In other words, what in such information led him to form the belief that income escaped assessment.
The Assessing Officer, being a quasi-judicial authority, is expected to arrive at a subjective satisfaction independently on an objective criteria. Belief may be subjective but reason has to be objective as held by the Hon’ble Court in the case of Ganga Prasad Maheshwari v. CIT (1983)139 ITR 1043: (1981) 21 CTR 83 (All.). The expression ‘reason to believe’ occurring in section 147 does not mean a purely subjective satisfaction on the part of the ITO, the reasons for the belief must have a rational connection or relevant bearing to the formation of the belief [ITO v. Nawab Mir Barkat Ali Khan Bahadur (1974) 97 ITR 239 (SC)].
1.2.4 Heart of the Section 147 is the formation of belief by the Assessing Officer that income has escaped The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. This is the bare minimum mandatory requirement of the first part of Section 147(1) of the Act. Merely saying that `loan has been advanced’ or `ITR has not been filed’, without disclosing the reasons, which led the assessing officer to hold such a belief, does not confer valid jurisdiction on the Assessing Officer to take action u/s 147 and 148 as held in the case of Birla VXL Ltd. v. ACIT (1996) 217 ITR 1 (Guj.)
1.2.5 In ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC), the Hon’ble Supreme Court affirmed the decision of the High Court and held that there was nothing to show in the confession made by a third party related to the loan taken by the assessee much less a loan which was shown to have advanced by that person to the assessee and, therefore, live link or close nexus, which should be there between the material and the belief formed by the Assessing Officer was missing or was too tenuous to provide a legally sound foundation for initiation of assessment proceedings under section 147. If the primary burden u/s 147, lying on AO, remains un-discharged, then the entire proceedings would
3 DISPOSAL OF OBJECTIONS BY LD. AO REVEAL THE MIND OF THE LD. AO:
1.3.1 Objections of the assessee against the notice u/s 148 were as under:
“That assessee has submitted confirmation of Pooja Agarwal to whom loan was given Rs. 5405000/- during the year as well as proof of immediate source of deposit, which was received from Vandana Leasing Pvt Ltd. thru bank account. Thus the source of deposit was explained. Hence amount given to Mrs. Pooja Agarwal was justified, which has no co-relation with the income earned during the year… ”
1.3.2 Ld. AO disposed the objections vide notice u/s 142(1) dated 28/11/2016 (See PB No. 34) as under:
“In this regard it is to communicate you that you have not filed return of income for AY 2011-12 within time allowed u/s 139 of the I. T. Act, 1961 whereas you have taxable income. Therefore, as per explanation 2(a) to Section 147, your case is deemed to be the case where income chargeable to tax has escaped assessment. Further, the loans advanced by you were also not subject to verification”
1.3.3 Analysis of above disposal confirms the view that the reasons were defective as per following discussions:
a) “In this regard it is to communicate you that you have not filed return of income for AY 2011-12 within time allowed u/s 139 of the I. T. Act, 1961 whereas you have taxable income. Therefore, as per explanation 2(a) to Section 147, your case is deemed to be the case where income chargeable to tax has escaped
Ld AO has relied upon Clause 2(a) of the Explanation 1 to the Section 147 which reads as under:
Explanation 2.—For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :—
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax”
Above reveals the hollowness and fallacy of the reasons justifying the reopening. It has no-where been mentioned in the reasons that assessee has total income which has exceeded the maximum amount which is not chargeable to income tax. Therefore, reliance on `Explanation 2(a)’ for deeming the escapement is a post-reopening improvement of reasons by the Ld. AO in the disposal order. Subsequent improvement in the reasons is not permissible.
1.3.4 Second part of the disposal communication mentions:
“Further, the loans advanced by you were also not subject to verification”
Notice under section 148 cannot be issued for verification of information. Of course, it may be desirable, from the point of view of revenue authorities, to examine the matter in detail, but then reassessment proceedings cannot be resorted to only to examine the facts of a case, no matter how desirable that be, unless there is a reason to believe, rather than suspect, that an income has escaped assessment.
If primary burden u/s 148 lying on AO remains un-discharged then entire proceedings shall crumble (refer latin maxim sublato fundamento cadit opus meaning once foundation fails super structure falls). Therefore, Your honors may please hold the entire proceedings without jurisdiction and void.
Additional Ground No. 1B
Ld. Assessing Officer erred in law by making addition on some other grounds, while not making any addition in the assessment order on the primary issue which led to the reopening of assessment.
Ld. AO did not have valid jurisdiction to make addition on some other grounds not forming part of the reasons recorded u/s 148(2), if no addition is made on the primary / basic issue, for which the reopening was initiated.
The reasons recorded at the time of reopening and the additions finally made in the assessment order are as under:
