Reassessment notice invalid if AO not applied his mind & not supplied reasons

R N Khemka Enterprises (P) Ltd. Vs ITO (ITAT Delhi)

Co-ordinate Benches of the Tribunal are taking the consistent view that when there is non-application of mind by the AO to the report of the Investigation Wing, such reassessment proceedings are not in accordance with law and such reopening proceedings have been quashed. Since, in the instant case, the AO has not applied his mind as there is non-identification of the deponents, non-mentioning of middleman if any, absence of details in the form of instrument number through which the cheques/RTGS was accepted by the assessee company, name of the bank from which the accommodation entries were provided, the name of the bank in which the accommodation entries were credited and the date of transaction etc. therefore, we are of the considered opinion that there is complete non- application of mind by the AO to the information received from the Investigation Wing. Therefore, in view of the decision of the Hon’ble Delhi High court in the case of Pr. CIT vs Meenkashi Overseas Pvt. Ltd. (supra), the reassessment proceedings are not in accordance with law.

We further find the Hon’ble Delhi High Court in the case of Sh Rajiv Agarwal vs ACIT, reported in 395 ITR 0255 (Del) has held that even in cases where the AO 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. There is non-application of mind by the AO could not be said to have reason to believe as to justify reopening of assessment.

We further find in the instant case, the assessee in response to notice u/s 148 of the Act vide letter dated 12.04.2018 (Paper book page 77) stated that return of income filed u/s 139 of the Act be treated as return of income filed in response to notice u/s 148 and also requested for supply of the copy of reasons. We find the AO after more than four months vide letter dated 07.08.2018 (Paper book 73), directed the assessee to e-file the return of income which was done on 13.10.2018. We find the AO thereafter issued notice dated 16.10.2018 u/s 143(2)/142(1) of the Act (Paper book 74-76) and supplied reasons recorded on 22.10.2018 (Paper book 45) against which the assessee submitted objection to assumption to jurisdiction on 05.11.2018 and same were disposed of by AO on 09.11.2018. From the above facts, it is evident that the AO assumed jurisdiction to make assessment by issuing notice u/s 143(2) of the Act on 16.10.2018 before supplying reason which means that the AO assumed jurisdiction before allowing assessee to file objection to assumption to jurisdiction.

We find the Hon’ble Delhi High Court in the case of Mastech Technologies Pvt Ltd. vs DCIT reported in 407 ITR 242(Del.) at para 30 of the order has observed as under:-

“30. As regards the non-communication of the reasons as contained in Annexure-A to the proforma on which the approval dated 19th March, 2015 was granted by the Additional CIT, there is again no satisfactory explanation. The fact remains that what was communicated to the Petitioner on 23rd February, 2016 was only one line without any supporting material. There appears to be also no clarity of how the case had to be proceeded with by the Revenue, On one date i.e. 16th February 2016, the AO was issuing notice both under Section 142(1) of the Act as well as notice under Section 143(2) of the Act when on that very date the Petitioner had asked for the reasons for reopening by notice dated 18th January, 2016. Again, it is not clear why the AO did not wait for the process of supplying reasons to the Petitioner, considering the Petitioner’s objections thereto and passing a reasoned order thereon to be completed before issuing the notice under Section 142(1) and 143(2) of the Act. There appears to be non-application of mind.”

In view of the above discussion, we are of the considered opinion that reassessment proceeding initiated by the AO in the instant case and upheld by the learned CIT(A) is not in accordance with law. Therefore, we quash the reassessment proceeding. Since, the assessee succeeds on this legal ground, therefore, the other plank of arguments challenging the validity of reassessment proceeding and the arguments challenging the validity on merit are not being adjudicated.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal filed by the assessee is directed against the order dated 07.08.2019 of the learned CIT(A)-7, New Delhi, relating to Assessment Year 2011-12.

2. Facts of the case, in brief, are that the assessee is engaged in the business of finance and filed its return of income on 12.09.2011, declaring total income of Rs.30,460/-. The return was processed u/s 143(1) of the Act. Subsequently, information was received regarding the search & seizure operation in the case of entry provider Mr. Anand Kumar Jain and Mr. Naresh Kumar Jain (the Jain Brothers) according to which the assessee is a beneficiary of Rs.92,00,110/-. Reasons were recorded for reopening u/s 147 of the Act and a notice u/s 148 of the Income Tax Act, 1961 was issued on 26.03.2018 after obtaining prior approval of the Pr. CIT-7, New Delhi. The notice was duly served on the assessee. In response to the same, the assessee filed a letter stating that the return already filed u/s 139 of the Act may be treated as return filed in response to notice u/s 148 of the Act.

2.1. Subsequently, the AO issued another letter to the assessee requesting him to file the return in response to notice u/s 148 of the Act. Ultimately, the assessee filed his return of income on 13.10.2018 declaring income of Rs.30,460/-. Thereafter, the AO issued notice u/s 143(2) and 142(1) of the Act and the copies of the reasons recorded were also handed over to the assessee. The assessee filed objections in response to notice u/s 142(1) of the Act vide letter dated 05.11.2018 and the AO vice order dated 09.11.2011 disposed off such objection by passing a speaking order.

3. During the course of assessment proceedings, the AO noted that the assessee has received accommodation entries to the tune of Rs.92,00,110/- from the companies controlled by Mr. Anand Kumar Jain and Mr. Naresh Kumar Jain which are as under:-

4. The assessee filed confirmations of unsecured loan from the above parties. From the various details furnished by the assessee, the AO noted that all these companies are owned and controlled by Mr. Anand Kumar Jain and Mr. Naresh Kumar Jain. Therefore, in order to ascertain the genuineness of the transactions, summons u/s 131 of the Act were issued to these parties on 14.12.2018, both at the addresses appearing in ROC as well as mail-ID appearing at the ROC website for personal deposition of the Principal Officer of these companies.

However, no-one appeared on the appointed date and on being confronted by the AO, the assessee also expressed its inability to produce these parties on the ground that they are not in touch with the directors of these companies at present since loans taken from these companies were refunded in the subsequent year. It was also explained that interest has been paid on such loans and TDS has also been deducted from such interest. However, the AO rejecting the various explanation given by the assessee made addition of Rs.92,00,100/- invoking the provisions of section 68 of the Act.

5. The AO further noted that as per the other information received from the Investigation Wing, the assessee has taken accommodation entries of Rs.50 lakhs from M/s. Ashish Capital Services (P) Ltd. on 15.05.2010. This company is controlled by Shri Surender Kumr Jain & Virendra Kumar Jain who are involved in the business of providing accommodation entries. He, therefore, asked the assessee to substantiate the amount of Rs.50 lakhs by proving the identity and creditworthiness of the investor and the genuineness of the transactions. It was explained by the assessee that they have received share capital of Rs.50 lakhs from Aasheesh Capital Services Pvt. Ltd. through banking channel. The assessee filed the copy of audited balance sheet, bank statement, confirmation with ITR as proof of genuineness, etc. It was explained that no accommodation entries from anyone was received by the assessee and the transaction was genuine.

5.1. In order to verify the genuineness of the transactions, the AO issued summons u/s 131 of the Act to M/s Aasheesh Capital Services Pvt. Ltd. on 14.12.2018 for personal deposition of the principal officer. However, nobody appeared on the appointed date nor any request for adjournment was received. On being asked by the AO to produce the parties the assessee expressed its inability to produce them. In view of the above, the AO, invoking the provisions of section 68 of the Act and relying on various decisions including the decision of the Tribunal in the case of Sh. Surender Kumar Jain and Sh. Virendra Jain wherein they are treated as entry operators made addition of Rs.50 lakhs to the total income of the assessee u/s 68 of the Act.

6. The AO has also received information from ADIT(Inv.), Unit-5(4), New Delhi, dated 23.03.2018, that the assessee has availed accommodation entries of Rs.33 lakhs from M/s RKG Finvest Pvt. Ltd.. He, therefore, asked the assessee to prove the identity and creditworthiness of the said parties and the genuineness of the transactions. It was explained that the assessee company had already repaid the above loan amount in the subsequent year and also deducted TDS on interest paid on this loan. Copy of confirmation with ITR and audited balance sheet of the said party was filed before the AO.

6.1. However, the AO was not satisfied with the explanation given by the assessee. Since, the principal officer of M/s RKG Finvest Ltd. did not appear before the AO in response to summons issued by him u/s 131 of the Income Tax Act, 1961 and the assessee also failed to produce the director of M/s RKG Finvest Ltd. for recording of his statement, therefore, the AO, invoking the provisions of section 68 of the Act made addition of Rs.33 Lakhs to the total income of the assessee. Thus, the AO determined the total income of the assessee at Rs.1,75,30,470/- by making addition of Rs.1,75,00,110/- to the returned income of Rs.30,460/-.

7. Before the learned CIT(A), the assessee apart from challenging the addition on merit challenged the validity of reassessment proceedings. It was argued that the provisions of section 153C are applicable to the facts of the present case and not 147. It was also argued that the reassessment proceedings were made without applying independent mind by the AO and the reopening was merely based on the report of the Investigation Wing. It was also argued that the reasons recorded do not contain the name of the so called entry provider, the important details in form of instrument number through which cheques/RTGS were accepted by the assessee company, name of the bank from which the accommodation entries were provided, the name of the bank in which the accommodation entries were credited and the date of transaction etc. The assessee also challenged the validity of reassessment proceedings on the ground that the AO assumed jurisdiction by issuing notice u/s 143(2) of the Act on 16.10.2018 and supplied the reasons after that which means the AO assumed jurisdiction before allowing the assessee to file objections for assumption of jurisdiction. Relying on the decision of the Hon’ble Delhi High Court in the case of Mastech Technologies Pvt. Ltd. vs DCIT vide Writ Petition No.2858/2016, order dated 13.07.2017 wherein, it was held that the issuance of notice u/s 142(1)/143(2) of the Act before supplying the reasons and considering the objection and passing reasoned order thereon does not meet requirement of law, therefore, the reassessment proceedings should be held as invalid. It was argued that the information/report from the Investing Wing is not a gospel truth as held by the AO without applying his independent mind. Further, the approving authorities have approved the reassessment proceedings in a mechanical manner without due application of mind. Relying on various decision, it was submitted that such approval given by the higher authority does not demonstrate the due application of mind and therefore, such reassessment proceedings are invalid.

8. So far as the, merits of the case is concerned, it was submitted that the assessee has filed the requisite details before the AO by filing confirmations, copy of ITR , bank statement of relevant period, audited financial statement, subsequent ledger account of repayment of loan along with bank interest, etc. It was argued that when the assessee has repaid the unsecured loan obtained from these companies in the subsequent assessment years which is prior to the notice issued u/s 148 of the Act and interest has been paid on such unsecured loan and TDS has been deducted, therefore, non-production of the directors of those companies before the AO for recording of their statement should not be held against the assessee for making the addition. Relying on various decisions, it was argued that the addition made by the AO should be deleted.

9. However, the learned CIT(A) was not satisfied with the arguments advanced by the assessee and upheld the validity of reassessment proceedings as well as the addition on merit.

9.1. Aggrieved with such order of the learned CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:-

1. “The impugned assessment is invalid and without jurisdiction as the said assessment is completed without complying with legal requirements of the provisions of section 147/148 of the Income Tax Act therefore such assessment is void ab initio and liable to be quashed.

2. The Ld. CIT(A) on the facts and circumstances of the case has erred in upholding the validity of impugned assessment order passed u/s 143 (3)/147 of the Act on the ground that the AO was not entitled to take cognizance of the material seized from the third party by invoking provisions of sec 147/148 of the Act ignoring the specific provision u/s 153C of the Act dealing with such material.

3. The Ld. CIT(A) has erred both in law and circumstances of the case in upholding the reassessment proceedings initiated u/s 147 of the IT Act ignoring the contention of appellant that the proceedings have been initiated by the AO without application of independent mind on the material, if any, provided by the Inv. Wing of the department. In view of the above defects in the compliances the resultant reassessment proceedings are required to be set aside.

3.1 The validity of reassessment proceedings have been confirmed by Ld CIT(A) on basis of a finding of fact given by the Ld CIT(A) that the information from the investigation wing was specific which contains names of companies, cheques number and date of accommodation entries. The above finding is factually incorrect looking into the reasons recorded and on that ground the reassessment proceedings and the impugned assessment order both need be quashed as the reasons being vague, incoherent and indicative of lack of application of independent mind by the AO.

4. The Ld. CIT(A) has erred both in law and in facts of the case in upholding the impugned reassessment proceedings ignoring the fact that the sanction u/s 151 of IT Act as provided with the copy of the reason recorded shows mechanical satisfaction by the Pr CIT, Delhi-7, New Delhi and the Ld. CIT(A) have held that such mechanical satisfaction are procedural infirmity which does not invalidate the reassessment proceedings.

5. The Ld. CIT(A) has erred both in law and circumstances of the cases in upholding the additions of Rs. 1,25,00,110/-and Rs.50,00,000/- u/s 68 of the IT Act holding the unsecured loan and share capital respectively as unexplained cash credit ignoring the fact that the assessee has discharged its initial onus u/s 68 of the IT Act explaining nature and source of the credits by filing requisite documents proving identity and creditworthiness of the lenders and also to establish genuineness of the transaction during assessment proceedings.

6. The Ld. CIT(A) has erred both in law and circumstances of the cases in upholding action of the AO, in making additions u/s 68 of the IT Act of Rs.1,25,00,110/- and Rs.50,00,000/- are erroneous as the evidences filed by the appellant in support of above cash credits have been rejected by the AO without conducting any enquiry thereon in discharge of onus shifting on the revenue after the initial onus discharged by the appellant.

7. The Ld. CIT(A) has erred both in law and circumstances of the cases in reliance on the material to take view adverse to the appellant without confronting the same and therefore action of the Assessing Officer is in contravention of the principals of natural justice.

8. The appellant craves leave to add, delete, modify/amend the above grounds of appeal with the permission of the Hon’ble appellate authority.”

10. At the time of hearing, the learned counsel for the assessee did not press the ground challenging the applicability of provisions of section 153C of the Act as per ground of appeal no.2, for which the learned DR has no objection. Therefore, the ground of appeal no. 2 is dismissed as not pressed.

11. Ground of appeal no.8 being general in nature and is dismissed.

12. Ground of appeal nos.1, 3, 3.1 and 4 relate to the validity of reassessment proceedings.

13. The learned counsel for the assessee referring to the copy of the reasons recorded which is placed at page 47 to 59 of the paper book (PDF page 48 to 60) submitted that the AO has reproduced therein the information obtained from the Investigation Wing and has straight away reached the stage of formation of belief of escapement of income. He submitted that in the information, there is a general mention of various un-specified seized material such as seized papers/digital evidences and also certain statements of individuals connected to Jain brothers. He submitted that in absence of identity of specific seized material by the AO, the non-application of mind is evident since no person of ordinary intelligence could be in a position to reach to belief of escapement of income u/s 147 of the Act. He submitted that mentioning of statements of unnamed individuals shows non-application of mind qua this evidence as firstly their names are not stated and contents of their statements are not specifically dealt and it is not clear whether the name of the assessee as beneficiary of the accommodation entries was mentioned by any of the individuals examined by the Investigation Wing. Referring to the decision of the Co-ordinate Bench of the Tribunal in the case of M/s Integrated Global Solutions Pvt. Ltd. in ITA No.4993/Del/2012, dated 31.12.2019, he submitted that the Tribunal relying on the decision in the case of Pr. CIT vs Meenakshi Overseas Pvt. Ltd. 395 ITR 677(Del.), has held that reproduction of information without showing how the material referred to therein does not show application of mind by the AO in absence of any specific discussion on the material on the basis of which independent prima facie belief is reached that income has escaped assessment.

14. Referring the decision of the Hon’ble Delhi High Court in the case of Sabh Infrastructure vs ACIT reported in 398 ITR 198 (Del.) , he submitted that it is settled position of law that the reason for reopening must be complete and self explanatory demonstrating the application of mind by the AO of the relevant material in his possession. He also relied on the following decisions:-

i. Pr. CIT vs RMG Polyvinyl (I) Ltd. (2017) 396 ITR 5(Del.)

ii. Pr. CIT vs G & G Pharma India Ltd. 384 ITR 147 (Del.)

iii. CIT vs Independent Media Pvt. Ltd. in ITA No.108/2015(Del.)

iv. Signature Hotels P. Ltd. vs ITO [2011] 338 ITR 0051 (Del.)

v. CIT vs SFIL Stock Broking ltd. 325 ITR 285 (Del.)

vi. Sarthak Securities Co. P. Ltd. vs ITO 329 ITR 110 (Del.)

vii. CIT vs Suprme Polypropolene (P) Ltd. ITA No.266/2011(Del.)

viii. CIT vs Multiplex Trading & Industrial Co. Ltd. 378 ITR 351 (Del.)

ix. Hindustan Lever Ltd. [2004] 137 Taxman 479 (Bom.)

x. CIT vs Greenworld Corporation 314 ITR 81(SC)

15. The learned counsel for the assessee in his next plank of argument submitted that non-identification of nature of alleged accommodation entries, mode of payments and the parties acted as entry provider entities make such recording of reasons insufficient for initiating the proceedings u/s 147 of the Act.

16. Referring to the decision of the Hon’ble Delhi High Court in the case of M/s. Superior Buildwell Private Limited vs Pr. CIT vide ITA No.3301/Del/2017, he submitted that initiation of reassessment proceedings by recording incorrect facts and not mentioning the names of the entities in the reasons recorded are not in accordance with law for which the reassessment proceedings be quashed. He also relied on the decision of the Hon’ble Delhi High Court in the case of Ms/ Shiv Sai Infrastructure P Ltd. vs DCIT vide Writ Petition No.2158/2016, order dated 23.07.2018.

16.1. The learned counsel for the assessee in his another plank of argument submitted that the reassessment proceedings in the instant case is based on borrowed satisfaction based on the conclusion drawn by Investigation 0Wing, on incomplete/unverified information and the purpose of the exercise undertaken by the AO is to verify further facts and tax possible escapement of income. Referring to the decision of the Hon’ble Delhi High Court in the case of Sh. Rajiv Agarwal vs ACIT 395 ITR 255(Del.), he submitted that the Hon’ble Delhi High Court held that even in cases where the AO comes across certain unverified information, it is necessary for him to take further steps, make enquiries 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. It has been held that where there is non-application of mind by the AO, it cannot be said to have reason to believe so as to justify reopening of the assessment. Referring to the decision of the Hon’ble Supreme Court in the case of Indian Oil Corporation vs ITO reported in 159 ITR 956 (SC) and Bhor Industries Ltd. vs ACIT reported in 267 ITR 161 (Bom.) and various other decisions, he submitted that reopening of the assessment for verification of facts and possible escapement on the basis of incomplete material is not in accordance with law.

17. The learned counsel for the assessee submitted that the assessee in response to notice u/s 148 of the Act dated 12.04.2018 had stated that the return of income filed u/s 139 of the Act be treated as return of income filed in response to notice u/s 148 of the Act and also requested for supply of reason. The AO after more than 4 months vide letter dated 07.08.2018, copy of which is placed at page 73 (PDF page 77) of the paper book directed the assessee to e-file the return of income which was done on 13.10.2018 copy of which is placed at page 1A (PDF PB 2) of the paper book. Referring to page 74 to 76 of the paper book, he submitted that the AO issued notice dated 16.10.2018 u/s 143(2)/142(1) and supplied reasons recorded on 22.10.2018 against which the assessee submitted objection to assumption of jurisdiction on 05.11.2018,. The same were disposed of by the AO on 09.11.2018 as per Pages 65 to 72 of the paper book. He accordingly submitted that the AO has assumed jurisdiction to make assessment by issuing notice u/s 143(2) of the Act on 16.10.2018 before supplying reason which means that the AO assumed jurisdiction before allowing assessee to file objections against assumption of jurisdiction. Referring to the decision of the Hon’ble Delhi High Court in the case of Mastech Technologies Ltd. vs DCIT in Writ Petition No.2858/2016, order dated 13.07.2017, he submitted that the Hon’ble Delhi High Court has held that issuance of notice u/s 142(1)/143(2) before supplying the reasons and considering petitioner’s objection and passing reasoned order thereon does not meet requirement of law. Such legal infirmity leads to inevitable invalidation of all the proceedings that took place pursuant to notice u/s 148 of the Act.

18. The learned counsel for the assessee also challenged the validity of reassessment proceedings on account of error in quantification of income escaping assessment and mechanically approved by the Pr. CIT by simply stating “Yes, it is a fit case of issue of notice u/s 148 r.w.s. 147 of the Act, 1961”. Referring to various decisions, he submitted that such error in quantification of income escaping assessment and mechanical approval by the Pr. CIT makes such reassessment a nullity.

19. So far as, the merits of the case is concerned, the learned counsel for the assessee submitted that to prove the identity, creditworthiness of the loan creditors/investor and the genuineness of the transactions, the assessee has filed confirmations from the parties, copies of their income tax return, copies of their bank statement for the relevant period, copies of the audited financial statement of current year, ledger account showing repayment of loan along with bank interest, etc. before the Assessing Officer. Further, the assessee has paid interest on such loans obtained and deducted TDS from such interest and has repaid such loans in the subsequent year and therefore merely because there is non-compliance to summons and non-production of directors, the AO should not have made the addition u/s 68 of the Act. The learned CIT(A) without considering the above has upheld the addition so made which is not correct.

20. So far as the objections of the AO that there are credits of the identical amount in the bank accounts of lenders before the transfer to the assessee company is concerned, he submitted that all the companies in question apart from their primary business were also involved in activities of financing. In the business of financing, such company has to arrange the funds and only then lend the money/make investment and in that process, credit of identical amount in the bank account of such company before lending/investment is something which is a common feature. He submitted that a perusal of the bank statements of the above companies would show that there is no cash deposit in the bank account and the assessee has paid interest to the above lenders on the amount borrowed and also has deducted TDS u/s 194A of the Act. Relying on various decisions as per case law compilation, he submitted that action of the AO and the learned CIT(A) are not in accordance with law.

21. So far as, the addition on account of unexplained share capital is concerned, he submitted that the assessee has filed the confirmations, share application forms, bank statements for the relevant period, copies of ITR filed and copies of audited financial statements of the share applicants, etc. The assessee has discharged the onus cast upon it. Nothing has been brought on record by the AO to substantiate his allegation that these credit entries by way of share capital are accommodation entries. Relying on various decisions, he submitted that merely because the directors were not produced before the AO, the addition cannot be made u/s 68 of the Act. He submitted that the assessee has proved all the three important ingredients of section 68 of the Act by proving the identity and creditworthiness of the investor/share applicants and the genuineness of the transactions. He further submitted that despite request made to the AO, the assessee was not provided the opportunity for cross examine of the persons whose statements were the basis for reopening of the assessment. The learned counsel for the assessee, accordingly submitted that both on merit as well as on the validity of reassessment proceedings, the assessee has a strong case and therefore, the order of the learned CIT(A) be set-aside and the grounds raised by the assessee should be allowed.

22. The learned DR on the other hand, heavily relied on the order of the AO and the learned CIT(A). He submitted that the AO has got specific, tangible and actionable information while recording the reasons for reopening of the assessment. At the time of reopening of assessment, the AO is not required to conclusively prove that income has escaped assessment. Referring to the order of the learned CIT(A), he submitted that the learned CIT(A) has given valid reasons for upholding the reassessment proceedings. So far as the argument of the learned counsel for the assessee that the notice u/s 143(2) was issued prior to supply of reasons recorded and disposal of the objection is concerned, he submitted that no such ground was taken before the AO or the learned CIT(A).

23. So far as the merit of the case is concerned, he submitted that despite many opportunities granted by the AO, the assessee has not produced the principal Officers/directors of the loan creditor companies or the companies who have given loan to the assessee or who have invested in the shares of the assessee company. He submitted that mere submission of certain details before the AO cannot discharge the assessee from the onus cast upon it, especially when the assessee company has taken money from an entry Provider Company. He accordingly, submitted that the order of the learned CIT(A) being a reasoned one be upheld.

24. The learned counsel for the assessee in his rejoinder reiterated the same arguments as made before the learned CIT(A). Referring to page 8 of the order of the learned CIT(A) he drew the attention of the Bench to the specific arguments taken before the learned CIT(A) that assuming jurisdiction by issuing notice u/s 143(2) before allowing the assessee to file objection and subsequent disposal of the same is nothing but non-application of mind. He accordingly submitted that the contention of the learned DR is not factually correct.

25. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the learned CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO on the basis of information received from the Investigation Wing that the assessee is beneficiary of accommodation entries to the tune of Rs. Rs.92,00,110/-evidence of which was found during the course of search and seizure operation in the case of Mr. Anand Kumar Jain and Mr. Naresh Kumar Jain on 17.12.2015 who are known as entry providers, reopened the assessment u/s 147 of the Act after recording the reasons and issued notice 148 of the Act.

26. We find the AO completed the assessment u/s 147 r.w.s. 143(3) of the Act and determined the total income of the assessee at Rs.1,75,30,470/- by making addition of Rs.1,75,00,110/- to the returned income of Rs.30,460/-. We find the learned CIT(A) upheld the action of the AO both on merit as well as on the validity of reassessment proceedings. It is the submission of the learned counsel for the assessee that reopening of the assessment in the instant case is not in accordance with law on account of number of infirmities.

27. Before proceeding further, we deem it proper to reproduce the reasons recorded by the AO for reopening of the assessment which are as under:-

Download Full Text About PDF of F.No. ITO/Ward 20 (3)/2018-19 

28. A perusal of the reasons recorded as reproduced above shows that the AO has reproduced therein the information from the Investigation Wing and has straightway reached the stage of formation of belief of escapement of income. We find in the information, there is general mention to various unspecified seized material such as seized papers, digital evidence and also certain statement of individuals who are connected to Jain Brothers. However, we find there is complete absence of identity of specific seized material by the AO which shows his non-application of mind to the information received from the Investigation Wing. In our opinion, no person of ordinary intelligence could be in a position to reach to belief of escapement of income u/s 147 of the Act, from the reasons recorded by the AO. Mentioning of statements of unnamed individuals shows non-application of mind by the AO since, their names are not stated and contents of their statements are not specifically dealt with and it is not clear as to whether the name of the assessee as beneficiary of the accommodation entries was mentioned by any of the individuals examined by the Investigation Wing. We find force in the argument of the learned counsel for the assessee that non-identification of the deponents proves that the statements of these individuals were not available to the AO at the time of formation of belief while recording of reasons. Either these details were not available with him and even if available the same failed to find any subjective consideration by the AO. Further, although the AO in his reasons recorded has identified various possible modes of accommodation entries such as provision of cheques/RTGS etc for unaccounted cash either through fake purchase and sale, commodity profit/loss, fake commission, one time entry or other modes but failed to identify the particular mode(s) of accommodation entries adopted in the present case. In absence of identification of mode of accommodation entry, the reason recorded in our opinion is incomplete, vague and incoherent and leaves the reader clueless. Besides non-identification of the entities, the AO has also failed to identify middleman, if any, in the deal. The important details in the form of instrument number through which cheques/RTGS was accepted by the assessee company, name of the bank from which the accommodation entry was provided, the name of the bank in which the accommodation entry was credited and the date of the transaction is missing in the reason. The date of transaction in our opinion, is important to verify whether the transaction falls in the year under consideration which is extremely important piece of information to justify independent application of mind.

29. We find during the course of assessment proceedings, the assessee had raised specific objection before the AO regarding the non-mentioning of the entities as per reasons provided who had given accommodation entries. However, a perusal of the said annexure which is reproduced as under does not give such details giving the names of the entities giving the amount of accommodation entries during the year.

30. We find that Hon’ble Delhi High Court in the case of Pr. CIT vs Meenakshi Overseas Pvt. Ltd. reported in 395 ITR 677 (Del.) has quashed the reassessment proceedings on the ground that the reasons recorded by the AO failed to demonstrate link between tangible material and formation of reason to believe that income had escaped assessment. The relevant observations of the Hon’ble Delhi High Court from paras 19 to 38 read as under:-

“19. A perusal of the reasons as recorded by the AO reveals that there are three parts to it. In the first part, the AO 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 AO 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 straightaway records the conclusion that “the abovesaid 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 AO 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 AO 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 AO 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 AO 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 AO 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 AO 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 AO 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 AO for a valid assumption of jurisdiction under Section 147 of the Act to reopen a past assessment.

28.1 In Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra), the reasons for reopening as recorded by the AO in a proforma and placed before the CIT for approval read thus:

“11. Reasons for the belief that income has escaped assessment.- Information is received from the DIT (Inv.-1), New Delhi that the assessee has introduced money amounting to Rs. 5 lakh during the F.Y. 2002-03 relating to A.Y. 2003-04. Details are contained in Annexure. As per information amount received is nothing but accommodation entry and assessee is a beneficiary.”

28.2 The Annexure to the said proforma gave the Name of the Beneficiary, the value of entry taken, the number of the instrument by which entry was taken, the date on which the entry was taken, Name of the account holder of the bank from which the cheque was issued, the account number and so on.

28.3 Analysing the above reasons together with the annexure, the Court observed:

“14. The first sentence of the reasons states that information had been received from Director of Income-Tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lacs during financial year 2002-03 as per the details given in Annexure. The said Annexure, reproduced above, relates to a cheque received by the petitioner on 9th October, 2002 from Swetu Stone PV from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary.

15. The aforesaid reasons do not satisfy the requirements of Section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except Annexure, which has been quoted above. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not a pointer and does not indicate escapement of income. Further, it is apparent that the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. The Assessing Officer accepted the plea on the basis of vague information in a mechanical manner. The Commissioner also acted on the same basis by mechanically giving his approval. 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 arrive at a belief whether or not any income had escaped assessment.”

28.4 The Court in Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra) quashed the proceedings under Section 148 of the Act. The facts in the present case are more or less similar. The present case is therefore covered against the Revenue by the aforementioned decision.

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 AO 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. In the present case, however, the AO has made no effort to set out the portion of the investigation report which contains the information specific to the Assessee. He does not also examine the return already filed to ascertain if the entry has been disclosed therein.

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 8 th 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:

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) to 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 AO 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 AO 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 AO 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.

31. In Commissioner of Income Tax v. G&G Pharma (supra) there was a similar instance of reopening of assessment by the AO based on the information received from the DIT (I). There again the details of the entry provided were set out in the ‘reasons to believe’. However, the Court found that the AO had not made any effort to discuss the material on the basis of which he formed prima facie view that income had escaped assessment. The Court held that the basic requirement of Section 147 of the Act that the AO should apply his mind in order to form reasons to believe that income had escaped assessment had not been fulfilled. Likewise in CIT-4 v. Independent Media P. Limited (supra) the Court in similar circumstances invalidated the initiation of the proceedings to reopen the assessment under Section 147 of the Act.

32. In Oriental Insurance Company Limited v. Commissioner of Income Tax 378 ITR 421 (Del) it was held that “therefore, even if it is assumed that, in fact, the Assessee‟s income has escaped assessment, the AO would have no jurisdiction to assess the same if his reasons to believe were not based on any cogent material. In absence of the jurisdictional pre- condition being met to reopen the assessment, the question of assessing or reassessing income under Section 147 of the Act would not arise.”

33. In Rustagi Engineering Udyog (P) Limited (supra), it was held that “…the impugned notices must also be set aside as the AO had no reason to believe that the income of the Assessee for the relevant assessment years had escaped assessment. Concededly, the AO had no tangible material in regard to any of the transactions pertaining to the relevant assessment years.

Although the AO may have entertained a suspicion that the Assessee‟s income has escaped assessment, such suspicion could not form the basis of initiating proceedings under Section 147 of the Act. A reason to believe – not reason to suspect – is the precondition for exercise of jurisdiction under Section 147 of the Act. “

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 AO 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.”

36. In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a ‘borrowed satisfaction’.

The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.

37. For the aforementioned reasons, the Court is satisfied that in the facts and circumstances of the case, no error has been committed by the ITAT in the impugned order in concluding that the initiation of the proceedings under Section 147/148 of the Act to reopen the assessments for the AYs in question does not satisfy the requirement of law.

38. The question framed is answered in the negative, i.e., in favour of the Assessee and against the Revenue. The appeal is, accordingly, dismissed but with no orders as to costs.”

31. We find, following the above decision, the Co-ordinate Benches of the Tribunal are taking the consistent view that when there is non-application of mind by the AO to the report of the Investigation Wing, such reassessment proceedings are not in accordance with law and such reopening proceedings have been quashed. Since, in the instant case, the AO has not applied his mind as there is non-identification of the deponents, non-mentioning of middleman if any, absence of details in the form of instrument number through which the cheques/RTGS was accepted by the assessee company, name of the bank from which the accommodation entries were provided, the name of the bank in which the accommodation entries were credited and the date of transaction etc. therefore, we are of the considered opinion that there is complete non- application of mind by the AO to the information received from the Investigation Wing. Therefore, in view of the decision of the Hon’ble Delhi High court in the case of Pr. CIT vs Meenkashi Overseas Pvt. Ltd. (supra), the reassessment proceedings are not in accordance with law.

32. We further find the Hon’ble Delhi High Court in the case of Sh Rajiv Agarwal vs ACIT, reported in 395 ITR 0255 (Del) has held that even in cases where the AO 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. There is non-application of mind by the AO could not be said to have reason to believe as to justify reopening of assessment.

33. We further find in the instant case, the assessee in response to notice u/s 148 of the Act vide letter dated 12.04.2018 (Paper book page 77) stated that return of income filed u/s 139 of the Act be treated as return of income filed in response to notice u/s 148 and also requested for supply of the copy of reasons. We find the AO after more than four months vide letter dated 07.08.2018 (Paper book 73), directed the assessee to e-file the return of income which was done on 13.10.2018. We find the AO thereafter issued notice dated 16.10.2018 u/s 143(2)/142(1) of the Act (Paper book 74-76) and supplied reasons recorded on 22.10.2018 (Paper book 45) against which the assessee submitted objection to assumption to jurisdiction on 05.11.2018 and same were disposed of by AO on 09.11.2018. From the above facts, it is evident that the AO assumed jurisdiction to make assessment by issuing notice u/s 143(2) of the Act on 16.10.2018 before supplying reason which means that the AO assumed jurisdiction before allowing assessee to file objection to assumption to jurisdiction.

34. We find the Hon’ble Delhi High Court in the case of Mastech Technologies Pvt Ltd. vs DCIT reported in 407 ITR 242(Del.) at para 30 of the order has observed as under:-

“30. As regards the non-communication of the reasons as contained in Annexure-A to the proforma on which the approval dated 19th March, 2015 was granted by the Additional CIT, there is again no satisfactory explanation. The fact remains that what was communicated to the Petitioner on 23rd February, 2016 was only one line without any supporting material. There appears to be also no clarity of how the case had to be proceeded with by the Revenue, On one date i.e. 16th February 2016, the AO was issuing notice both under Section 142(1) of the Act as well as notice under Section 143(2) of the Act when on that very date the Petitioner had asked for the reasons for reopening by notice dated 18th January, 2016. Again, it is not clear why the AO did not wait for the process of supplying reasons to the Petitioner, considering the Petitioner’s objections thereto and passing a reasoned order thereon to be completed before issuing the notice under Section 142(1) and 143(2) of the Act. There appears to be non-application of mind.”

35. In view of the above discussion, we are of the considered opinion that reassessment proceeding initiated by the AO in the instant case and upheld by the learned CIT(A) is not in accordance with law. Therefore, we quash the reassessment proceeding. Since, the assessee succeeds on this legal ground, therefore, the other plank of arguments challenging the validity of reassessment proceeding and the arguments challenging the validity on merit are not being adjudicated.

36. In the result, the appeal filed by the assessee is allowed.

Order was pronounced in the open court on 12/08/2021.