Reassessment not valid if no application of mind by AO: ITAT Pune

Aadhunik Infrastructure Development Pvt. Ltd. Vs DCIT (ITAT Pune)

The Income Tax Appellate Tribunal (ITAT), Pune Bench “A,” has ruled in favor of Aadhunik Infrastructure Development Pvt. Ltd. (formerly Gauri Plasticulture Pvt. Ltd.), setting aside the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, for the Assessment Year 2012-13. The appeal was filed against the order of the CIT(A)/NFAC, Delhi, which upheld the validity of reassessment and sustained an addition of ₹50 lakh under Section 68.

Background of the Case

• The original assessment was completed under Section 143(3) on March 11, 2015, determining the total income at ₹9,18,632.
• The case was reopened based on information from the Kolkata Investigation Wing, which suggested that the assessee had received an unsecured loan of ₹50 lakh from Cambridge Financial Services Pvt. Ltd., allegedly sourced through accommodation entries.
• The reassessment order, passed in 2019, held that the loan was unexplained, resulting in an addition of ₹50 lakh under Section 68.

Tribunal’s Observations

1. Invalid Reopening of Assessment

• • The assessee had disclosed all relevant facts, including details of the loan, during the original assessment.
  • The Assessing Officer (AO) had already obtained information under Section 133(6) from the lender, Cambridge Financial Services Pvt. Ltd.
  • There was no failure on the part of the assessee to disclose material facts fully and truly.
  • The Tribunal ruled that reopening based solely on information from the Investigation Wing constituted “borrowed satisfaction” and was not a valid “reason to believe.”

2. Merits of the Addition under Section 68

• • The assessee provided sufficient documentary evidence, including PAN details, bank statements, confirmations, and audited accounts of the lender.
  • The AO arbitrarily accepted ₹65 lakh of the total ₹1.15 crore loan while making an addition for ₹50 lakh, indicating inconsistency.
  • The interest paid on the loan was allowed as a deduction, further supporting the genuineness of the transaction.

Final Decision

The ITAT quashed the reassessment proceedings, holding them as invalid. Consequently, the addition of ₹50 lakh under Section 68 was set aside. Since the reassessment was annulled, the Tribunal did not adjudicate the merits of the addition.

This ruling reinforces the principle that reopening of assessments must be based on independent application of mind by the AO and not merely on third-party information. The case highlights the importance of procedural compliance in reassessment proceedings and substantiating unsecured loans with proper documentation.

The case was represented by CA Kishor Phadke (Assisted by CA Saurabh Jadhav)

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the assessee is directed against the order dated 31.07.2021 of the CIT(A) / NFAC, Delhi relating to assessment year 2012-13.

2. Although a number of grounds have been raised by the assessee, however, these all relate to the order of CIT(A) / NFAC in upholding the validity of the reopening proceedings and thereby sustaining the addition of Rs.50 lacs u/s 68 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

3. There is a delay of 565 days in filing of this appeal before the Tribunal, for which the assessee has filed a condonation application along with an affidavit explaining the reasons for such delay which is partly due to the then prevailing Covid and the misplacement of the appeal order by the staff which came to be known only after the penalty order was passed u/s 271(1)(c) of the Act. After considering the contents of the condonation application filed along with affidavit and after hearing the Ld. DR, the delay in filing of the appeal is condoned and the appeal is admitted for adjudication.

4. Facts of the case, in brief, are that the assessee M/s. Adhunik Infrastructure Development Pvt. Ltd. (earlier known as M/s Gauri Plasticulture Pvt. Ltd.) is a company engaged in trading of drip material and onions. It filed its return of income on 31.01.2013 declaring total income of Rs.8,06,410/-. The Assessing Officer completed the assessment u/s 143(3) of the Act on 11.03.2015 determining the total income of the assessee at Rs.9,18,632/- wherein he made disallowance of Rs.35,820/- u/s 14A of the Act, Rs.50,935/- on account of Miscellaneous expenses and Rs.25,467/- on account of Legal and licence fees. Subsequently, on the basis of information obtained from the Investigation Wing, Kolkata, the Assessing Officer reopened the assessment by recording the following reasons:

“Reasons for the reopening of the assessment in case of Gauri Plasticulture Pvt. Ltd. (Now Aadhunik Infrastructure Development Pvt. Ltd.) for A.Y. 2012-13.

1. The Assessee M/s Adhunik Infrastructure Development Pvt Ltd (earlier known as M/s Gauri Plasticulture Pvt. Ltd) is engaged in trading of drip material and onions. The assessee company had filed its return of income for A.Y 2012-13 on 31/01/2013 declaring total income of Rs.8,06,410/-. The assessment u/s 143(3) of the Income Tax Act was completed on 11/03/2015 assessing the total income of the assessee of Rs.9,18,632/- against return income of Rs. 8,06,410/-.

2. The information has been received from the Dy. Director of Income Tax (inv.) Unit 2(2), Kolkata vide letter No. DDIT(Inv.)/U-2(2)/Kol./S- 10173279 &10274973/2018-19/2016, dated 01.03.2019 received in this office on 8.03.2019.

Facts of the case is that the DDIT unit-2(2) had carried out an inquiry in case of M/s Swastik commercials, proprietary concern of Shri Subrata Roy. The financial analysis of the concern M/s Swastik Commercials is as follows:

3. The bank account Statement of M/s Swastik Commercial and M/s Kali Traders were perused by the DDIT and it was found that significant transactions of money were recorded into its Bank Accounts of these concerns. On analysis of the financials of the above concern, the DDIT further inferred that these proprietary concerns are not into any actual business doing no justice with these transactions recorded into Bank Statement of its Bank Accounts. In light of these observation which establish that M/s Swastik Commercial and Kali Traders do not possess any financial credentials, a Money Trail was prepared to ascertain actual beneficiaries of these funds. The Money Trail so prepared fetched several names of the actual beneficiaries, M/s Gauri Plasticulture Pvt. Ltd. (Aadhunik Infrastructure Development Pvt. Ltd. is one of the actual beneficiaries of these transactions amounting to Rs. 50,00,000/- for the A.Y 2012-13.

4. As per the fund trail, the amount is transferred from M/s Swastik Financials and M/s Kali traders to several intermediary entities including Cambridge Financials services Pvt Ltd. The cash is also credited in the bank account of M/s Cambridge Financials Pvt Ltd and the same is transferred to the assessee company M/s Gauri plasticulture Pvt Ltd. (The copy of the fund trails is enclosed for ready reference).

5. I have carefully analysed and perused the information received. After analysing the information as well as AIR information, return of income filed and assessment records, therefore, I have reason to believe that the income of Rs.50,00,000/- has escaped the assessment for A.Y 2012-13 in case of the assessee.

6. In this case the return of income was filed and regular assessment u/s 143(3) was completed on 11.3.2015. Since more than four years have lapsed from the end of the assessment year in this case, the requirement to initiate the proceedings u/s 147 of the Act are reason to believe that income for the year under consideration has escaped the assessment because of failure on part of the assessee to disclose fully and truly all material facts necessary for this assessment. It has been noted that the assessee has not fully and truly disclosed the material facts necessary for the assessment as mentioned in para 2, 3and 4 above.

7. It is evident from the above facts that the assessee had not truly and fully disclosed the facts as mentioned in para 2, 3 and 4 above, necessary for the assessment for the year under consideration, thereby necessitating reopening u/s 147 of the Act. It is pertinent to mention here that even though the assessee has produced the copy of B/S, P/L account, return of income etc, the requisite material facts as mentioned in the above reasons for reopening were embedded in such a manner that material evidence could not be discovered by the A.O and could have been discovered with due diligence, accordingly attracting provision of explanation 1 of section 147 of the Act.

8. In this case, more than four years have lapsed from the end of assessment year under consideration. Hence necessary sanction to issue notice u/s 148 has to be obtained as per the provisions of section u/s 151 of the IT Act from the Pr. Commissioner of Income Tax.-2, Nashik. Therefore, necessary sanction u/s 151(1) of the Act, to issue notice u/s 148 of the Income Tax Act, 1961 for A.Y. 2012-13 may be accorded, if approved.”

5. Accordingly, notice u/s 148 of the Act was issued to the assessee on 26.03.2019, in response to which the assessee filed its return of income declaring the income originally returned. The assessee thereafter asked the reasons for reopening the assessment which were supplied to the assessee. The assessee filed its objections before the Assessing Officer against the reopening of the assessment vide letter dated 17.09.2019. The Assessing Officer vide order dated 30.10.2019 rejected the objections filed by the assessee by passing a speaking order. Thereafter, the Assessing Officer issued a show cause notice to the assessee asking him to explain as to why the amount of Rs.50 lacs should not be added u/s 68 of the Act. Rejecting the various explanations given by the assessee, the Assessing Officer made addition of Rs.50 lacs by observing as under:

“9. The submission of the assessee has been carefully perused. However, the submission is found to be not acceptable:

9.1 The investigation was carried out in case of Swastik Commercials and Mis Kali Traders (Proprietor Subrata Roy) by the DDIT(inv) Unit 2(2), Kolkata. In the investigation, it was found that the entities are not having any financial foothold. At the same time, the bank account of the entities was perused and it was found that the significant transactions were carried out in the bank account of the above entities. Thus, it was proved that these proprietary concerns were not into any kind business and thus does not possess any financial credentials. The DDIT prepared a money trail of the above-mentioned entities. The money trail is enclosed along with this order. On perusal of the money trail, it was found that the cash was deposited into the company Cambridge Financials Pvt Ltd and the amount was then transferred to the different beneficiaries. M/s Aadhunik Infrastructure is one of such beneficiaries. Thus, it is clear that the company Cambridge Financials Pvt Ltd is used only for providing accommodation entries in the form of loans. During the year the assessee has taken such accommodation entry to the tune of Rs.50,00,000/-.

9.2 Apart from the above transaction, it was found that the funds in the company Cambridge financials Pvt Ltd were channeled through the entities Swastik Commercials and M/s Kali Traders (Proprietor Subrata Roy) It has been proved without any doubt that above mentioned entities are not doing any business and such huge bank transactions in their accounts are nothing but to provide the accommodation entries through routing of funds.

9.3 Therefore, it is clear that the company Cambridge financials pvt ltd is used only for providing the accommodation entries and as such it has no other business Therefore, the loan received by the assessee company M/s Aadhunik Infrastructure pvt Ltd is bogus and just an accommodation entry provided by the Cambridge finacials pvt ltd. Therefore, the amount of Rs 50,00,000/- shown in the books of the assessee as loan is treated as bogus and added back to the total income of the assessee u/s 68 of the Act.

9.4 The provision of section 68 is attracted when any sum is found credited in the books of accounts of the assessee. The word “any sum” are wide enough to cover the transactions appearing in the books of accounts of an assessee and, therefore, if the assessee offers no explanation about the nature and sources of the unsecured loans, then such loan is nothing but the deemed income of the assessee as per the provisions of the section 68 of the Act.

For the sake of clarity the section 68 is reproduced herewith:

Section 68. Cash Credits- Where any sum is found credited in the books of an assessee maintained for any previous year, and assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the Income of the assessee of that previous year

9.5 The scheme of Section 68 of the Income-tax Act, 1961, would show that in cases where the nature and source of credits in the books of the assessee is not explained at all, or not satisfactorily explained, then, the credits recorded in the books of accounts may be deemed to be the income of such assessee. The provisions of section 68 of the Act treat unexplained credits as deemed income where the nature and source of such credits in the books have not been explained or satisfactorily explained. Therefore, in such cases, the source not being known, such deemed income is covered under the provisions of Section 68 of the Act in view of the scheme of those provisions.

9.6 For application of Section 68 of the Act, the fundamental condition is that the credits in the books of accounts are not explained or not explained satisfactorily by the assessee. The expression “nature and source” used in this section should be understood to mean requirement of identification of source and its genuineness. To explain “Nature” it would require the assessee to explain what is description of cash credits period and the manner in which it was done. To explain the source it would require the assessee to explain the corpus or fund from where such credits/receipts has been earned.

9.7 In the present case, the assessee has received loan to the extent of Rs.50,00,000/- are treated as unexplained cash credits in the books. Further, the nature and source of such credits were not at all explained satisfactorily by the company. Further, for invoking deeming provisions under Section 68 of the act, there should be clearly identifiable receipts/credits in the books. It is amply proved beyond doubt that the assessee has shown the cash credits in the books which stands unexplained to the extent of Rs.50,00,000/- and thus the corresponding loan received from Cambridge financials of Rs. 50,00,000/- in bank accounts stands unexplained.

9.8 In the cases where assessee has received loan from entities but the genuineness and creditworthiness were neither explained nor such money offered for taxation, the onus is on the assessee to prove that the funds credited in the books did not bear the character of income. In this case, the assessee had failed to prove this fact and I hold that the amount of loan received from Cambridge financials pvt ltd to the extent of Rs.50,00,000/- represented income from undisclosed sources and unexplained credits in the books of the assessee.

9.9 The assessee has taken loans amounting to Rs.50,00,000/- is remained unexplained. Therefore, the amount of Rs.50,00,000/- is treated as unexplained credits u/s 68 of the Income Tax Act, 1961 and added to the Total Income of the assessee. Penalty proceedings are separately initiated u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income.”

6. Aggrieved with such order of the Assessing Officer, the assessee filed appeal before the CIT(A) / NFAC challenging the validity of re-assessment proceedings as well as the addition on merits. However, the Ld. CIT(A) / NFAC was not satisfied with the arguments advanced by the assessee. So far as the validity of re-assessment proceedings are concerned, he upheld the validity of reopening of the assessment by observing as under:

“5. Ground Nos. 2, 3, 4 and 6 These grounds of appeal are against validity of proceedings u/s 147/148 of the Act. The appellant is engaged in trading in drip irrigation material and agricultural produce like onions. DEPARTMENT Income Tax Return in this case for the A.Y. 2012-13 declaring income of Rs.8,06,410/-/-was furnished on 31.01.2013 which was processed u/s 143(1) of the Act. The assessment u/s 143(3) of the Income Tax Act was completed on 11.03.2015 assessing the total income of Rs.9,18,632/- against returned income of Rs.8,06,410/-. The AO subsequently received information from the Directorate of Income Tax (Inv.), Kolkata in which the entire modus operandi, investigation report in respect of accommodation entries given by certain entry (M/s Swastik Commercials) resulting into a money trail of bogus entries. The AO found that as per fund trail, the amount was transferred from M/s Swastik Financials to several intermediary entries including M/s Cambridge Financials Pvt. Ltd. and the same is transferred to the appellant. After considering the material on record reasons were recorded u/s 147 of the Act by making inference that the appellant was part of fund trail and taking accommodation entries from non genuine or paper companies for providing further accommodation entries. The AO made reliance upon provision of clause (b) of explanation 2 to section 147 of the Act. Notice u/s 148 was issued on 28.03.2019 after obtaining approval of Pr. Commissioner of Income Tax.

8. During the appellate proceedings, it was stated by the Ld. AR that there was no material before the AO on the basis of which such belief could have been made and therefore, such reasons were arbitrary. Approval u/s 151 has been given in the mechanical manner. The written submission of the Ld. AR has been reproduced as above.

9. Facts of the case and material available on record have been gone through. The assessment record has been perused. It is noted from the record that the appellant engaged in trading in drip irrigation material and agricultural produce like onions. Income Tax Return in this case for the A.Y. 2012-13 declaring income of Rs.8,06,410/-/- was furnished on 31.01.2013 which was processed u/s 143(1) of the Act. The assessment u/s 143(3) of the Income Tax Act was completed on 11.03.2015 assessing the total income of Rs.9,18,632/- against returned income of Rs.8,06,410/-. The AO in this case has recorded detailed reasons u/s 147 of the Act by inferring that the income of Rs.50,00,000/- has escaped assessment. The AO has received information from Inv. Wing Kolkata in which the entire modus operandi, investigation report in respect of accommodation entries given by certain entry operators in garb of facilitating fund trail to the non genuine paper entities, names of such entry providers along with entire material were enclosed. Thus on the basis of above tangible material the AO inferred that the appellant has obtained bogus accommodation entry.

10. Thus, the information received by the AO was having complete modus operandi and other factual details in respect of accommodation entries received by the appellant through entry operators in the garb of exempt income. The AO has gone through the return of income furnished by the appellant on 31.01.2013 u/s 139 of the Act and considered the particulars of the income as reflected in the return of income in the light of information received. On the basis of these facts, the AO came to the belief that income chargeable to tax for Rs 50,00,000/- shown as unsecured loan in the return of income which was in the nature of accommodation entry has escaped assessment. On the strength of above material, the AO had basis to believe that claim unsecured loan in the return of income was not bona fide and thus not explained. Thus it is noted that there was live link between the information received by the AO and belief made that income chargeable to tax has escaped assessment. The reasons recorded by AO have been found on the basis of tangible material and with application of mind. At the stage of formation of belief u/s 147 of the Act, it is necessary to have existence of reasons to believe that income has escaped assessment, their sufficiency cannot be examined at that stage. Clearly in this case the AO was having tangible material to draw such inference. Reliance is hereby placed upon the decisions of Hon’ble Supreme Court in the case of RAYMOND WOLLEN MILLS LTD. Vs. ITO 236 ITR 34 (SC) and ACIT VS. RAJESH JHAVERI STOCK BROKERS (P) LTD. 291 ITR 500 (SC), PHOOL CHAND BAJRANG LAL AND ANOTHER VS. ITO & ANOTHER 203 ITR 456 (SC) and Hon’ble Madras High Court in the case of STERLITE INDUSTRIES (INDIA) LTD. v ASSISTANT COMMISSIONER OF INCOME-TAX AND ANOTHER [2008] 302 ITR 275 (MAD.).It has been held by Hon’ble Supreme Court in the case of ITO vs. Purshotam Dass Bangur (1997) 224 ITR 362 (SC) that the information received from the Deputy Director (Inv.) constitutes valid information and reasons to believe that income has escaped assessment. Hon’ble Supreme Court in the case of Paramount Communication (P.) Ltd. Vs PCIT 2017-TIQL-253- SC-IT SLP has dismissed the SLP of assessee on the ground that Information regarding bogus purchase by assessee received by DRI from CCE which was passed on to revenue authorities was ‘tangible material outside record to initiate valid reassessment proceedings. Thus there was no borrowed satisfaction on the part of the AO. There was independent application of mind on the part of the AO. Further reliance is placed upon clause (b) of explanation 2 to provisions of section 147 of the Act as on the basis of the facts of the case the AO had the basis to believe that claim of exempt income u/s 10(38) of the Act in the return of income was not allowable.

11. Keeping in view above facts and discussion, it is held that the AO has drawn his satisfaction u/s 147 of the Act in accordance with the provisions of the Act and accordingly the same is held as valid. Notice u/s 148 issued on the strength of such reasons is also held as valid. Therefore, it is observed that there is no merit in these grounds of appeal taken by the appellant. Ground Nos. 2, 3, 4 and 6 of the appellant are dismissed.”

7. So far as the merit of the case is concerned, he sustained the addition by observing as under:

“5. Ground Nos. 1,5 and 7 The appellant’s submission and the order of the AO has been gone through. The appellant company took unsecured loan from the Cambridge Financial Limited of Rs.50,00,000/-, An investigation was completed by the Investigation Unit, Kolkata of the department. The enquiry was carried out in the case of M/s Swastik Commercials on analysis of financials of above concern. It was found that these proprietary concerns were not carrying any actual business and did not have any financial credentials. There was a fund trail as the fund transferred from M/s Swastic Commercial and M/s Kali Traders to several intermediary entities including Cambridge Financial Services Pvt. Ltd and the same from Cambridge Financial Services Pvt. Ltd. to the appellant company, unsecured loan was not genuine transaction.

6. The appellant submission that there is no room for suspicious, surmises and conjecture on the part of AO in rejecting a valid explanation and cannot be rejected arbitrarily, unreasonably and without any material to the contrary, is not acceptable.

7. The enquiry found these entities have no financial foothold. It was also submitted that the proprietary concern involved were not into any kind business and thus not possess any financial credentials. The money trail showed that cash was deposited in Cambridge Financials Pvt. Ltd. and these amount transferred to different beneficiaries and the appellant company was one of beneficiaries. Thus the AO findings that the transaction was used only for providing accommodation entries through routing of funds and as such it has no other business was right. Therefore, the AO rightly made the addition/ disallowance of Rs.50,00,000/-. Thus, Ground Nos. 1, 5 and 7 of the appellate are dismissed.”

8. Aggrieved with such order of CIT(A) / NFAC, the assessee is in appeal before the Tribunal.

9. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A) / NFAC upholding the validity of re-assessment proceedings as well as the addition on merit. So far as the validity of re-assessment proceedings are concerned, he submitted that the Assessing Officer during the course of assessment proceedings has made thorough enquiry by calling for information u/s 133(6) of the Act from the party concerned and thereafter has accepted the unsecured loan. Referring to page 42 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the questionnaire issued by the Assessing Officer dated 22.07.2014 wherein at clause (10) the Assessing Officer has asked the assessee to furnish the addresses of unsecured loan givers. Referring to the reply dated 12.08.2014 filed by the assessee, copy of which is placed at pages 45 to 48 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the reply so given which contains the details of interest paid to Cambridge Financial Services Pvt. Ltd. at Rs.4,20,369/- and the loan of Rs.1,15,00,000/- received by the assessee from the said company on three occasions. Referring to the questionnaire issued by the Assessing Officer on 16.12.2014, copy of which is placed at pages 49 and 50 of the paper book, he drew the attention of the Bench to clause (5) of the details to be furnished wherein the Assessing Officer has asked the assessee to furnish the name, address & PAN of the unsecured loan givers. Referring to the reply dated 19.12.2014, copy of which is placed at pages 51 to 52 of the paper book, he drew the attention of the Bench to the reply wherein the assessee had given name, address and PAN of the unsecured loan givers. Referring to the notice issued u/s 133(6) of the Act to Cambridge Financial Services Pvt. Ltd., copy of which is placed at page 62 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the same and submitted that the Assessing Officer has asked the said party to submit the bank account, source of cash deposits, if any, before issue of cheque, capital account of the said company, statement of affairs, copy of income tax return, computation of income, etc. Referring to pages 63 to 66 of the paper book, the Ld. Counsel for the assessee drew the attention to the reply furnished by the loan giver i.e. Cambridge Financial Services Pvt. Ltd. in response to notice u/s 133(6). He submitted that after considering all these vital details obtained by the Assessing Officer directly from the party concerned and submissions of the assessee from time to time, the Assessing Officer has completed the assessment u/s 143(3) of the Act on 11.03.2015. Therefore, the reopening of the assessment after a period of four years from the end of the relevant assessment year is not correct since there is no failure on the part of the assessee to disclose truly and fully all material facts necessary for completion of the assessment.

10. He submitted that the assessee has taken an amount of Rs.1,15,00,000/- from Cambridge Financial Services Pvt. Ltd. The Assessing Officer has accepted an amount of Rs.65 lacs and has made addition of Rs.50 lacs only u/s 68 of the Act. Further, the payment of interest to the said party has not been disallowed by the Assessing Officer meaning thereby the Assessing Officer has accepted the genuineness of the loan on which the interest has been paid.

11. Referring to the additional information forwarded by the DDIT (Inv), Kolkata, which is the basis for reopening of the case, he submitted that the DDIT has in fact, asked the Assessing Officer to obtain the information u/s 133(6) of the Act and thereafter complete the assessment. He submitted that in the instant case the Assessing Officer after obtaining the information u/s 133(6) of the Act has passed the order and therefore, the reopening of the assessment is not correct. Further, the information given by the DDIT (Inv), Kolkata can at best be ‘reason to suspect’ but it cannot be ‘reason to believe’. He submitted that the money trail mentioned by DDIT (Inv), Kolkata was never enclosed along with the reasons nor available from the record of the department at the time of inspection. Even the so-called annexure which is mentioned by the Assessing Officer in the body of the assessment order was never enclosed and also not available at the time of inspection. Relying on various decisions, he submitted that the reopening proceedings initiated by the Assessing Officer and upheld by the CIT(A) / NFAC are not in accordance with law and therefore, the same should be quashed.

12. So far as the merit of the case is concerned, he submitted that the entire amount was received through proper banking channel, the lender party has responded to the notice issued u/s 133(6) of the Act, the amount of Rs.50 lacs was given after encashing the investment in Reliance Liquidity Fund, the PAN number, bank account of the loanee and copy of income tax return, etc. were furnished at the time of original assessment proceedings. Therefore, when the assessee has established the identity and creditworthiness of the loan creditor and genuineness of the transaction, the addition could not have been made u/s 68 of the Act. He accordingly submitted that both on legally and factually the grounds raised by the assessee should be allowed. He also relied on the following decisions:

1. Hindustan Lever Ltd. v. R.B. Wadkar [2004] 137 Taxman 479 (Bombay)

2. Siemens Information System Ltd. v. ACIT [2008] 172 Taxman 315 (Bombay)

3. Idea Cellular Ltd. v. DCIT [2008] 301 ITR 407 (Bombay)

4. Punia Capital (P.) Ltd. v. ACIT [2023] 149 com 53 (Bombay)

5. Marico Ltd. v. ACIT-(3)(2) [2019] 111 com 253 (Bombay)

6. CIT vs ICICI Bank [2013] 31 com 53 (Bombay)

7. Kapstone Constructions (P.) Ltd. v. ACIT [2023] 153 com 305 (Bombay)

8. PCIT vs Shodiman Investments Pvt. Ltd ITA No. 1297 OF 2015 (Bombay HC)

9. GKN Driveshafts (India) Ltd. vs ITO [2002] 125 Taxman 963 (SC)

10. CIT vs Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC)

13. The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and CIT(A) / NFAC. He submitted that during the course of original assessment proceedings the loan taken by the assessee from a company having meager income was not properly verified by the Assessing Officer, details of which came to light only during the course of investigation by the Investigation Wing, Kolkata. The Assessing Officer has followed the due process of law for reopening of the assessment which has been narrated by the CIT(A) / NFAC while upholding the validity of re-assessment proceedings. Therefore, the grounds challenging the validity of reopening of the assessment should be dismissed.

14. So far as the merit of the case is concerned, the Ld. DR submitted that the lender company has taken loan from certain non-existing companies who have deposited cash immediately before issuing the cheque and through clearing the money has come to the assessee which is verifiable from the money trail as mentioned by the DDIT (Inv). He however, fairly conceded that the copy of money trail and the annexure mentioned by the Assessing Officer in the assessment order are not available in the assessment record of the department. Referring to the reasons given by the Assessing Officer for making the addition and reasons given by the CIT(A) / NFAC while sustaining the same, he submitted that the same is self explanatory. He accordingly submitted that the grounds raised by the assessee challenging the addition on merit should be dismissed.

15. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed by both the sides. We have also considered the various decisions cited before us.\

We find the Assessing Officer in the instant case has completed the assessment u/s 143(3) of the Act on 11.03.2015 determining the total income of the assessee at Rs.9,18,632/- as against the returned income of Rs.8,06,410/-. In the said order, the Assessing Officer, after considering the submissions made by the assessee from time to time and after obtaining information u/s 133(6) of the Act from Cambridge Financial Services Pvt. Ltd. had accepted the unsecured loan of Rs.1,15,00,000/-. Subsequently, the Assessing Officer on the basis of information obtained from the DDIT (Inv), Kolkata that the assessee has obtained unsecured loan from a company which do not possess any financial credentials, reopened the assessment by recording the reasons which have already been reproduced in para 4 of the order above. We find the Assessing Officer rejecting the various explanations given by the assessee made addition of Rs.50 lacs u/s 68 of the Act. When the assessee challenged the validity of re-assessment proceedings as well as the addition on merit, we find the CIT(A) rejected both the contentions of the assessee, the reasons of which have already been reproduced in the preceding paragraphs.

16. It is the submissions of the Ld. Counsel for the assessee that when all primary facts were given to the Assessing Officer including the bank account details, income tax return details, confirmation copies, audited financial accounts of Cambridge Financial Services Pvt. Ltd., etc., therefore, there was absolutely no failure on the part of the assessee to disclose fully and truly all the material facts necessary for completion of the assessment. Merely because the Assessing Officer has mentioned in the order that there is failure on the part of the assessee to disclose fully and truly all the material facts necessary for completion of the assessment, the same is not in the true spirit of the proviso to section 147 of the Act. It is the submission of the Ld. Counsel for the assessee that the so-called information received by the Assessing Officer from the Investigation Wing can at best be a reason to suspect but it cannot be reason to believe. It is also his contention that when the Assessing Officer in the instant case has accepted an amount of Rs.65 lacs as genuine out of total amount of Rs.1,15,00,000/- taken by the assessee and the interest debited in the Profit and Loss Account on the whole amount of Rs.1,15,00,000/- has been accepted by the Assessing Officer even in the re-assessment proceedings, reopening of the assessment is not justified. Even on merit also, he submitted that when a part of the loan amount has been accepted as genuine and the whole of the interest has been accepted, such addition u/s 68 of the Act is also not warranted especially when the assessee has filed the audited accounts, bank statements, confirmation etc and the Assessing Officer also independently obtained information u/s 133(6) of the Act from Cambridge Financial Services Pvt. Ltd.

17. We find some force in the above arguments of the Ld. Counsel for the assessee. Admittedly, during the course of original assessment proceedings the assessee had filed the relevant details substantiating the identity and creditworthiness of the loan creditor and genuineness of the transaction by filing the requisite details as called for by the Assessing Officer from time to time. Further, the Assessing Officer has also directly obtained information u/s 133(6) of the Act from Cambridge Financial Services Pvt. Ltd. and even the information obtained from the Investigation Wing reveals that the DDIT (Inv) has suggested the Assessing Officer to reopen the assessment and complete the assessment by obtaining information from the said loan creditor. In our considered opinion, once the Assessing Officer had obtained the information u/s 133(6) of the Act from the said loan creditor, it is not understood as to what purpose it would serve to again call for the same information from the said loan creditor and complete the assessment. In the instant case, as mentioned earlier, the assessee had filed all the requisite details as called for by the Assessing Officer from time to time and the Assessing Officer after considering the details filed by the assessee and after obtaining the information u/s 133(6) of the Act from the loan creditor i.e. Cambridge Financial Services Pvt. Ltd. had completed the assessment u/s 143(3) of the Act. Therefore, in our opinion, so far as the assessee is concerned, there was no failure on the part of the assessee to disclose fully and truly all the material facts necessary for completion of the assessment. A perusal of the earlier reasons recorded shows that the Assessing Officer has simply reopened the assessment on the basis of the information obtained from the Investigation Wing and there is no application of mind.

18. We find the Hon’ble Bombay High Court in the case of Sesa Sterlite Ltd. vs. ACIT (2019) 417 ITR 334 (Bom) has held that where in case of assessee, carrying on business of mining and trading of iron ore, assessment was completed u/s 143(3), in absence of any independent material on record, assessment could not be reopened merely on basis of opinion formed by Commission appointed by Central Government that there was under invoicing of exports by assessee.

19. We find the Hon’ble Bombay High Court in the case of Punia Capital (P.) Ltd. vs. ACIT (supra) has held that where the Assessing Officer sought to reopen assessment of assessee after period of four years on ground that assessee had transacted funds with certain company which had been conclusively proven to be a shell company, since Assessing Officer had reopened assessment solely on basis of ‘reason to believe’ and not on grounds of failure to disclose material facts duly and truly, and moreover, AO failed to highlight in reasons recorded as to what was that material fact, which was not disclosed by assessee in its return, impugned reopening notice and consequent order were to be quashed.

20. We find the Hon’ble Bombay High Court in the case of CIT vs. ICICI Bank (2012) 349 ITR 482 (Bom) has held that the Assessing Officer having allowed assessee’s claim under section 36(1)(viii) in respect of fund based income, could not initiate reassessment proceeding by merely taking a view that income earned in non-fund business had been included in income earned in fund based activity and, thus, excessive deduction was allowed to assessee. Accordingly, the re-assessment proceedings initiated were quashed.

21. We find the Hon’ble Bombay High Court in the case of PCIT vs. Shodiman Investments Pvt. Ltd. (supra) while dealing with an identical issue has upheld the order of the Tribunal quashing the re-assessment proceedings and thereby dismissing the appeal filed by the Revenue by holding as under:

“12. The re­opening of an Assessment is an exercise of extra­ordinary power on the part of the Assessing Officer, as it leads to unsettling the settled issue/assessments. Therefore, the reasons to believe have to be necessarily recorded in terms of Section 148 of the Act, before re­opening notice, is issued. These reasons, must indicate the material (whatever reasons) which form the basis of re­opening Assessment and its reasons which would evidence the linkage/ nexus to the conclusion that income chargeable to tax has escaped Assessment. This is a settled position as observed by the Supreme Court in S. Narayanappa v/s. CIT 63 ITR 219, that it is open to examine whether the reason to believe has rational connection with the formation of the belief. To the same effect, the Apex Court in ITO v/s. Lakhmani Merwal Das 103 ITR 437 had laid down that the reasons to believe must have rational connection with or relevant bearing on the formation of belief i.e. there must be a live link between material coming the notice of the Assessing Officer and the formation of belief regarding escapement of income. If the aforesaid requirement are not met, the Assessee is entitled to challenge the very act of re­opening of Assessment and assuming jurisdiction on the part of the Assessing Officer.

13. In this case, the reasons as made available to the Respondent­ Assessee as produced before the Tribunal merely indicates information received from the DIT (Investigation) about a particular entity, entering into suspicious transactions. However, that material is not further linked by any reason to come to the conclusion that the Respondent­Assessee has indulged in any activity which could give rise to reason to believe on the part of the Assessing Officer that income chargeable to tax has escaped Assessment. It is for this reason that the recorded reasons even does not indicate the amount which according to the Assessing Officer, has escaped Assessment. This is an evidence of a fishing enquiry and not a reasonable belief that income chargeable to tax has escaped assessment.

14. Further, the reasons clearly shows that the Assessing Officer has not applied his mind to the information received by him from the DDIT (Inv.). The Assessing Officer has merely issued a re­opening notice on the basis of intimation regarding re­opening notice from the DDIT (Inv.) This is clearly in breach of the settled position in law that re­ opening notice has to be issued by the Assessing Office on his own satisfaction and not on borrowed satisfaction.

15. Therefore, in the above facts, the view taken by the impugned order of the Tribunal cannot be found fault with. This view of the Tribunal is in accordance with the settled position in ”

22. We find in the instant case also the Assessing Officer has reopened the assessment merely on the basis of information received by him from the DDIT (Inv) and has not applied his mind, therefore, on this score also, the re-assessment proceedings initiated by the Assessing Officer are to be quashed. In view of the above discussion, we set aside the order of the CIT(A) / NFAC and quash the re­assessment proceedings. Since we have quashed the re-assessment proceedings, the grounds challenging the addition on merit become academic in nature and therefore, the same are not being adjudicated.

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

Order pronounced in the open Court on 18^th September, 2024.