Section 68: Sales declared as Income in books cannot be treated as cash credit

Bhagwant Merchants Private Limited Vs ITO (ITAT Kolkata)

Reopening Not Justified as AO not applied his mind on information available

The issue under consideration is whether the reopening of assessment u/s 147 is justified in law?

In the present case, the Assessing Officer reopened the assessment against the assessee on the basis of the information that the assessee receives ₹12 lakhs from one M/s. Medimix Sales Pvt. Ltd and the same was escaped from assessment during the relevant year. According to him, the assessee has raised Securities Premium Account ₹38,00,000/- during the previous year which is not offered to taxation. In response to the addition, the assessee submitted that the transaction of purchase and sale of shares are recorded in the books of account and disclosed to the Department.

ITAT states that the re-opening in this case is beyond a period of 4 years from the end of the assessment year. The original return file was processed u/s 143(1) of the Act. Approval in such cases is to be obtained from ACIT or JCIT u/s 151 of the Act and not from the Pr. CIT. In any event no proof of approval from any authority is produced before ITAT. Further, there is non-application of mind by the AO to the information received, prior the re-opening of the assessment. This fact is clear from the facts and figures given in the reasons recorded are wrong. Such non-application of mind to the information received by the AO prior to recording of reasons for re-opening of assessment makes the reopening bad in law.

Sales declared as Income in books cannot be treated as cash credit Under Section 68

Also ITAT states that the assessee has disclosed the sale of shares in its books of account. Once the sale is declared as income by the assessee, the question of treating the same amount as a cash credit u/s 68 of the Act results in double addition. Thus, the addition is also bad on merits. Hence, the appeal of the assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This is an appeal filed by the assessee directed against the order of the Commissioner of Income Tax (Appeals)-5, Kolkata [‘CIT(A)’ for short] dated 14.10.2019 u/s 250 of the Income Tax Act, 1961 (‘the Act’ for short) for AY 2011-12.

2. The assessee is a company and has filed its return of income for the AY 2011-12 on 22.09.2011 declaring income of ₹39,020/-. The assessment was re-opened u/s 147 of the Act by issue of notice u/s 14 of the Act dated 30.03.2015. In response, the assessee filed the return of income on 16.04.2018. The AO issued notice u/s 143(2) of the Act and has also supplied a copy of the reasons recorded for re-opening of assessment u/s 147 of the Act, to the assessee. On 27.07.2018 the assessee objected to the re-opening of assessment by a letter dated 21.08.20018. The AO disposed off these objections on 27.08.2018.

3. Thereafter, the AO issued a letter to the assessee dated 28.08.2018, replying to the objections raised by the assessee to the re-opening of assessment u/s 147 of the Act. In this letter, the AO asked the assessee to ignore his reply dated 27.08.2018. Thereafter the AO passed an order u/s 143(3) r.w.s. 147 of the Act on 11.12.2018 determining the total income of the assessee at ₹50,39,020/-.

4. Aggrieved, the assessee carried the matter in appeal challenging both the reopening of assessment as well as the addition on grounds of merit. The first appellate authority upheld the order of the AO. Further, aggrieved, the assessee is in appeal before me on both the issue of validity of re-opening of assessment as well as the validity of the addition on ₹15 lakhs made in support of transaction related to sale of 15 thousand shares of M/s. Mogra Commerce Pvt. Ltd. to M/s. Medimix Sales Pvt. Ltd.

5. The ld. Counsel for the assessee challenges the re-opening of assessment on the ground that (a) the information based on which the re-opening was initiated, that the assessee receives ₹12 lakhs from one M/s. Medimix Sales Pvt. Ltd., is factually incorrect information. Thus, he submits that re-opening was made based on wrong information. (b) Nowhere in the information received, it is alleged that there is escapement of income. (c) The AO has not applied his mind to the information received and hence it is a case of non-application of mind by the AO to the material that came into his possession, prior to forming of a belief that income subject to tax has escaped assessment. (d) A copy of approval from the competent authority permitting re-opening of assessment was not provided to the assessee despite specific request and hence the assessment was invalid. (e) The reason for re-opening was that an amount of ₹12 lakhs was received by the assessee was income which escaped assessment and as no addition whatsoever was made of this amount in the final assessment order passed u/s 143(3) r.w.s. 147 of the Act, no other addition can be made. (f) In reply to the objections made by the assessee for the re-opening, the AO stated that, the assessee has raised Securities Premium Account ₹38,00,000/- during the previous year which is not offered to taxation. This is factually wrong and shows non-application of mind by the AO.

6. In his reply, the AO states that re-opening is not possible without approval from the Pr. CIT/CIT but does not specify as to who has given the approval and hence, the reopening is bad in law.

7. In his reply, the AO admits that the re-assessment was on the basis of the report of the Investigation Wing. The information given by the Investigation Wing is factually wrong as the assessee did not receive any amount of deposit of ₹57,48,996/- that there is no figure of ₹3,35,16,000/- or ₹1,77,06,230/- in the balance sheet of the assessee which can be said to be undisclosed and unaccounted for.

8. The report of the Investigation Wing only rises doubts and re-opening cannot be made on mere suspicion.

9. On merits, the ld. Counsel for the assessee submitted that the addition of ₹15 lakhs which is a receipt of an amount on sale of shares, is bad in law as the allotment of shares to the assessee company for M/s. Mogra Commerce Pvt. Ltd. is evidenced by an allotment advice which is placed at page 33 of the paper book, the payment of which is made through cheques. The sale of shares of M/s. Mogra Commerce Pvt. Ltd. is placed at page 36 of paper book. He pointed out that all these parties are assessed to income tax and evidence regarding the same has been furnished. He submitted that the transaction of purchase and sale of shares are recorded in the books of account and disclosed to the Department, the addition of the sale proceeds u/s 68 of the Act is arbitrary and illegal. He submitted that the assessee had already disclosed this amount as income as it was its sales and making an addition once again is bad in law.

10. The ld. DR on the other hand, submitted that the assessee company has no real business and it was a jama-kharchi company. He argued that all these companies were part of the chain of companies incorporated for circulating funds. He submitted that reopening was made, based on specific information received from the Investigation Wing of the Department. He relied on the order of the ld. CIT(A) and submitted that the AO has conducted verification, applied mind and thereafter recorded reasons and reopened the assessment. On the addition of ₹15 lakhs he submitted that the identity, creditworthiness of the party as well as the genuineness of the transaction was not proved by the assessee and hence he argued that the addition should be upheld.

11. Rival contentions heard. On a careful consideration of the facts and circumstances of the case, perusal of the papers on record and case laws cited, I hold as follows.

12. The reasons recorded for re-opening of the assessment are as follows:

“The assessee company filed its return of income for the A.Y. 2011-12 on 22.09.2011 declaring a total income of Rs. 39,020/- as business income. The assessee has not assessed on regular assessment.

Information has been received from the ADIT (Inv.), Unit-2(l), Kolkata vide letter bearing no. ADIT(Inv.)/Kol/Unit.2(1)/Joydeb Sarkar/2017-18/8530 dated 09.03.2018 regarding credible sources that large value cash were deposited into the bank accounts No. 063205500113 of Gupta trading co. account No. 063205500114 of Adarsh Marketing and account No. 134805500060 of Noresh Kr. Parekh respectively were followed by immediate transfer to the bank account of Hindusthan Hardwere (accounts No. 62760525894) and Kazi Nachher Enterprises (A/c No 627605500226).

Prima facie, it appears that funds are rotated through above bank accounts for the purpose of accommodation entry. Accordingly a ‘Cash Trail’ tracing several beneficiaries has been prepared. On perusal the Cash Trail and placed on the records wherein it has been found that alleged funds were deposited in cash into subject bank account, and after layering through 2-3 inermediates bank accounts, the same funds were transferred to the bank accounts of beneficiaries.

“Cash Trail” tracing several beneficiaries has been prepared. On perusal of the cash trail it’s seen that the assessee company M/s. Bhagwant Merchants (P). LTD. as a beneficiary received Rs. 12,00,000/- from M/s. Medimix Sales (P) Ltd. for the F Y. 2010-11.

I have gone through the records and return of the assessee it is seen that the assessee company has no real business activities as no Purchase & Sales find during the F.Y. 2010-11. Therefore, there is no logic of received of Rs. 12,00,000/- from M/s. Medimix Sales (P) Ltd. which is a Shell company. By this modus operandi actually the unaccounted money of the assessee has back to the Books of the assessee.

Thus, income to that extent of Rs. 12,00,000/- as unaccounted income has escaped assessment in terms of section 147 of the Income Tax Act, 1961.

By the reason of the failure on the part of the assessee to disclose fully and truly all material fact necessary for assessment and from this material on record, there is enough reason to believe that income has escaped assessment in the hand of M/s. BHAGWANT MERCHANTS (P). LTD. amounting to Rs. 12,00,000/- for the A.Y. 2011-12 as per provision of section 147 of the I.T. Act, 1961.

Since more than four years have elapsed form the end of the relevant assessment year 2011-12 the case is put up to the Pr.ClT-5, Kolkata for his kind perusal and grant of sanction u/s. 151(1) of the I. T. Act, if satisfied.”

13. The allegation in the reasons that the assessee company had received ₹12 lakhs from M/s. Medimix Sales Pvt. Ltd. is factually incorrect. No addition has been made on this basis also. In the reply rejecting, the objections raised by the assessee to the reopening, the AO stated that the assessee had advanced recoverable in cash or kind of ₹33,50,000/- and that it raised deposits of ₹2,35,226/-. The AO further, states that he has received tangible material and reliable information that the assessee has raised securities premium account of ₹38 lakhs during the previous year. He further states that the re-opening was made after obtaining sanction of the Pr. CIT, Kol-5. All the figures mentioned in this reply are factually incorrect. It is not clear from where the AO picked up these figures. The ld. DR could not prove the correctness of these figures. The AO has mixed up the facts with some other case. Re-opening made based on such incorrect facts or such wrong figures cannot be sustained.

14. The re-opening in this case is beyond a period of 4 years from the end of the assessment year. The AO states that approval for re-opening of assessment was obtained from the Pr. CIT, Kol-5. The original return file was processed u/s 143(1) of the Act. Approval in such cases is to be obtained from ACIT or JCIT u/s 151 of the Act and not from the Pr. CIT. In any event no proof of approval from any authority is produced before me.

15. There is non-application of mind by the AO to the information received, prior the re-opening of the assessment. This fact is clear from the facts and figures given in the reasons recorded are wrong. Such non-application of mind to the information received by the AO prior to recording of reasons for re-opening of assessment makes the reopening bad in law.

16. This Bench of the Tribunal in the case of M/s. Cygnus Investments & Finance Pvt. Ltd. Vs. ACIT, Kolkata in ITA No. 117/Kol/2018 for AY 2008-09 order dated 18.05.2018 from para 7 onwards held as follows:

“7. Further a perusal of the reasons recorded shows non-application of mind by the Assessing Officer. Directions have been given by the DDIT (Inv.) Unit-2(1), Kolkata, vide communication cited. The reasons recorded are only based on such directions. The reopening was done in compliance in such directions.

7.1. The Hon’ble Delhi High Court in the case of Commissioner of Income-tax, IV v.Insecticides (India) Ltd[2013] 357ITR 330 (Delhi) upheld the order of the ITAT Delhi Bench in ITA Nos. 2332-2333/Del/2010, holding as follows:-

“7. We may point out at this juncture itself that the Tribunal did not go into the question of merits. It only examined the question of the validity of the proceedings under Section 147 of the said Act. The Tribunal, in essence, held that the purported reasons for reopening the assessments were entirely vague and devoid of any material. As such, on the available material, no reasonable person could have any reason to believe that income had escaped assessment. Consequently, the Tribunal held that the proceedings under Section 147 of the said Act were invalid.

8. The Tribunal gave detailed reasons for concluding that the proceedings under Section 147 were invalid. Instead of adding anything to the said reasons, we think it would be appropriate if the same are reproduced:—

“In the case at hand, as is seen from the reasons recorded by the AO, we find that the AO has merely stated that it has been informed by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 that the above named company was involved in giving and taking bogus entries/transactions during the relevant year, which is actually unexplained income of the assessee company. The AO has further stated that the assessee company has failed to disclose fully and truly all material facts and source of these funds routed through bank account of the assessee company. In the reasons recorded, it is nowhere mentioned as to who had given bogus entries/transactions to the assessee or to whom the assessee had given bogus entries or transactions. It is also nowhere mentioned as to on which dates and through which mode the bogus entries and transactions were made by the assessee. What was the information given by the Director of Income-tax (Inv.), New Delhi, vide letter dated 16.06.2006 has also not been mentioned. In other words, the contents of the letter dated 16.06.2006 of the Director of Income-tax (Inv.), New Delhi have not been given. The AO has vaguely referred to certain communications that he had received from the DIT(Inv.), New Delhi; the AO did not mention the facts mentioned in the said communication except that from the informations gathered by the DIT (Inv.), New Delhi that the assessee was involved in giving and taking accommodation entries only and represented unsecured money of the assessee company is actually unexplained income of the assessee company or that it has been informed by the Director of Income-tax (Inv.), New Delhi vide letter dated 16.06.2006 that the assessee company was involved in giving and taking bogus entries/transactions during the relevant financial year. The AO did not mention the details of transactions that represented unexplained income of the assessee company. The information on the basis of which the AO has initiated proceedings u/s 147 of the Act are undoubtedly vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which a reasonable person could have formed a belief that income had escaped assessment. In other words, the reasons recorded by the AO are totally vague, scanty and ambiguous. They are not clear and unambiguous but suffer from vagueness. The reasons recorded by the AO do not disclose the AO’s mind as to what was the nature and amount of transaction or entries, which had been given or taken by the assessee in the relevant year. The reasons recorded by the AO also do not disclose his mind as to when and in what mode or way the bogus entries or transactions were given or taken by the assessee. From the reasons recorded, nobody can know what was the amount and nature of bogus entries or transactions given and taken by the assessee in the relevant year and with whom the transaction had taken place. As already noted above, it is well settled that only the reasons recorded by the AO for initiating proceedings u/s 147 of the Act are to be looked at or examined for sustaining or setting aside a notice issued u/s 148 of the Act. The reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No addition can be made to those reasons. Therefore, the details of entries or amount mentioned in the assessment order and in respect of which ultimate addition has been made by the AO, cannot be made a basis to say that the reasons recorded by the AO were with reference to those amounts mentioned in the assessment order. The reasons recorded by the AO are totally silent with regard to the amount and nature of bogus entries and transactions and the persons with whom the transactions had taken place. In this respect, we may rely upon the decision of Hon’ble jurisdictional Delhi High Court in the case ofCIT v. Atul Jain [2000] 299 ITR 383, in which case the information relied upon by the AO for initiating proceedings u/s 147 of the Act did indicate the source of the capital gain and nobody knew which shares were transacted and with whom the transaction has taken place and in that case there were absolutely no details available and the information supplied was extremely scanty and vague and in that light of those facts, the Hon’ble Jurisdictional Delhi High Court held that initiation of proceedings u/s 147 of the Act by the AO was not valid and justified in the eyes of law. The recent decision of Hon’ble jurisdictional High Court of Delhi in the case of Signature Hotels (P.) Ltd. (supra) also supports the view we have taken above.”

9. We do not see any reason to differ with the view expressed by the Tribunal. No substantial question of law arises for our consideration. The appeals are dismissed. There shall be no order as to costs.

7.2. The Jurisdictional High Court in the case of Principal CIT vs G&G Pharma India Ltd. in ITA 545/2015 vide order dt. 08.10.2015 at paras 12 and 13 was held as follows:

“12. In the present case, after setting out four entries, stated to have been received by the assessee on a single date i.e. 10th Feb. 2003, from four entries which were received by the assessee on a single date i.e. 10th Feb. 2003, from four entries which were termed as accommodation entries, which information was given to him by the Director Investigation, the A.O. stated: ‘I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has, introduced its own unaccounted money in its bank account by way of above accommodation entries’. The above conclusion is unhelpful in understanding whether the A.O. applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the A.O., if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the assessee, which must have been tendered along with the return, which was filed on 14th November, 2004 and was processed u/s 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the A.O. to have simply concluded: ‘it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries’. In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decision discussed, the basic requirement that the A.O. must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment is missing in the present case.

13. A perusal of the reasons recorded demonstrate total non application of mind by the A.O. Thus applying the proposition laid down by the Jurisdictional High Court in G&G Pharma India (supra) we hold that the reopening of assessment is bad in law”

7.3. The Hon’ble Delhi High Court in the case of Signature Hotels (P) Ltd. vs ITO and another, reported in 338 ITR 51 (Delhi) has under similar circumstances held as follows:

“For the A.Y. 2003-04, the return of income of the assessee company was accepted u/s 143(1) of the Income-tax Act, 1961 and was not selected for scrutiny. Subsequently, the Assessing Officer issued notice u/s 148 which was objected by the assessee. The Assessing Officer rejected the objections. The assessee company filed writ petition and challenged the notice and the order on objections.

The Delhi High Court allowed the writ petition and held as under: ‘(i) Section 147 of the Income-tax Act, 1961, is wide but not plenary. The assessing Officer must have ‘reasons to believe’ that income chargeable to tax has escaped assessment. This is mandatory and the ‘reason to believe’ are required to be recorded in writing by the Assessing Officer.

(ii) A notice u/s 148 can be quashed if the ‘belief is not bona fide, or one based on vague, irrelevant and non-specific information. The basis of the belief should be discernible from the material on record, which was available with the Assessing Officer when he recorded the reasons. There should be a link between the reasons and the evidence material available with the Assessing Officer.

(iii) The reassessment proceedings were initiated on the basis of information received from the Director of Income-tax (Investigation) that the petitioner had introduced money amounting to Rs.5 lakhs during F.Y.2002-03 as stated in the annexure. According to the information, the amount received from a company, S, was nothing but an accommodation entry and the assessee was the beneficiary. The reasons did not satisfy the requirements of section 147 of the Act. There was no reference to any document or statement, except the annexure. The annexure could not be regarded as a material or evidence that prima facie showed or established nexus or link which disclosed escapement of income. The annexure was not a pointer and did not indicate escapement of income.

(iv) Further, the Assessing Officer did not apply his own mind to the information and examine the basis and material of the information. There was no dispute that the company, S, bad a paid up capital of Rs. 90 lakhs and was incorporated on January 4, 1989, and was also allotted a permanent account number in September 2001. Thus, it could not be held to be a fictitious person. The reassessment proceedings were not valid and were liable to the quashed.

7.4. In the case of CIT vs Atul Jain reported in 299 ITR 383 it has been held as follows:

“Held dismissing the appeals, that the only information was that the assessee had taken a bogus entry of capital gains by paying cash along with some premium for taking a cheque for that amount. The information did not indicate the source of the capital gains which in this case were shares. There was no information which shares had been transferred and with whom the transaction had taken place. The A.O. did not verify the correctness of information received by him but merely accepted the truth of the vague information in a mechanical manner. The A.O. had not even recorded his satisfaction about the correctness or otherwise of the information for issuing a notice u/s 148. What had been recorded by the A.O. as his ‘reasons to believe’ was nothing more than a report given by him to the Commissioner. The submission of the report was not the same as recording of reasons to believe for issuing a notice. The A.O. had clearly substituted form for substance and therefore the action of the A.O. was not sustainable”

8. Respectfully applying the propositions of law laid down in the judgments cited above to the facts of the case, we have no other alternative but to hold that the reopening of the assessments is bad in law. Hence we quash the re-opening of amount.”

17. The Hon’ble Gujarat High Court in the case of Mumtaz Haji Mohmad Memon vs. ITO, Ward-6(1)(1) dated 21.03.2018 at para 11 & 12 stated as follows:

“11. In this context, we have noted that the reasons proceeded on two fundamental grounds. One, that the property in question was sold for a sum of Rs.1,18,95,000/and two; that the assessee had not filed the return and that therefore his 1/3rd share out of the sale proceeds was not offered to tax. Both these factual grounds are totally incorrect as is now virtually admitted by the Revenue. It is undisputed that the assessee had actually filed the return of income for the said assessment year and income also offered his share of the declared sale consideration to tax as capital gain. The Assessing Officer may have dispute with respect to computation of such capital gain, he cannot simply dispute the fact that the assessee did file the return. Importantly, even the second factual assertion of the Assessing Officer in the reasons recorded is totally incorrect. He has referred to said sum of Rs.1,18,95,000/as a sale price of the property. The assessee had produced before the Assessing Officer, the sale deed in which, the sale consideration disclosed was Rs.50 lakhs.

12. The Assessing Officer may be correct in pointing out that when the sale consideration as per the sale deed is Rs. 50 lakhs but the registering authority has valued the property on the date of sale at Rs. 1,18,95,000/for stamp duty calculation, section 50C of the Act would apply, of course, subject to the riders contained therein. However, this is not the cited reason for reopening the assessment. The reasons cited are that the assessee filed no return and that 1/3rd share of the assessee from the actual sale consideration of Rs. 1,18,95,000/therefore, was not brought to tax. These reasons are interconnected and interwoven. In fact, even if these reasons are seen as separate and severable grounds, both being factually incorrect, Revenue simply cannot hope to salvage the impugned notice. Through the affidavit in reply a faint attempt has been made to entirely shift the center of the reasons to a completely new theory viz. the possible applicability of section 50C of the Act. The reasons recorded nowhere mentioned this possibility. Reasons recorded, in fact, ignored the fact that the sale consideration as per the sale deed was Rs. 50 lakhs and that the assessee had by filing the return offered his share of such proceeds by way of capital gain.”

18. Applying the propositions of law laid down in the above case to the facts of this case I have to necessarily hold that the re-opening of assessment based on wrong facts and figures is bad in law. The re-opening is also bad in law as it proves non-application of mind by the AO.

19. Be it as it may the assessee has disclosed the sale of shares in its books of account. Once the sale is declared as income by the assessee, the question of treating the same amount as a cash credit u/s 68 of the Act results in double addition. Moreover, the gross receipt cannot be brought to tax, specifically when the assessee had acquired the shares to an allotment as evidenced by the letter of allotment payment details etc. Thus, the addition is also bad on merits.

20. Before parting, it is noted that the order is being pronounced after ninety (90) days of hearing. However, taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, I rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JSW Limited in ITA No. 6264/Mum/2018 & 6103/Mum/2018, Assessment Year 2013-14, order dated 14th May, 2020.

21. In the result, the appeal of the assessee is allowed.

Kolkata, the 29th May, 2020.