IN HIGH COURT OF DELHI AT NEW DELHI 9 ITA 692/2016 PRINCIPAL COMMISSIONER OF INCOME TAX-6 Appellant Through: Mr. Rahul Chaudhary, Senior standing counsel. Versus MEENAKSHI OVERSEAS PVT. LTD. Respondent Through: Mr. Kapil Goel, Advocate. CORAM: JUSTICE S. MURALIDHAR JUSTICE CHANDER SHEKHAR ORDER 26.05.2017 Dr. S. Muralidhar, J. 1. This appeal under Section 260A of Income Tax Act, 196 ( Act ) by Revenue is directed against impugned order dated 22nd March, 2016 passed by Income Tax Appellate Tribunal ( ITAT) in ITA No. 3148/Del2013 for Assessment Year (AY) 2004-05. 2. Admit. 3. following question of law is framed for consideration: Whether ITAT erred in law and on facts in quashing assessment proceedings under Section 147/148 of Act? ITA 692/2016 Page 1 of 18 4. facts in brief are that Assessee, Meenakshi Overseas Private Limited, filed its return of income on 30th October, 2004 for AY 2004-05 declaring its income as Rs. 2,050. return was processed under Section 143(1) of Act on 25th November, 2004. 5. It is stated that information was received from Director of Income Tax (Investigation), New Delhi [ DIT(I) ] that during year under consideration, Assessee had received accommodation entries. Notice under Section 148 of Act was issued after taking approval from Additional Commissioner of Income Tax ( ACIT ) under Section 151(1) of Act. Notice under Section 148 of Act was thus issued on 23rd/24th March, 2011 after recording reasons for re-opening of assessment. 6. said reasons as recorded by Assessing Officer ( AO ) read as under: Reasons for belief that income has escaped assessment: In this case, information has been received from Director of Income Tax, (Investigation) New Delhi that Assessee has received amount of Rs. 5,00,000/- as follows: Beneficiary s Name Meenakshi Overseas P. Ltd. Beneficiary Bank Name State Bank of Hyderabad Beneficiary Bank Branch Karol Bagh Value of entre taken 500,000 Instrument no. by which entry taken 8628 Date on which entry taken 31.03.2004 Name of A/c Holder of entry giving account Shubham Electronic & Electric ITA 692/2016 Page 2 of 18 Bank from which entry given SBH Branch of entry given bank KB A/c No. Entry giving account 50038 Information so received has been gone through. above said instruments are in nature of accommodation entry, which Assessee has taken after paying unaccounted cash to accommodation entry given, who is known entry operator as per report of Investigation Wing. In view of these facts, alleged transaction is not bonafide one. Therefore, I have reason to believe that income of Rs. 5,00,000 has escaped assessment in AY 2004-05 due to failure on part of Assessee to disclose fully and truly all material facts necessary for its assessment so far as this amount is concerned. Therefore, this case is fit for issuing notice under Section 148 of Income Tax Act, 1961 . In this case assessment was made under Section 143 (1) not under Section 143 (3) of IT Act, 1961. I am therefore, satisfied that said income, on account of accommodation entry worth Rs. 5,00,000 received by Assessee has escaped assessment and accordingly after recording above said reasons as laid down under provisions of Section 148 (2) of Income Tax Act, 1961 under Section 148 is being issued. 7. In response to said notice served on it, Assessee wrote letter dated 25th April, 2011 stating that original return of income under Section 139 of Act be treated as return filed in compliance with notice under Section 148 of Act. 8. assessment order was passed by AO on 30th November 2011 under Section 143 (3) read with Section 147 of Act treating credit received from Shubham Electronics & Electricals Pvt Ltd. as unexplained income under Section 68 of Act. Besides from statement of ITA 692/2016 Page 3 of 18 Assessee's bank account it was found that there were other credit entries that remained unverified, unsubstantiated and unexplained. As result, "an amount of Rs. 74,50,000 after including Rs. 5,00,000 in respect of Subham Electricals Pvt. Ltd." was treated as unexplained credits under Section 68 of Act and added to total income of Assessee as income from undisclosed sources. 9. Assessee then appealed before Commissioner of Income Tax (Appeals) [ CIT(A) ] which appeal was dismissed by order dated 12th February, 2013. 10. Thereafter, Assessee filed appeal before ITAT. In first round, ITAT by order dated 18th March, 2015 held that requisite sanction had not been obtained by AO from Competent Authority under Section 151 of Act and, therefore, invalidated re-opening of assessment under Section 147/148 of Act. Revenue s appeal against said order of ITAT was allowed by this Court. appeal of Assessee was restored to file of ITAT to consider other grounds relating to validity viz., ground Nos. 1(a) to 1(d). 11. Therefore, in impugned order dated 22nd March 2016, only those grounds were considered by ITAT. 12. Perusing reasons for re-opening of assessment in present case, ITAT came to conclusion that it was apparent that AO proceeded to send notice under Section 147/148 of Act solely on basis of information received from DIT(I). After writing about ITA 692/2016 Page 4 of 18 information received, AO jumped to conclusion that said tabulated instrument are in nature of accommodation entry. This was done without further verification, examination or any other exercise. ITAT also noted that AO has not mentioned nature of transaction which was effected for alleged accommodation entry and even without mentioning date of recording of reasons. Following decision of this Court in Commissioner of Income Tax v. G&G Pharma (2015) 384 ITR 147 (Del.), ITAT held that AO had not applied his mind at time of initiating proceedings of reassessment under Section 147 of Act. ground Nos. 1(a) to 1(d) of Assessee s appeal were, accordingly, allowed. 13. Mr. Rahul Chaudhary, learned Senior standing counsel appearing for Revenue submitted that as original return was processed under Section 143(1) of Act, Revenue was only to demonstrate existence of tangible material which formed basis of formation of belief by AO that income had escaped assessment. This tangible material was in form of investigation report of DIT(I) which was mentioned in reasons for re-opening assessment. Relying on decisions in Signature Hotels Pvt. Ltd. v. Income Tax Officer (2011) 338 ITR 51 (Del), AGR Investment Ltd. v. Additional Commissioner of Income Tax (2011) 336 ITR 146 (Del.), AG Holding v. Income Tax Officer (2013) 352 ITR 364 (Del), Mr. Chaudhary submitted that adequacy or sufficiency of material of basis on which belief was formed by AO for re- opening of assessment could not be enquired into at this stage. ITA 692/2016 Page 5 of 18 14. Mr Chaudhary referred to fact that it became apparent in assessment proceedings that credible information was received in case of one Mr. Mahesh Garg, accommodation entry provider. Statements were made during investigation by former directors who admitted that Mr Garg was providing accommodation entries to various persons including Assessee. This itself shows formation of belief by AO that escaped assessment was justified. 15. Countering above submissions, Mr. Kapil Goel, learned counsel for Respondent/Assessee first pointed out that Court is not obliged to examine reasons with reference of any material that may be disclosed subsequently by Revenue either at stage of considering objections by Assessee to reopening or during re-assessment proceedings. reasons for reopening as penned by AO had to speak for themselves. Secondly, it is submitted that reasons recorded by AO in present case were based on borrowed satisfaction and on directions of Investigation Wing without any independent application of mind. crucial link between material and formation of belief was missing. Thirdly, it is submitted that in G&G Pharma (supra) this Court dealt with similar instance of reopening of assessment by AO on basis of report of DIT(I) without making any effort to discuss material on basis of which such belief was formed. reopening was invalidated by this Court and its decision was accepted by Revenue since no Special Leave Petition was filed by it. ITA 692/2016 Page 6 of 18 16. Relying on decision in Union of India v. Kaumudini Narayan Dalal (2001) 10 SCC 231, Commissioner of Income Tax v. Narendra Doshi (2004) 2 SCC 81, Berger Paints India Limited v. Commissioner of Income Tax, Calcutta (2004) 12 SCC 42 and Commissioner of Income Tax v. Shivsagar Estate (2004) 9 SCC 420 Mr Goel submitted that once Revenue did not challenge correctness of law laid down by High Court and accepted it in case of one Assessee, it was not open to Revenue to challenge its correctness in case of another Assessee without just cause. 17. In support of his contention that information received from Investigation Wing cannot constitute tangible material for re-opening assessment without Assessee being informed what in report of investigation wing constituted tangible material for forming belief, Mr Goel placed reliance on decisions in CIT v. SFIL Stock Broking Limited (2010) 325 ITR 285 (Del.), Sarthak Securities Co. Pvt. Ltd. v. ITO (2010) 329 ITR 110 (Del.), Signature Hotels Pvt Ltd v. ITO (supra), CIT v. Insecticides (India) Limited (2013) 357 ITR 330 (Del.) and Krown Agro Foods (P) Ltd v. Assistant Commissioner of Income Tax, Circle 5(1) (2015) 375 ITR 460 (Del). Reliance was also placed on decision of this Court dated 19th November, 2015 in ITA No. 108 of 2013 (Commissioner of Income Tax-IV v. Independent Media P. Limited), Oriental Insurance Company Limited v. Commissioner of Income Tax (2015) 378 ITR 421 (Del), Rustagi Engineering Udyog (P.) Limited v. DCIT (2016) 382 ITR 443 (Del), Agya Ram v. CIT (2016) 386 ITR 545 (Del) and Rajiv Agarwal ITA 692/2016 Page 7 of 18 v. ACIT (decision dated 16th March, 2016 in Writ Petition (Civil) No. 9659 of 2015). 18. It must be noted at outset that by order dated 4th November, 2016, this Court had directed that file by which reasons to believe for escapement of income was recorded by AO for purpose of reassessment shall be produced for consideration by Court. said file has been produced today by Mr. Chaudhary, learned counsel for Revenue. It is seen that reasons recorded by AO for re-opening assessment has been extracted verbatim by ITAT in para 2 of impugned order. 19. perusal of reasons as recorded by AO reveals that there are three parts to it. In first part, AO has reproduced precise information he has received from Investigation Wing of Revenue. This information is in form of details of amount of credit received, payer, payee, their respective banks, and cheque number. This information by itself cannot be said to be tangible material. 20. Coming to second part, this tells us what AO did with information so received. He says: information so received has been gone through. One would have expected him to point out what he found when he went through information. In other words, what in such information led him to form belief that income escaped assessment. But this is absent. He straightaway records conclusion that "the abovesaid instruments are in nature of accommodation entry which Assessee had taken after paying unaccounted cash to accommodation entry given ITA 692/2016 Page 8 of 18 (sic giver)". AO adds that said accommodation was "a known entry operator" source being "the report of Investigation Wing". 21. third and last part contains conclusion drawn by AO that in view of these facts, alleged transaction is not bonafide one. Therefore, I have reason to be believe that income of Rs. 5,00,000 has escaped assessment in AY 2004-05 due to failure on part of Assessee to disclose fully and truly all material facts necessary for its assessment... 22. As rightly pointed out by ITAT, 'reasons to believe' are not in fact reasons but only conclusions, one after other. expression 'accommodation entry' is used to describe information set out without explaining basis for arriving at such conclusion. statement that said entry was given to Assessee on his paying "unaccounted cash" is another conclusion basis for which is not disclosed. Who is accommodation entry giver is not mentioned. How he can be said to be "a known entry operator" is even more mysterious. Clearly source for all these conclusions, one after other, is Investigation report of DIT. Nothing from that report is set out to enable reader to appreciate how conclusions flow therefrom. 23. Thus, crucial link between information made available to AO and formation of belief is absent. reasons must be self evident, they must speak for themselves. tangible material which forms basis for belief that income has escaped assessment must be evident from ITA 692/2016 Page 9 of 18 reading of reasons. entire material need not be set out. However, something therein which is critical to formation of belief must be referred to. Otherwise link goes missing. 24. reopening of assessment under Section 147 is potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. heart of provision is formation of belief by AO that income has escaped assessment. reasons so recorded have to be based on some tangible material and that should be evident from reading reasons. It cannot be supplied subsequently either during proceedings when objections to reopening are considered or even during assessment proceedings that follow. This is bare minimum mandatory requirement of first part of Section 147 (1) of Act. 25. At this stage it requires to be noted that since original assessment was processed under Section 143 (1) of Act, and not Section 143 (3) of Act, proviso to Section 147 will not apply. In other words, even though reopening in present case was after expiry of four years from end of relevant AY, it was not necessary for AO to show that there was any failure to disclose fully or truly all material facts necessary for assessment. 26. first part of Section 147 (1) of Act requires 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. AO being quasi judicial authority is expected to arrive at subjective satisfaction independently on objective criteria. While ITA 692/2016 Page 10 of 18 report of Investigation Wing might constitute material on basis of which he forms reasons to believe process of arriving at such satisfaction cannot be mere repetition of report of investigation. recording of reasons to believe and not reasons to suspect is pre- condition to assumption of jurisdiction under Section 147 of Act. reasons to believe must demonstrate link between tangible material and formation of belief or 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 large number of cases explaining legal requirement that requires to be satisfied by AO for valid assumption of jurisdiction under Section 147 of Act to reopen past assessment. 28.1 In Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra), reasons for reopening as recorded by AO in proforma and placed before CIT for approval read thus: "11. Reasons for belief that income has escaped assessment.- Information is received from DIT (Inv.-1), New Delhi that assessee has introduced money amounting to Rs. 5 lakh during 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 beneficiary." 28.2 Annexure to said proforma gave Name of Beneficiary, value of entry taken, number of instrument by which entry was taken, date on which entry was taken, Name of account holder of bank from which cheque was issued, account number and so on. ITA 692/2016 Page 11 of 18 28.3 Analysing above reasons together with annexure, Court observed: "14. first sentence of reasons states that information had been received from Director of Income-Tax (Investigation) that petitioner had introduced money amounting to Rs. 5 lacs during financial year 2002-03 as per details given in Annexure. said Annexure, reproduced above, relates to cheque received by petitioner on 9th October, 2002 from Swetu Stone PV from bank and account number mentioned therein. last sentence records that as per information, amount received was nothing but accommodation entry and assessee was beneficiary. 15. aforesaid reasons do not satisfy requirements of Section 147 of Act. reasons and 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 material or evidence that prima facie shows or establishes nexus or link which discloses escapement of income. Annexure is not pointer and does not indicate escapement of income. Further, it is apparent that Assessing Officer did not apply his own mind to information and examine basis and material of information. Assessing Officer accepted plea on basis of vague information in mechanical manner. Commissioner also acted on same basis by mechanically giving his approval. reasons recorded reflect that Assessing Officer did not independently apply his mind to information received from Director of Income-Tax (Investigation) and arrive at belief whether or not any income had escaped assessment." 28.4 Court in Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra) quashed proceedings under Section 148 of Act. facts in present case are more or less similar. present case is therefore covered against Revenue by aforementioned decision. ITA 692/2016 Page 12 of 18 29.1 above decision can be contrasted with decision in AGR Investment v. Additional Commissioner of Income Tax (supra), where 'reasons to believe' read as under: "Certain investigations were carried out by Directorate of Investigation, Jhandewalan, New Delhi in respect of bogus/accommodation entries provided by certain individuals/companies. name of assessee figures as one of beneficiaries of these alleged bogus transactions given by Directorate after making necessary enquiries. In 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 purpose of business or for personal needs such as purchase of assets etc., in form of gifts, share application money, loans etc. 2. To inflate expense in trading and profit and loss account so as to reduce real profits and thereby pay less taxes. It has been revealed that following entries have been received by assessee:...." 29.2 details of six entries were then set out in above 'reasons'. These included name of beneficiary, beneficiary's bank, value of entry taken, instrument number, date, name of account in which entry was taken and account from where entry was given details of those banks. reasons then recorded: "The transactions involving Rs. 27,00,000/-, mentioned in manner above, constitutes fresh information in respect of assessee as beneficiary of bogus accommodation entries provided to it and represents undisclosed income/income from other sources of ITA 692/2016 Page 13 of 18 assessee company, which has not been offered to tax by assessee till its return filed. On basis of this new information, I have reason to believe that income of Rs. 27,00,000/- has escaped assessment as defined by section 147 of Income Tax Act. Therefore, this is fit case for issuance of notice under section 148." 29.3 Court was not inclined to interfere in above circumstances in exercise of its writ jurisdiction to quash proceedings. careful perusal of above reasons reveals that AO does not merely reproduce information but takes effort of revealing what is contained in investigation report specific to Assessee. Importantly he notes that information obtained was 'fresh' and had not been offered by Assessee till its return pursuant to notice issued to it was filed. This is crucial factor that went into formation of belief. In present case, however, AO has made no effort to set out portion of investigation report which contains information specific to Assessee. He does not also examine return already filed to ascertain if 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, reasons to believe read as under: It has been informed by 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 giving and taking bogus entries/ transactions during financial year 1996-97, as per deposition made before them by Shri Sanjay Rastogi, CA during survey operation conducted at his office premises by Investigation ITA 692/2016 Page 14 of 18 Wing. particulars of some of transaction of this nature are as under: Date Particulars of cheque Debit Amt. Credit Amt 18.11.96 305002 5,00,000 Through Bank Account No. CA 4266 of M/s. Mehram Exports Pvt. Ltd. in PNB, New Rohtak Road, New Delhi. Note: It is noted that there might be more such entries apart from above. return of income for assessment year 1997-98 was filed by Assessee on 4th March 1998 which was accepted under Section 143 (1) at declared income of Rs. 4,200. In view of these facts, I have reason to believe that amount of such transactions particularly that of Rs. 5,00,000 (as mentioned above) has escaped assessment within meaning of proviso to Section 147 and clause (b) to Explanation 2 of this section. Submitted to Additional CIT, Range -12, New Delhi for approval to issue notice under Section 148 for assessment year 1997-98, if approved. 30.2 AO was not merely reproducing information received from investigation but took effort of referring to deposition made during survey by Chartered Accountant that Assessee company was involved in giving and taking of bogus entries. AO thus indicated what tangible material was which enabled him to form reasons to believe that income has escaped assessment. It was in those circumstances that in case, Court came to conclusion that there was prima facie material for AO to come to conclusion that Assessee had not made full and true disclosure of all material facts relevant for assessment. ITA 692/2016 Page 15 of 18 31. In Commissioner of Income Tax v. G&G Pharma (supra) there was similar instance of reopening of assessment by AO based on information received from DIT (I). There again details of entry provided were set out in 'reasons to believe'. However, Court found that AO had not made any effort to discuss material on basis of which he formed prima facie view that income had escaped assessment. Court held that basic requirement of Section 147 of Act that 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) Court in similar circumstances invalidated initiation of proceedings to reopen assessment under Section 147 of 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, Assessee s income has escaped assessment, AO would have no jurisdiction to assess same if his reasons to believe were not based on any cogent material. In absence of jurisdictional pre-condition being met to reopen assessment, question of assessing or reassessing income under Section 147 of 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 AO had no reason to believe that income of Assessee for relevant assessment years had escaped assessment. Concededly, AO had no tangible material in regard to any of transactions pertaining to relevant assessment years. ITA 692/2016 Page 16 of 18 Although AO may have entertained suspicion that Assessee s income has escaped assessment, such suspicion could not form basis of initiating proceedings under Section 147 of Act. reason to believe not reason to suspect is precondition for exercise of jurisdiction under Section 147 of Act. 34. Recently in Agya Ram v. CIT (supra), it was emphasized that reasons to believe "should have link with objective fact in 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 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 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 Assessee has escaped assessment, form belief that income of Assessee has escaped assessment. 36. In present case, as already noticed, reasons to believe contain not reasons but conclusions of AO one after other. There is no independent application of mind by AO to tangible material which forms basis of reasons to believe that income has escaped assessment. conclusions of AO are at best reproduction of conclusion in investigation report. Indeed it is 'borrowed satisfaction'. ITA 692/2016 Page 17 of 18 reasons fail to demonstrate link between tangible material and formation of reason to believe that income has escaped assessment. 37. For aforementioned reasons, Court is satisfied that in facts and circumstances of case, no error has been committed by ITAT in impugned order in concluding that initiation of proceedings under Section 147/148 of Act to reopen assessments for AYs in question does not satisfy requirement of law. 38. question framed is answered in negative, i.e., in favour of Assessee and against Revenue. appeal is, accordingly, dismissed but with no orders as to costs. S. MURALIDHAR, J CHANDER SHEKHAR, J MAY 26, 2017/Rm ITA 692/2016 Page 18 of 18 Principal Commissioner of Income-tax-6 v. Meenakshi Overseas Pvt. Ltd