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2015 (10) TMI 23 - DELHI HIGH COURT

2015 (10) TMI 23 - DELHI HIGH COURT - [2015] 378 ITR 351 - Validity of reopening of assessment - assessment was re-opened based on information received by the AO from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators during the relevant period - Held that:- Once the tangible material available with the AO provides a live link with him forming a belief that income of an Assessee had escaped assessment, he would, subject to other statutory req .....

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that the AO had reopened the assessment on the same material as was available during the initial assessment proceedings.

In the present case it is difficult to accept that reasonable conclusion could be drawn that the Assessee had failed to disclose truly and fully all material facts necessary for its assessment. In the facts of this case, where the AO had already in the initial round examined and verified the entries in question, it would only be reasonable for the AO to examine the .....

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period and this was also confirmed independently to the AO. In the given circumstances, the least that was required for the AO was to independently apply his mind to ascertain that the information provided was credible and sufficient for drawing a reasonable inference that the income of the Assessee had escaped assessment on account of failure on the part of the Assessee to disclose truly and fully all material facts. Clearly, the examination of facts required at the threshold to form such a be .....

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sessment period. In view of the above, we find no infirmity with the conclusion of the CIT(A) and the Tribunal that AO could not have assumed jurisdiction to reopen the assessment under Section 147/148 of the Act.

Assessee produced ample evidence to indicate that the entries in question were genuine. During the initial assessment, the Assessee had filed a copy of the agreement between the Assessee and Mahan Enterprises Ltd., which indicated that certain activities of the Assessee were .....

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ichie Rich, as well as confirmation from Richie Rich. The Assessee had also pointed out that the transaction in question had been examined during the regular assessment proceedings. The AO simply rejected the contention as non-tenable. The confirmation produced by the Assessee was faulted as not being of a current date. We are unable to find any justification for these views and, therefore, the assessment order cannot be sustained. The funds availed by the Assessee from Richie Rich had been retu .....

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assed by the CIT(A) - Decided in favour of the Assessee - ITA 356/2013 - Dated:- 22-9-2015 - Dr. S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Kamal Sawhney, Senior Standing Counsel with Mr Raghvendra Singh, Junior Standing Counsel For the Respondent : Mr Ved Jain and Mr Pranjal Srivastava ORDER Vibhu Bakhru, J 1. This appeal under Section 260A of the Income Tax Act, 1961 (hereafter the Act ) has been preferred by the Revenue impugning an order dated 9th November, 2012 passed by the .....

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Section 147 of the Act. 2. The controversy involved in the present appeal relates to the action of the AO in reopening the assessment in respect of transactions that had been examined and verified by the AO during the initial assessment proceedings which culminated in the assessment order dated 31st December, 2003. The assessment was re-opened based on information received by the AO from the Investigation Wing that the Assessee had obtained accommodation entries from certain entry operators dur .....

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with law; and (b) Whether the ITAT fell into error in not upholding the Revenue s contentions that the other accounts have to be added on merits under Section 68 of the Income Tax Act. 4. Briefly stated, the relevant facts necessary to consider the controversy involved in the present appeal are as under:- 4.1 The Assessee filed its return of income for the Assessment Year (hereafter the AY ) 2001-02 declaring an income of ₹ 27,83,483/- under Section 115JB of the Act. The said return was pi .....

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ed loans alongwith copies of confirmation, copies of income tax returns and copies of ledger accounts pertaining to the unsecured loans. This also included details pertaining to Richie Rich Overseas Pvt. Ltd. (hereafter Richie Rich ). During the course of the assessment proceedings, the Assessee was also called upon to explain its agreement with Mahan Enterprises Ltd. In response thereto, the Assessee filed the Agreement entered into with Mahan Enterprises. The Assessee explained that it had ent .....

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rtain investments had been arranged by Mahan Enterprises Ltd. and out of the loans so arranged the Assessee had, subsequently, returned back loans to the extent of ₹ 1.07 crores. The said amount also included loan received from Richie Rich, which is sought to be taxed as unexplained credit in the re-assessment proceedings. 4.3 The AO received information from the Investigation Wing of the Income Tax Department that the Assessee had obtained accommodation entries from certain entry operator .....

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he Assessee requested the AO to treat the return as originally filed as a return in response to the notice under Section 148 of the Act. The Assessee also sought the reasons for the re-opening of the assessment. 4.4 Thereafter, the AO proceeded with the reassessment proceedings and called upon the Assessee to furnish details in respect of certain transactions reflected in its bank account. Subsequently, the AO also provided the Assessee with the reasons for initiating proceedings under Section 1 .....

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hie Rich. This included the Ledger Accounts of Richie Rich in the books maintained by the Assessee; a bank statement; and confirmation of accounts. Subsequently, before the CIT(A), the Assessee also produced a copy of the income tax return filed by Richie Rich for the AY 2001-02; copy of the balance sheet of Richie Rich for the AY 2001-02; copy of the bank statement of Richie Rich; copy of the company master details of Richie Rich with the Registrar of Companies. 4.7 The AO did not dispose of th .....

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Act as well as challenged the addition of ₹ 55,15,400 on merits. The Assessee prevailed before the CIT(A). The CIT(A) held that the AO had not been able to make out the case to sustain the reopening of assessment under Section 147 of the Act. The CIT(A) noted that the notice under Section 148 of the Act had been issued after a lapse of 4 years from the end of the relevant assessment year and in the circumstances, reopening of assessment was permissible only if the proviso to Section 147 o .....

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sable income of the Assessee under Section 68 of the Act, was erroneous. 4.9 The Revenue, being aggrieved by the decision of CIT(A), preferred an appeal before the Tribunal, which was rejected by the order dated 9th November, 2012 - the order impugned in the present appeal. The Tribunal had held that the Assessee had disclosed all the relevant material at the time of original assessment and, therefore, the pre-condition under the proviso to Section 147 of the Act had not been met. The Tribunal f .....

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facturing Company v. CIT & Anr.: 308 ITR 38 in support of its view that the reopening of assessment could not be sustained as the necessary condition for invoking Section 147 of the Act had not been met. The Tribunal was also of the view that the addition had been made on account of a change in AO s opinion, which was not permissible. 5. Mr Sawhney, learned counsel appearing for the Revenue, contended that the Tribunal had erred in observing that no fresh material had been relied upon for re .....

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urther contended that the Tribunal had not examined the issue regarding addition made under Section 68 of the Act on merits. 6. Mr Sawhney relied upon the decision of the Supreme Court in Phool Chand Bajrang Lal v. Income-Tax Officer: 2003 ITR 456 in support of his contention that information obtained by the AO subsequent to the assessment could lead to a belief that income chargeable to tax had escaped assessment even though the transaction in question had been examined during the assessment pr .....

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expiry of four years from the relevant assessment year unless the AO came to the conclusion that the income had escaped by reason or failure on the part of the Assessee to file a return or to disclose fully and truly all material facts necessary for the assessment. He submitted that in the present case the Assessee had provided all necessary material and, thus, the reopening of assessment under Section 147 of the Act could not be sustained. 8. He also submitted that the judgment of Phool Chand .....

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nt. It is now well settled that the AO can reopen the assessment if he has reason to believe the Assessee s income has escaped assessment. However, his reasons to believe must not be based on surmises, conjectures or occasioned by change in opinion but must be based on some tangible and credible material on the basis of which a reasonable belief could be formed that income of an assessee has escaped assessment. The language of Section 147 requires the AO to have a reason to believe and not a rea .....

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the Act, an assessment, which has been concluded under section 143(3) of the Act - that is, the return filed by the Assessee was scrutinised and verified by the AO - cannot be reopened after the expiry of four years from the end of the relevant assessment year unless the condition as specified under the proviso to Section 147, is met; that is, the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return, either under Section 139(1) of the Ac .....

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ssment unless the AO, on the basis of credible and tangible material, which was not in his possession during the initial assessment, believes that income of the Assessee has escaped assessment. 13. The Supreme Court in CIT v. Kelvinator of India Ltd.: 320 ITR 561 (SC) emphasised that the expression reason to believe as used in Section 147 of the Act must be read in context of the scheme of the Act and cannot be interpreted in a manner as conferring arbitrary power on the AO. Thus, such reason to .....

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fect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words " reason to believe" failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen a .....

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sment, review would take place. One must treat the concept of " change of opinion" as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is " tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as .....

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In the present case the material on the basis of which the AO has formed such opinion is a report from the Investigation Wing of the department. This would certainly be fresh material and cannot be considered to be the same material which was available with the AO at the time of initial assessment proceedings. 15. In Phool Chand Bajrang Lal (supra), the Court had explained as under:- Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment w .....

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eedings, cannot be said to be a disclosure of the true and full facts in the case and the ITO would have the jurisdiction to reopen the concluded assessment in such a case. 16. The next aspect to be examined is whether the material which was forwarded to the AO i.e. report of the Investigation Wing could reasonably lead to the inference that the income of the Assessee had escaped assessment. A copy of the said information has been placed on record. The Investigation Wing had reported that one La .....

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me included Mahan Enterprises Ltd. as well as Richie Rich. A list of entries had also been provided, which included certain bank transactions with the Assessee. The investigation report also indicated that the entries were provided as gifts or subscription to share capital. 17. Section 147 of the Act does not postulate that the AO arrives at a final conclusion and ascertains, as a fact, that the income of the Assessee had escaped assessment. All that is required at the stage of initiation of pro .....

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The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute .....

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believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. P. Ltd. [1996] 217 ITR .....

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the standpoint of the AO. Thus indisputably, in certain circumstances, such information as was received by the AO in this case may have provided the AO with a reason to believe that income of the Assessee had escaped assessment. In our view, the Tribunal erred in observing that the AO had reopened the assessment on the same material as was available during the initial assessment proceedings. 19. It is also relevant to note that, in the present case, the AO has sought to reopen the assessment be .....

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es to establish the genuineness of the transactions. In view of the same, it has been contended that the conditions as contained in the proviso to Section 147 have not been met as there has been no failure on the part of the Assessee to either file the return of income or to disclose fully and truly all material facts. 20. In Calcutta Discount Company v. Income Tax Officer: 41 ITR 191 the Supreme Court considered the import of the words "omission or failure to disclose fully and truly all m .....

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se of computing or determining the proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession whether on disclosure by the assessee, or discovered by him on the basis of the facts disclose, or otherwise, the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper le .....

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her held that : mere production of the books of account or other evidence from which material facts could with due diligence have been discovered does not necessarily amount to disclosure within the meaning of Section 34(1), but where on the evidence and the materials produced the Income-tax Officer could have reached a conclusion other than one which he has reached, a proceeding under Section 34(1)(a) will not lie merely on the ground that the Income-tax Officer has raised an inference which he .....

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g the assessment proceedings, it would not be open for the AO to allege that the Assessee had not truly and fully disclosed all material facts. In our view, the decision in the case of M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) must be understood in the context of the facts of that case. It is also relevant to note that in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra) the reasons recorded by the AO did not even mention that the Assessee had failed to disclose truly and fully .....

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ment year since the issue had been examined in the initial assessment. 24. In our view, the question whether the Assessee could have been stated to disclosed fully and truly all material facts have to be examined in the light of facts of each case and also the reasons that led the AO to believe that income of an Assessee has escaped assessment. In a case where the primary facts have been truly disclosed and the issue is only with respect to the inference drawn, the AO would not have the jurisdic .....

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subsequent to the conclusion of the original assessment proceedings, which enables him to form a reasonable belief that the income of the assessee had escaped assessment because of the omission or failure of the assessee to disclose true and full facts during the assessment proceedings, he cannot reopen the assessment. The observations in Burlop s case, noticed above, were made in the peculiar fact-situation of that case and cannot be construed to be of universal application irrespective of the .....

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April 1989 read as under:- "147 If- (a) the Assessing Officer has reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the Assessing Officer or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax has escaped assessment for that year, or (b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the .....

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of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where income chargeable to tax has been underassessed; or (b) where such income has been assessed at too low a rate; or (c) where such income has been made the subject of excessive relief under this Act or under the Indian Incometax Act, 1922 (11 of 1922); or (d) where excessive loss or depreciation allowance has been computed. Explanation 2: Production before the A .....

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8 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section and in sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under subsection (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the .....

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material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso. Explanation 2: For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assess .....

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ssessed at too low a rate; or (iii) such income has been made the subject of excessive relief under this Act; or (iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed.]" 29. It is at once seen that the Amendment in Section 147 of the Act brought about a material change in law w.e.f. 1st April, 1989. Section 147(a) as it stood prior to 1st April 1989 required the AO to have a reason to believe that (a) the income of the Assessee has escaped ass .....

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which has been made under Section 143(3) of the Act, after the expiry of four years. However, this proscription is not applicable where the income of an Assessee has escaped assessment on account of failure on the part of the Assessee to make a return or to disclose fully and truly all material facts necessary for his assessment. Thus, in order to reopen an assessment which is beyond the period of four years from the end of the relevant assessment year, the condition that there has been a failu .....

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ion could be drawn that the Assessee had failed to disclose truly and fully all material facts necessary for its assessment. In the facts of this case, where the AO had already in the initial round examined and verified the entries in question, it would only be reasonable for the AO to examine the information received and to at least verify the same with the records of the concluded assessment proceedings. A plain examination of the same would have revealed that the Assessee had not claimed to h .....

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ided was credible and sufficient for drawing a reasonable inference that the income of the Assessee had escaped assessment on account of failure on the part of the Assessee to disclose truly and fully all material facts. Clearly, the examination of facts required at the threshold to form such a belief would be more detailed if the said transaction in question had already been subjected to scrutiny during the initial assessment. 31. In the present case, it does not appear that the AO applied its .....

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v. ITO: (2003) 259 ITR 19 (SC); (2003) 1 SCC 72 had held that if an Assessee if so desirous, could seek reasons for issuance of notice under Section 148 of the Act and the AO would be bound to furnish the same within a reasonable time. The Court further held that that the noticee would be entitled to file objections against the issuance of the notice and the AO would be bound to dispose of the same by passing a speaking order. 33. In the present case, the Assessee filed its objections by a lette .....

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rements regarding recording the reasons to believe; communicating the same to the Assessee; permitting the Assessee to file the objections; and passing a speaking order disposing of the objections are all designed to ensure that the AO does not reopen assessments, which have been finalized, on his mere whim and fancy and that he does so only on the basis of lawful reasons. It was further held that a deviation from the directions issued by the Supreme Court in G.K.N Driveshafts (India) Ltd.(supra .....

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d 148 of the Act. 34. Thus, although we are in agreement with the contention advanced by the Revenue that information received by the AO regarding passing of bogus entries in its books after the conclusion of the assessment proceedings could in certain circumstances, provide tangible material for AO to reopen assessment and assume jurisdiction, but, in the facts of the present case, we are unable to accept that it would be open for the AO to proceed on the basis that income of the Assessee had e .....

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dit under Section 68 of the Act. At the outset, it is relevant to observe that although the AO had reopened the assessment, the AO did not produce any material or confront the Assessee with any credible evidence that could lead to the inference that the entries pertaining to the loan from Richie Rich were bogus or accommodation entries. In the absence of such material, it was clearly not permissible for the AO to take a view contrary to one taken by the AO during the initial assessment. 37. The .....

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