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TMI Blog2019 (3) TMI 1670X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection that reasons recorded in instant case are completely vague and lacks total coherence as manifest from cursory look to the same as even minimum pains to describe and detail the composition of alleged income escapement for Rs. 2.93 crores is not taken by AO and approving authority where ultimately it is found that correct escapement is of Rs. 1.75 crores (refer para 8.1 CIT(A) order) thus breaking reasons recorded completely beyond repair as sought to be done feebly by Ld CIT(A) by referring to extraneous material like letters internally exchanged between AO and other agencies/officers etc which is totally alien to reasons recorded/communicated to assessee (refer para 7.1, 7.2 and 7.3 of ld CIT(A) order which has reduced reasons recording and communicating requirement to an empty ritual it looks like reasons are recorded here completely by CIT(A) in his order for fist time which is sufficient to quash the reopening) ; further fatal defect of incorrect mention of no return filing by assessee in reasons recorded/communicated to assessee is wrongly treated by Ld CIT(A) in his order at para 8.3.1 to 8.3.3 as inadvertent error thereby validating the incorrect reasons which is imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on share applicants being matter of records. Further in the said reply request was made to AO to provide cross examination of Mr. Himanshu Verma. As noted in assessment order at page 13 where from it is clear that only when statements were provided at fag end of assessment proceedings there assessee requested for cross examination of those persons including Himanshu Verma in reply dated 29.12.2017. Thereafter, the AO has passed the order u/s 147/143(3) of the Act making sole addition of Rs. 1,75,00,000 on account of bogus share application u/s. 68 of the Act in contrast to amount of Rs. 2.93 crores as referred in reasons recorded on 03.03.2017 by assessing the income of the assesse at Rs. 1,75,4,1760/- u/s. 143(3)/147 of the Act vide order dated 29.12.2017. Against the said assessment order, assessee appealed before the Ld. CIT(A), who vide his impugned order dated 31.1.2019 has dismissed the appeal of assessee. Aggrieved with the order of the Ld. CIT(A), assessee is in appeal before the Tribunal. 3. Ld counsel for the assessee while arguing the appeal has made preliminary submissions before us on legal issues of validity of extant reopening action u/s 148 of the Act and on vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mn no 12 of said format of reasons Ld AR highlighted to us the manner in which approval is given by PCIT: 12. Whether the P Commissioner of income tax is satisfied With reasons recorded by ITO that it is a fit case for issue of notice u/s 148 of the Income Tax Act. I am satisfied it is fit case for issue of notice u/s 148 of the IT Act" 3.3 On basis of aforesaid background Ld AR made his arguments that reopening made by AO as sustained by Ld CIT(A) is manifestly unlawful and without authority of law. The crux of his arguments is a) firstly reasons recorded are based on borrowed satisfaction without independent application of mind; b) secondly reasons are based on wrong and incorrect facts as evident from AO's narration of no return filing where assesssee has admittedly filed regular return 30.09.2011 and figure of Rs. 2.93 crores is found to be non existing qua assessee and correct figure as finally noted in assessment order is Rs. 1.75 crores; c) reasons recorded lack and fail on live nexus test and there is no coherence in reasons recorded which is flashing from the following portions of reasons recorded "on going through the list of accommodation entries provider... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ening against the appellant has transgressed his boundary by referring to various extraneous material which is not forming part of reasons recorded/communicated to assessee which approach is proscribed in law as validity of reopening is to strictly seen with reference to reasons recorded and as communicated to assessee; Thus making his arguments Ld AR pleaded for quashing of reopening action of AO which is simply based on pretence and guesswork. Various case laws and precedents are relied by Ld AR some of which are discussed by us in succeeding paragraphs . 3.4 Further Ld AR has highlighted with reference to specific ground taken before Ld CIT(A) that there is gross violation of principle of natural justice and no cross examination is offered for revenue's witness whose statements is heavily relied by AO to draw adverse inference u/s 68 of the Act (reference was made to assessment /AO order sheet entry dated 15/12/2017-page 12 of assessment order where only statements were purveyed at fag end of assessment proceedings without cross examination being offered for the same) and Ld CIT(A) without making legitimate efforts to cure that fatal defect by directing AO for doing the needfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of extant reopening u/s 148 made on basis of reasons recorded dated 03/03/2017 , we find force in arguments of Ld AR as recorded above. Before testing the arguments of both sides on validity of reopening action, it may be profitable to refer to guiding words of Hon'ble Delhi High Court in case of Signature Hotels as cited by Ld AR (338 ITR 51) on subject of reopening made on basis of allegation of accommodation entry: "5. Before dealing with the facts of the case, we may notice some judgments of the Supreme Court when proceedings under Section 147/148 of the Act can be initiated on statements made by third person on the account of "accommodation entry". In ITO versus Lakhmani Mewal Das, [1976] 103 ITR 437 (SC), the Supreme Court affirmed the decision of the High Court and held that there was nothing to show in the confession made by a third party related to the loan taken by the assessee much less a loan which was shown to have advanced by that person to the assessee and, therefore, live link or close nexus, which should be there between the material and the belief formed by the Assessing Officer was missing or was too tenuous to provide legal sound basis for initiation of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the case of Lakhmani Mewal Das [1976] 103 ITR 437." 6.3 The view taken by the Supreme Court in Lakhmani Mewal Das (supra) was followed in Ganga Saran and Sons Private Limited versus Income-Tax Officer-I, [1981] 130 ITR 1 (SC). The matter was again examined by the Supreme Court in Phool Chand Bajrang Lal and Another versus Income-Tax Officer and Another, [1993] (203) ITR 456 (SC). In the said case, information was received by the Assessing Officer that the third company had never actually advanced loans to any person and the said third company was in the business consisting entirely of name lending. Noticing the judgment in Lakhmani Mewal Das (supra) it was held that the nature of information which was available was vastly different. In the case of Lakhmani Mewal Das (supra), the information was extremely vague and scanty whereas in the case of Phool Chand Bajrang Lal (supra), the information was specific, unambiguous and clear. 6.4 In the present case the undated reasons recorded by the Assessing Officer for initiation of proceedings read as under: " Information received from the office of the DIT (Inv.)-VI, New Delhi revealed that M/s Signature Hotels ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961, after obtaining the sanction of the Commissioner of Income-tax is challenged, the only document to be looked into for determining the validity of the notice is the report on the basis of which the sanction of the Commissioner of Incometax has been obtained. The Income-tax Department cannot rely on any other material apart from the report." (emphasis supplied) 6.7. The aforesaid paragraph in IBM World Trade Corporation (supra) was cited with approval in Prashant S. Joshi versus Income-Tax Officer and Another, 2010 (324) ITR 154 (Bom.) and it was held as under: "Section 147 provides that if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may subject to the provisions of sections 148 to 163, 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 the section. The first proviso to section 147 has no application in the facts of this case. The basis postulate which underlies section 147 is the formation of the belief by the Assessing Officer that any income chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctively with reference to the language used in the order itself. Orders are not like old wine becoming better as they grow older." 6.9 Similarly, Hon'ble Orissa High court Visa Comtrade Ltd. vs UOI and Ors. 338 ITR 343 has held that "It is a settled legal proposition that if an order is bad in its inception, it does not get sanctified at a later stage. A subsequent action/development cannot validate an action which was not lawful at its inception, for the reason that the illegality strikes at the root of the order.( (vide: Upen Chandra Gogoi v. State of Assam & Ors., AIR 1998 SC 1289; Mangal Prasad Tamoli (Dead) by L.Rs. v. Narvadeshwar Mishra (Dead) by L.Rs. & Ors. , AIR 2005 SC1964; and Ritesh Tiwari & Anr. v. State of U.P. & Ors., AIR 2010 SC 3823))." 6.10. So examining validity of extant reopening strictly on basis of reasons recorded which are approved by PCIT and are communicated to assessee , we find it very difficult to fathom and understand what was in mind of AO so that he has reopened the present case . As evident from reasons which are reproduced elsewhere in this order it would be clear like broad day light that reasons are recorded without independent application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Driveshafts (India) Ltd.'s case had specifically directed that when a notice under section 148 of the said Act is issued and the noticee files a return and seeks reasons for the issuance of the notice, the Assessing Officer is bound to furnish reasons within a reasonable time. On receipt of the reasons, the noticee is entitled to file objections to the issuance of notice and the Assessing Officer is bound to dispose of the same by passing a speaking order. These are specific directions given by the Supreme Court in all cases where notices under section 148 of the said Act are issued. Surely, the Assessing Officer could not have construed these specific directions to be a mere empty formalities or dead letters? There is a strong logic and purpose behind the directions issued by the Supreme Court and that is to prevent high-handedness on the part of Assessing Officers and to temper any action contemplated under section 147 of the said Act by reason and substance. In fact, even section 148 (2) stipulates that the Assessing Officer shall, before issuing any notice under the said section, record his reasons for doing so. The Supreme Court has only carried forward this mandatory requirem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d their signatures obtained. iii. The signature of the deponent should be obtained on each page and at the end of the statement. Each correction should be attested by the deponent. A deponent who refuses to sign is liable for penalty u/s 272A. iv. In case of a statement on oath the oath should be administered by the AO. The form of oath/affirmation is stipulated in the schedule to section 6 of the Indian Oaths Act. The form of oath given is: "I do swear in the name of God/or I do solemnly affirm that what I shall state will be the truth, the whole truth and nothing but the truth". v. A witness should first be examined by the party producing him (assessee or the AO), followed by cross-examination by the other party. After the crossexamination there can be a reexamination by the original party. vi. The statement recorded from a departmental witness cannot be used against the assessee unless the assessee is given an opportunity to cross-examine the witness. A statement without such cross examination would not be admissible evidence. A copy of the statement so recorded should be given to the assessee. In case the assessee does not wish to cross-examine the witness, that fact should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law arose." 6.11.2 This decision fully applies to preset facts because here also AO has wrongly stated in reasons format that return is not filed whereas return was filed in regular course u/s 139 and even on amount reasons described wrong amount as correct amount was discovered later on in assessment proceedings. This decision is in relied in Delhi A bench ITAT decision in case of M/s Asis Plywood Pvt Ltd order dated 28.01.2019 in ITA 2144/Del/2015 placed at pages 7 to 17 of compilation on records. Similar is decision of The Hon'ble Gujarat High Court in the case of Vijay Harishchandra Patel vs. ITO (2018) 400 ITR 167 (Guj.) (HC) where also it was held that "When the original ground for reopening the assessment did not survive, the Assessing Officer had sought to proceed further with the assessment on totally different grounds, which was impermissible. Despite the fact that the assessee had duly submitted that he had filed his return, wherein the very same issue had been examined, instead of dropping the proceedings, the Assessing Officer had sought to proceed further for reasons which were alien to the reasons recorded for reopening the assessment. Thus the very intent and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he writ petition is accordingly allowed, but without order on costs". Here also we find that ld CIT(A) has tried to make such "correction" which is neither innocuous nor innocent; as it was clearly aimed at improving what was a fatally defective "reasons to believe" and mask the reality, to wit, that the revenue authorities utterly failed to apply their minds to the facts and circumstances of the case. 6.11.3 Next decision relied is Ahmedabad C bench ITAT decision in case of Rajendra Amin in ITA 2880/Ahd/2015 order dated 30.11.2016 wherein it is held that: "4. We have heard both the sides. Case file perused. It is not is dispute that the Assessing Officer's main ground as extracted hereinabove is that the assessee had not filed his return for the impugned assessment year. The same turns to be contrary to page (s) 16 to 18 of the paper book wherein the assessee's return in question is stated to have been filed on 19.12.2011 declaring total income as Rs. 27,02,520/- including long term capital gains of Rs. 35,35,765/- on sale of the impugned immovable property in question. The Assessing Officer's order dated 09.02.2015 disposing of assessee's objection to reopening reads that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these two companies, but, it is Rs. 50 lakhs each i.e., Rs. 1 crore. Thus, the facts mentioned in the reasons for reopening of the assessment are incorrect and non-existent. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Atlas Cycle Industries (1989) 180 ITR 319 (P & H) held as under : "Held (i) that the Tribunal was right in cancelling the reassessment as both the grounds on which the reassessment notice was issued were not found to exist, and, therefore, the Income-tax Officer did not get jurisdiction to make a reassessment." 13.2. Since the facts are totally different as A.O. had reason to believe that Rs. 10 lakhs has escaped assessment on account of Rs. 5 lakhs received from two companies referred to above, which was ultimately found to be incorrect and nonexistent, therefore, there may not be any application of mind on the part of the A.O. to proceed to initiate the re-assessment proceedings. There is no other material available on record except the information received from the Investigation Wing. The A.O. on the basis of the information and material received from Investigation Wing has recorded reasons for reopening of the assessment which was u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operators. It is also informed by DIT (Inv.), New Delhi, that assessee has received 03 accommodation entries totaling to Rs. 5,00,545/- from M/s. V.R. Traders Pvt. Ltd., It is also reported that extensive enquiry have been carried out by the DIT (Inv.) regarding non-genuine transactions. The A.O. reproduced the same facts in the reasons and straightaway concluded that the findings of the report of Investigation Wing shows the creditworthiness of the lender has not been established, therefore, these transactions SEEM to be non-genuine. The record reveals that vide Order dated 16.05.2018, the Ld. D.R. was directed to produce copy of the report of the DIT (Inv.) referred to and recorded by the A.O. in the reasons. However, till date, no such report has been produced on record for verification of the Tribunal. It may be noted that though in the reasons the A.O. has mentioned that value of the entry was of s.5,00,545/- but ultimately the A.O. made addition of Rs. 5 lakhs in the case of M/s. V.R. Traders Pvt. Ltd., in which case accommodation entry is stated to have been received. There is, thus, a factual error in the reasons recorded for reopening of the assessment regarding the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l.) held as under : "The basic requirement of law for reopening an assessment is application of, mind by the Assessing Officer, to the materials produced prior to reopening the assessment, to conclude that he has reason to believe that income has escaped assessment. Unless that basic jurisdictional requirement is satisfied- a post mortem exercise of analysing materials produced subsequent to the. reopening will not make an inherently defective reassessment order valid. ; The assessee filed returns for the assessment year 2003-04 which was processed under section 143(3) of the Income-tax Act, 1961. Based on information received from he Directorate of Investigation about four entries, stated to have been received by the assessee on a single date, i.e., February 10, 2003} from four entities which were termed as accommodation entries, the Assessing Officer issued notice to the assessee for reassessment for the assessment year 2003-04 on March 19, 2010 stating that it was evident that the assessee company had introduced its own unaccounted money in its bank by way of accommodation entries. The assessee's appeal was dismissed by the Commissioner (Appeals). The Tribunal concluded, fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. He straightaway records the conclusion that "the abovesaid instruments are in the nature of accommodation entry which the Assessee had taken after paying unaccounted cash to the accommodation entry given (sic giver)". The AO adds that the said accommodation was "a known entry operator" the source being "the report of the Investigation Wing". 21. The third and last part contains the conclusion drawn by the AO that in view of these facts, "the alleged transaction is not the bonafide one. Therefore, I have reason to be believe that an income of Rs. 5,00,000 has escaped assessment in the AY 2004-05 due to the failure on the part of the Assessee to disclose fully and truly all material facts necessary for its assessment... " 22. As rightly pointed out by the ITAT, the 'reasons to believe' are not in fact reasons but only conclusions, one after the other. The expression 'accommodation entry' is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the Assessee on his paying "unaccounted cash" is another conclusion the basis for which is not disclosed. Who is the accommod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre- condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment. 27. Each case obviously turns on its own facts and no two cases are identical. However, there have been a large number of cases explaining the legal requirement that requires to be satisfied by the AO for a valid assumption of jurisdiction under Section 147 of the Act to reopen a past assessment. 28.1. In Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra), the reasons for reopening as recorded by the AO in a proforma and placed before the CIT for approval read thus: "11. Reasons for the belief that income has escaped assessment.- Information is received from the DIT (Inv.- 1), New Delhi that the assessee has introduced money amounting to Rs. 5 lakh during the F.Y. 2002- 03 relating to A.Y. 2003-04. Details are contained in Annexure. As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above decision can be contrasted with the decision in AGR Investment v. Additional Commissioner of Income Tax (supra), where the 'reasons to believe' read as under: "Certain investigations were carried out by the Directorate of Investigation, Jhandewalan, New Delhi in respect of the bogus/accommodation entries provided by certain individuals/companies. The name of the assessee figures as one of the beneficiaries of these alleged bogus transactions given by the Directorate after making the necessary enquiries. In the said information, it has been inter-alia reported as under: "Entries are broadly taken for two purposes: 1. To plough back unaccounted black money for the purpose of business or for personal needs such as purchase of assets etc., in the form of gifts, share application money, loans etc. 2. To inflate expense in the trading and profit and loss account so as to reduce the real profits and thereby pay less taxes. It has been revealed that the following entries have been received by the assessee:...." 29.2. The details of six entries were then set out in the above 'reasons'. These included name of the beneficiary, the beneficiary's bank, value of the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No. CA 4266 of M/s. Mehram Exports Pvt. Ltd. in the PNB, New Rohtak Road, New Delhi. Note: It is noted that there might be more such entries apart from the above. The return of income for the assessment year 1997-98 was filed by the Assessee on 4th March 1998 which was accepted under Section 143 (1) at the declared income of Rs. 4,200. In view of these facts, I have reason to believe that the amount of such transactions particularly that of Rs. 5,00,000 (as mentioned above) has escaped the assessment within the meaning of the proviso to Section 147 and clause (b) to the Explanation 2 of this section. Submitted to the Additional CIT, Range -12, New Delhi for approval to issue notice under Section 148 for the assessment year 1997-98, if approved." 30.2. The AO was not merely reproducing the information received from the investigation but took the effort of referring to the deposition made during the survey by the Chartered Accountant that the Assessee company was involved in the giving and taking of bogus entries. The AO thus indicated what the tangible material was which enabled him to form the reasons to believe that income has escaped assessment. It was in those circumstances th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation or materials on record..." It was further emphasized that "mere allegation in reasons cannot be treated equivalent to material in eyes of law. Mere receipt of information from any source would not by itself tantamount to reason to believe that income chargeable to tax has escaped assessments." 35. In the decision of this Court dated 16th March 2016 in W.P. (C) No. 9659 of 2015 (Rajiv Agarwal v. CIT) it was emphasized that "even in cases where the AO comes across certain unverified information, it is necessary for him to take further steps, make inquiries and garner further material and if such material indicates that income of an Assessee has escaped assessment, form a belief that income of the Assessee has escaped assessment." 36. In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a 'borrowed satisfaction'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that: "16. In the reasons recorded, the Assessing Officer has reproduced the information received from investigation wing without conducting any enquiries on such information received that shows non application of mind as evident from the facts stated by the Assessing Officer in the last para the information received from the investigation wing is considered with reference to the return of income available on record, having satisfaction with the application / information received in the case of the assessee, I have reason to believe that income has escaped assessment. However, he has not mentioned the factum of quantum income of Rs. 10 lacs of share application money and the name of the suspicious accommodation entry providers for A. Y. 2008-09 to establish/substantiate reason to believe and the escaped assessment within meaning of the provision of section 147 of the IT Act 1961. 17. The above information in the reasons recorded clearly shows that the Assessing Officer has simply relied on the information received from the investigation wing without verifying the same with reference to the facts of the case; that the Assessing Officer has not even mentioned the name of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on reproduction of conclusion drawn in the investigation report cannot be held as valid reason to believe without application of mind. In this judgment their lordship also held that w here nothing from the report of investigation wing is set out to enable the reader to appreciate how the conclusions flow there from then there is no independent application of mind by the AO to the tangible material which form the very basis of the reasons to believe that income has escaped assessment. 20. In the instant case, as we have noted above, the note of satisfaction recorded by the AO in para 10 of the reasons is based on the information received from the director of investigation wing and the AO without making any effort to examine and discuss the material received from the Investigation Wing with the support of tangible material gathered by way of conducting inquiry shall be held as without application of the mind since, he has used the same to form reason to believe that income had escaped assessment. This also shows that the AO proceeded to initiate reassessm ent proceedings on the basis of borrowed satisfaction w ithout any application of mind and exercise on the information r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation in the context of the facts of the case and only on satisfaction leading to a reasonable belief that income chargeable to tax has escaped assessment, that reopening notice is to be issued. 8. From the reasons, it is evident that the impugned notice has been issued on the basis of information received from the Deputy Collector Income Tax (Investigation) alleging that M/s Nivyah Infrastructure & Telecom Services Ltd is a penny stock listed on the Bombay Stock Exchange and that the petitioner had dealt with the same leading to escapement of income. On receipt of information, the least that is expected of the Assessing Officer is to examine the same in the context of the facts of this case and satisfy himself whether the information received does prima facie lead to a reasonable belief that income chargeable to tax has escaped assessment. In this case, the reasons indicate that the Assessing Officer has not carried out such exercise and accepted the report of the Deputy Collector of Income Tax (Investigation) Mumbai to conclude that the petitioner had dealt with Nivyah Infrastructure and Telecom Services Ltd during the previous year relevant to the assessment year 201112. Ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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