High Court Of Delhi
Sarthak Securities Co. (P) Ltd. vs. Income Tax Officer
Section 147, 148
Asst. Year 2003-04
Dipak Misra, C.J. & Manmohan, J.
Writ Petn. No. 6087 of 2010
18th October, 2010
Counsel Appeared :
Udaibir Singh Kochar, for the Petitioner : Ms. Rashmi Chopra, for the Respondent
JUDGMENT
DIPAK MISRA, C.J. :
By this writ preferred under Art. 226 of the Constitution of India, the assessee-petitioner has prayed for issue of a writ of certiorari for quashment of the notice dt. 25th March, 2010, Annex. PII, issued under s. 148 of the IT Act, 1961 (for brevity ‘the Act’) pertaining to the asst. yr. 2003-04 by the ITO, the 1st respondent herein.
The facts which are imperative to be unfurled are that the assessee-petitioner filed its return for the asst. yr. 2003-04 on 31st March, 2004 declaring an income of Rs. 15,360 . The said return was processed and intimation under s. 143(1) was issued on 6th April, 2004 accepting the return. As put forth, the petitioner decided to issue shares in accordance with its memorandum and articles of association during the previous year relevant to the asst. yr. 2003-04 and for the said purpose approached a number of prospective investors. Four private limited companies, namely, Nishant Finvest (P) Ltd., Shri Dinanath Luhhariwal Spinning Mills (P) Ltd., Division Trading (P) Ltd. and K.R. Fincap (P) Ltd., decided to invest in the shares of the petitioner company. As pleaded, after observing all the legal formalities, the assessee-petitioner allotted the shares to these four companies on 31st March, 2003. The amounts invested by the said companies are Rs. 2,50,000, Rs. 2,50,000 , Rs. 3,00,000 and Rs. 2,50,000 respectively. The above-named companies were active as per the records of the Registrar of Companies (RoC) and are assessed to income-tax and have been allotted PANs by the IT Department.
As pleaded, on 25th March, 2010, a notice under s. 148 of the Act was issued by the respondent No. 1 to the petitioner alleging that he had reason to believe that the income chargeable to tax for the asst. yr. 2003-04 had escaped assessment within the meaning of s. 147 of the Act and, accordingly, he required the petitioner to file the return for the said assessment year. In response to the said notice, the assessee-petitioner requested vide letter dt. 28th April, 2010 to treat the return of income filed on 31st March, 2004 to be the return which would deem to have been filed in compliance with the notice. The assessee-petitioner also requested the respondent to provide a copy of the reasons recorded under s. 148(2) and the approval for issuance of notice. The respondent furnished the reasons recorded by him vide letter dt. 21st July, 2010. While furnishing the reasons, the respondent also initiated assessment proceedings by issuing formal notices. The assessee through his Authorized Representative raised objections to the initiation of the proceedings under s. 147 of the Act on the foundation that the same had not been initiated in accordance with law. Be it noted, in the objections, many a ground was raised and reliance was placed on the decision rendered by the apex Court in CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR (SC) 195 : (2008) 6 DTR (SC) 308 and on the decision of this Court in CIT vs. SFIL Stock Broking Ltd. (IT Appeal No. 1056 of 2009) [reported at (2010) 41 DTR (Del) 98 : (2010) 233 CTR (Del) 69—Ed.].
The respondent No. 1, by order dt. 25th Aug., 2010, rejected the objections raised by the petitioner and issued notices for fixing the hearing to 27th Aug., 2010. Be it noted, the matter was finally heard with the consent of the learned counsel for the parties. We have heard Mr. Udaibir Singh Kochar, learned counsel for the assessee- petitioner, and Ms. Rashmi Chopra, learned counsel for the Revenue.
It is contended by Mr. Kochar that the reasons recorded for initiation of proceedings under s. 147(2) do not disclose the basis. The proceedings have been initiated on the ground of information received from the Investigation Wing but the order of the AO does not reflect any independent application of mind to the information so received. It is urged that the respondent No. 1 has failed to appreciate the ratio laid down in the decision rendered in Lovely Exports (P) Ltd. (supra) when all the requisite information was available with the AO from the very beginning.
Ms. Rashmi Chopra, learned counsel for the Revenue, in support of the order, submitted that the order passed by the AO reflects application of mind and the sufficiency of reasons cannot be gone into at this stage.
The singular question that emerges for consideration is whether in the case at hand, the initiation of proceedings under s. 147 is justified in law or not. The AO, while issuing the notice, has stated thus :
“Whereas I have reason to believe that your income chargeable to tax for the asst. yr. 2003-04 has escaped assessment within themeaning of s. 147 of the IT Act, 1961. I, therefore, propose to assess/reassess the income for the said assessment year and I hereby require you to deliver to me within 20 days from the date of service of this notice, a return in the prescribed form of the income of your income in respect of which you are assessable for the said assessment year.”
10. After receipt of the said notice, the petitioner submitted that the return of income, as filed earlier, should be treated as the return in compliance with the notice under reference. In the said letter, he asked for reasons to enable him to file the objections. After receipt of the said letter, the respondent No. 1, the AO, sent a communication vide Annex. XI wherein it has been stated thus : “M/s Sarthak Securities (P) Ltd. Asst. yr. 2003- 04 19th March, 2010 Information was received from the office of the Addl. Director of IT (Inv.) Unit V that M/s Sarthak Securities (P) Ltd. had received bogus accommodation entries during the financial year 2002-03 relevant to the asst. yr. 2003-04 as per details placed contra. Beneficiary Beneficiary Beneficiary Value of Instrument Date on Name of Bank Branch name bank branch entry No. by which entry a/c holder from of which taken of entry which entry entry giving a/c entry giving taken given bank According to the information received from the Director of IT (Inv.) the accommodation entries are received as share application money or as unsecured loan. The assessee’s balance sheet as on 31st March, 2003 showed that there is introduction of share capital of Rs. 2,84,800 and share premium of Rs. 8,65,000.
In this case return of income for the asst. yr. 2003-04 was filed on declaring income of Rs. 15,360 and as per records assessment has not been completed under s. 143(3) of the IT Act. As the assessee had received bogus accommodation entry of Rs. 10,50,000 during the asst. yr. 2003-04, I have reason to believe that income chargeable to tax has escaped assessment.”
11. After receipt of the said communication, the assessee-petitioner filed objections to the initiation of proceedings under s. 147 of the Act. We think it apposite to reproduce the main part of the objections, which reads as follows :
“1. The reasons do not disclose the basis on which the Addl. Director of IT has termed the receipt of money by the assessee from four incorporated bodies viz. Nishant Finvest (P) Ltd., Shri Dinanath Luhariwala Spinning Mills (P) Ltd., K.R. Fincap (P) Ltd. and Division Trading (P) Ltd. towards share application money as bogus accommodation entries. If any investigations were carried out by Addl. Director of IT or any witnesses were examined by him who implicated the assessee, the report of such investigations or the statements of the witnesses do not form part of the reasons.
2. ‘……………….’
3. Further, the alleged information provided by the Addl. Director of IT has been accepted as gospel truth without any verification by the AO. The law postulates the AO (and not the Addl. Director of IT) to have reason to believe. Blind acceptance of the information furnished by the Addl. Director of IT cannot form reasons leading to the belief by the AO of any escapement of income. 4. The AO has to independently apply his mind to the information received from the Addl. Director of IT and arrive at the belief that income has escaped assessment……… In the instant case, the reasons recorded do not show any application of mind nor the same show any belief independently arrived at, which is the basic pre-requisite for issuing notice under s. 148. 5. At any rate, the alleged bogus shareholders are all incorporated and active companies as per the records of RoC. Moreover, as per the alleged information provided by the Addl. Director of IT himself, all of them had bank accounts and payments were made by them to the assessee company through banking channels. As such the identity of the shareholders stands duly accepted even by the Addl. Director of IT on whose information the proceedings have been initiated……
6. In the instant case, the names of the shareholders have been provided by the Addl. Director of IT himself and are also incorporated in the reasons recorded under s. 148. Hence, in case the Department feels that they were accommodation entry providers, it is free to proceed against them.”
12. The said objections have been rejected on 25th Aug., 2010, mainly stating, inter alia, as follows :
“In this regard, I hereby bring to your notice that, further to the information received from the Investigation Wing and on subsequent detailed examination, inter alia, of bank statements on record, I have strong reasons to form this honest and reasonable belief that you have, during the financial year 2002-03, transacted with : (a) M/s Nishant Finvest on 17th Dec., 2002 for an amount of Rs. 2,50,2000. (b) M/s Dinanath Luhhariwal Spinning Mill on 18th Sept., 2002 for an amount of Rs. 2,50,000. (c) M/s K.R. Fincap (P) Ltd. on 16th Dec., 2002 for an amount of Rs. 2,50,000 and (d) M/s Division Trading (P) Ltd. on 12th March, 2003 for an amount of Rs. 3,00,000 And have used the aforesaid entities as a conduit to absorb your own unaccounted monies and as such have accommodated with these entities.”
After so stating, the AO distinguished the decisions relied on by the assessee and rejected the objections.
13. It is submitted by Mr. Singh, learned counsel for the petitioner, that there has been no application of mind and further no new material has been brought to his notice. It is contended by him that the AO was very much aware of the names of the existing four companies and that being the position, the decision in Lovely Exports (P) Ltd. (supra) gets squarely attracted and not following the ratio of the said decision amounts to improper exercise of power which makes the order vulnerable and totally untenable.
14. In this context, we think it apt to refer to s. 147 of the Act, which reads as under. “147. Income escaping assessment—If the AO has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of ss. 148 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, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in ss. 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-s. (3) of s. 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 end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under s. 139 or in response to a notice issued under sub-s. (1) of s. 142 or s. 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year : Provided further that the AO may assess or reassess such income, other than the income involving matters which are the subject-matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. Explanation 1.—Production before the AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by the AO 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 assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) where an assessment has been made, but— (i) income chargeable to tax has been underassessed; or (ii) such income has been assessed 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.
Explanation 3.—For the purpose of assessment or reassessment under this section, the AO may assess or reassess the income in respect of any issue, which has escaped assessment and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-s. (2) of s. 148.”
15. On scanning of the anatomy of the aforesaid provision, it is clear as crystal that the formation of belief is a condition precedent as regards the escapement of the tax pertaining to the assessment year by the AO. The AO is required to form an opinion before he proceeds to issue a notice. The validity of reasons, which are supposed to sustain the formation of an opinion, is challengeable. The reasons to believe are required to be recorded by the AO.
16. In this regard, it is apt to reproduce a passage from N.D. Bhatt, IAC & Anr. vs. I.B.M. World Trade Corporation (1993) 115 CTR (Bom) 103 : (1995) 216 ITR 811 (Bom) : “It is also well-settled that the reasons for reopening are required to be recorded by the assessing authority before issuing any notice under s. 148 by virtue of the provisions of s. 148(2) at the relevant time. Only the reason so recorded can be looked at for sustaining or setting aside a notice issued under s. 148. In the case of Equitable Investment Co. (P) Ltd. vs. ITO & Ors. (1988) 73 CTR (Cal) 236 : (1988) 174 ITR 714 (Cal), a Division Bench of the Calcutta High Court has held that where a notice issued under s. 148 of the IT Act, 1961, after obtaining the sanction of the CIT 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 CIT has been obtained. The IT Department cannot rely on any other material apart from the report.”
17. In Hindustan Lever Ltd. vs. R.B. Wadkar (2004) 190 CTR (Bom) 166 : (2004) 268 ITR 332 (Bom), a Division Bench has opined thus :
“…. the reasons are required to be read as they were recorded by the AO. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the AO to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the AO to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the concerned assessment year. It is for the AO to form his opinion. It is for him to put his opinion on record in black and white. The reasons recorded should be clear and unambiguous and should not suffer from any vagueness. The reasons recorded must disclose his mind. Reasons are the manifestation of mind of the AO. The reasons recorded should be self-explanatory and should not keep the assessee guessing for the reasons. Reasons provide the link between conclusion and evidence. The reasons recorded must be based on evidence. The AO, in the event of challenge to the reasons, must be able to justify the same based on material available on record. He must disclose in the reasons as to which fact or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish the vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the AO cannot be supplemented by filing an affidavit or making an oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced.” (underlining, italicized in print, is ours)
18. In Asstt. CIT vs. Rajesh Jhaveri Stock Brokers (P) Ltd. (2007) 210 CTR (SC) 30 : (2007) 291 ITR 500 (SC), it has been ruled thus :
“Sec. 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word ‘reason’ in the phrase ‘reason to believe’ would mean cause or justification. If the AO 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 AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. ITO (1991) 98 CTR (SC) 161 : (1991) 191 ITR 662 (SC), for initiation of action under s. 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is ‘reason to 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 AO is within the realm of subjective satisfaction.” (Emphasis, italicized in print, supplied)
19. In this context, we may refer with profit to a Division Bench decision of this Court in IT Appeal No. 1056 of 2009 CIT vs. SFIL Stock Broking Ltd. decided on 27th April, 2010 (supra) wherein the Bench was dealing with the validity of the proceedings under s. 147 of the Act. The Bench reproduced the initial issuance of notice and thereafter referred to the reasons for issue of notice under s. 148 which was provided to the assessee. Thereafter, the Bench referred to the decisions in CIT vs. Atul Jain (2007) 212 CTR (Del) 42 : (2008) 299 ITR 383 (Del), Rajesh Jhaveri Stock Brokers (P) Ltd. (supra), Jay Bharat Maruti Ltd. vs. CIT (2009) 223 CTR (Del) 269 : (2009) 22 DTR (Del) 85 and CIT vs. Batra Bhatta Company (2008) 220 CTR (Del) 531 : (2008) 13 DTR (Del) 115 : (2008) 174 Taxman 444 (Del) and eventually held thus :
“9. In the present case, we find that the first sentence of the so-called reasons recorded by the AO is mere information received from the Dy. Director of IT (Inv.). The second sentence is a direction given by the very same Dy. Director of IT (Inv.) to issue a notice under s. 148 and the third sentence again comprises of a direction given by the Addl. CIT to initiate proceedings under s. 148 in respect of cases pertaining to the relevant ward. These three sentences are followed by the following sentence, which is the concluding portion of the so-called reasons : ‘Thus, I have sufficient information in my possession to issue notice under s. 148 in the case of SFIL Stock Broking Ltd. on the basis of reasons recorded as above.’
10. From the above, it is clear that the AO referred to the information and the two directions as ‘reasons’ on the basis of which he was proceeding to issue notice under s. 148. We are afraid that these cannot be the reasons for proceeding under s. 147/148 of the said Act. The first part is only an information and the second and the third parts of the beginning para of the so-called reasons are mere directions. From the so-called reasons, it is not at all discernible as to whether the AO had applied his mind to the information and independently arrived at a belief that, on the basis of the material which he had before him, income had escaped assessment. Consequently, we find that the Tribunal has arrived at the correct conclusion on facts. The law is well settled. There is no substantial question of law which arises for our consideration.” (Emphasis, italicized in print, is ours)
On a perusal of the aforesaid decisions, it is graphically clear that once the ingredients of s. 147 are fulfilled, the AO is competent in law to initiate the proceedings under s. 147. To put it differently, the conditions precedent as engrafted in the said provision are to be satisfied. At this juncture, it is profitable to refer to the authority in GKN Driveshafts (India) Ltd. vs. ITO & Ors. (2003) 179 CTR (SC) 11 wherein their Lordships of the apex Court have held thus :
“5. We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under s. 148 of the IT Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the AO is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the AO has to dispose of the objections, if filed, by passing a speaking order, before proceeding with the assessment in respect of the abovesaid five assessment years.”
22. In Lovely Exports (P) Ltd. (supra), the apex Court held thus :
“2. Can the amount of share money be regarded as undisclosed income under s. 68 of IT Act, 1961 ?
We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”
23. The obtaining factual matrix has to be tested on the anvil of the aforesaid pronouncement of law. In the case at hand, as is evincible, the AO was aware of the existence of four companies with whom the assessee had entered into transaction. Both the orders clearly exposit that the AO was made aware of the situation by the Investigation Wing and there is no mention that these companies are fictitious companies. Neither the reasons in the initial notice nor the communication providing reasons remotely indicate independent application of mind. True it is, at that stage, it is not necessary to have the established fact of escapement of income but what is necessary is that there is relevant material on which a reasonable person could have formed the requisite belief. To elaborate, the conclusive proof is not germane at this stage but the formation of belief must be on the base or foundation or platform of prudence which a reasonable person is required to apply. As is manifest from the perusal of the supply of reasons and the order of rejection of objections, the names of the companies were available with the authority. Their existence is not disputed. What is mentioned is that these companies were used as conduits. In that view of the matter, the principle laid down in Lovely Exports (P) Ltd. (supra) gets squarely attracted. The same has not been referred to while passing the order of rejection. The assessee in his objections had clearly stated that the companies had bank accounts and payments were made to the assessee company through banking channel. The identity of the companies was not disputed. Under these circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It is totally unwarranted.
24. Resultantly, the initiation of proceedings under s. 147 and issuance of notice under s. 148 of the Act are hereby quashed. In the facts and circumstances of the case, there shall be no order as to costs.
[Citation : 329 ITR 110]
