$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
17.
+ ITA 356/2013
COMMISSIONER OF INCOME TAX II ..... Appellant
versus
M/S MULTIPLEX TRADING & INDUSTRIAL
CO. LTD. ..... Respondent
Advocates who appeared in this case:
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.
CORAM:
HON'BLE DR. JUSTICE S.MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
% ORDER
22.09.2015
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 Income Tax Appellate Tribunal
(hereafter the `Tribunal') in ITA No.1202/Del/2011. The said appeal (ITA
ITA 356/2013 Page 1 of 32
No.1202/Del/2011) was preferred by the Revenue to impugn an order dated
23rd December, 2010 passed by the Commissioner of Income Tax (Appeals)
[hereafter the `CIT(A)] allowing the appeal preferred by the Assessee
against an assessment order dated 31st December, 2008 passed by the
Assessing Officer (hereafter `AO') in respect of Assessment Year 2001-02
pursuant to reopening of the assessment under 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 during the relevant period. The
Assessee's challenge to the initiation of re-assessment proceedings as well
as the addition made to the Assessee's taxable income pursuant thereto, was
sustained by the CIT(A) as well as the Tribunal.
3. This appeal was admitted on 6th January, 2014 and the following
questions were framed for consideration:-
ITA 356/2013 Page 2 of 32
"(a) Is the impugned decision of the ITAT justified
and correct inasmuch as it holds that the
reopening of assessment of the petitioner was
not in accordance 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 picked up for scrutiny and
the AO issued notice under 143(2) of the Act on 11th October, 2002.
Thereafter, the Assessee was issued a questionnaire on 7th November, 2002.
Subsequently, another questionnaire was issued to the Assessee on 21 st
March, 2003. The return filed by the Assessee was discussed and the
Assessee was also called upon to file details of the unsecured loans. In
response to the queries, the Assessee sent a letter dated 12 th December, 2003
enclosing therewith the details of unsecured 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
ITA 356/2013 Page 3 of 32
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 entered into an arrangement with Mahan Enterprises
Ltd., whereby, the said company had agreed to finance the cost and expenses
required to be incurred by the Assessee in relation to an assignment from
Gujarat Electricity Board. The issue as to sharing of revenue between the
Assessee and Mahan Enterprises Ltd. was also debated before the AO.
4.2 During the course of the proceedings a letter dated 18th December,
2003 was filed by Mahan Enterprises Ltd. with the AO which, inter alia,
confirmed that certain 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
ITA 356/2013 Page 4 of 32
entries from certain entry operators during the financial year 2000-01. This
included a sum of `55,15,400/- from Richie Rich and `2 Lacs from Adam
Impex Pvt. Ltd. On receiving this information, the AO recorded as a reason
to believe that the income of the Assessee for AY 2001-02 had escaped
assessment and, accordingly, issued a notice dated 31st March, 2008 under
Section 148 of the Act. Thereafter, the AO issued a notice dated 7th
November, 2008 under Section 143(2) of the Act. In response to the
aforesaid notice, the 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 147/148
of the Act.
4.5 The Assessee objected to the reopening of the assessment vide a letter
dated 12th December, 2008. According to the Assessee, the reasons
ITA 356/2013 Page 5 of 32
recorded were wrong; without application of mind; and there was no
tangible evidence, which indicated that income of the Assessee had escaped
assessment.
4.6 The Assessee also filed a detailed response enclosing all evidence that
was readily available with it to support the genuineness of the entries
pertaining to the transaction with Richie 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 the objections filed by the Assessee and
proceeded to reassess the income of the Assessee for the relevant assessment
year. The AO passed an assessment order dated 31st December 2008,
whereby the AO made a further addition of `55,15,400/- on account of
unexplained cash credit in the name of Richie Rich.
ITA 356/2013 Page 6 of 32
4.8 The Assessee preferred an appeal against the re-assessment order
before the CIT(A). The Assessee challenged the action of the AO in
reopening the assessment under Sections 147/148 of the 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 of the Act was satisfied; that is, income
chargeable to tax had escaped assessment by reason of failure on the part of
the Assessee to disclose fully and truly all material facts necessary for his
assessment. The CIT(A) observed that the Assessee had provided all
material in support of the loan availed from Richie Rich and the same was
ignored by the AO. The CIT(A) was of the view that the Assessee had duly
explained the entries in question and, therefore, the addition made by the
AO to the assessable income of the Assessee under Section 68 of the Act,
was erroneous.
ITA 356/2013 Page 7 of 32
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 further held that the
reopening of assessment was not based on any fresh material but material
disclosed by the Assessee during the initial assessment. The Tribunal also
observed that the reasons recorded by the AO for reopening of assessment
did not contain any allegation that there was any failure on the part of the
Assessee to disclose all material facts. The Tribunal relied upon the
decisions of this Court in Wel InterTrade P. Ltd. & Anr. v. ITO: 308 ITR
22 (Del.) and Haryana Acrylic Manufacturing 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.
ITA 356/2013 Page 8 of 32
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 reopening of assessment. He contended that the AO had
proceeded to reopen the assessment on the basis of information obtained
from the Investigation Wing and the same constitutes fresh material that was
not available with the AO at the time of initial assessment. He also pointed
out that the observation of the Tribunal that the reasons recorded by the AO
did not contain the allegation that there was a failure on the part of the
Assessee to disclose all material facts, was factually incorrect. He further
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 proceedings.
ITA 356/2013 Page 9 of 32
7. Countering the arguments made by Mr Sawhney, Mr. Ved Jain,
learned counsel appearing for the Assessee, contended that the Assessee had
disclosed fully and truly all material facts during the initial assessment
proceedings and, therefore, reopening of the assessment could not be
sustained. He referred to the decision of this Court in Haryana Acrylic
Manufacturing Company (supra) in support of his contention that the
provisions of Section 147 of the Act could not be invoked after the 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 Bajrang Lal
(supra) was not applicable as the provisions of Section 147 had undergone a
change. He drew the attention of this Court to paragraph 25 and 26 of the
decision in Haryana Acrylic Manufacturing Company (supra) in support
of this contention.
ITA 356/2013 Page 10 of 32
9. We have heard the learned counsel for the parties.
10. The first and foremost issue to be addressed is whether the AO could
assume jurisdiction to reopen the assessment based on the information
received from the Investigation Wing of the department. 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 reason to suspect. The reason to
believe that income of an Assessee has escaped assessment must be bonafide
and reasonable. It is also settled that the material on which the AO forms his
opinion must not be the same material which had been considered at the
time of the initial assessment, as in that case, the proceedings under Section
147 of the Act would amount to reviewing the assessment order merely on a
change of opinion, which is not permissible.
ITA 356/2013 Page 11 of 32
11. By virtue of the proviso to Section 147 of 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 Act or pursuant to a notice under
Section 142(1) of the Act, or is occasioned by the failure on the part of the
Assessee to disclose fully and truly all material facts necessary for the
assessment.
12. Indisputably, the entries relating to funds availed by the Assessee
from Richie Rich during the relevant year had been scrutinised by the AO
during the regular assessment proceedings and had been explained by the
Assessee. In the circumstances, it would be impermissible for the AO to
reopen the assessment 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.
ITA 356/2013 Page 12 of 32
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 believe' must be based on `tangible material' and not on a
change of opinion. The relevant extract from the said decision is quoted
below:
"6. On going through the changes, quoted above,
made to section 147 of the Act, we find that, prior to the
Direct Tax Laws (Amendment) Act, 1987, reopening could
be done under the above two conditions and fulfilment of
the said conditions alone conferred jurisdiction on the
Assessing Officer to make a back assessment, but in
section 147 of the Act (with effect 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 assessments on the basis of " mere change of
opinion", which cannot be per se reason to reopen. We
must also keep in mind the conceptual difference between
power to review and power to reassess. The Assessing
Officer has no power to review ; he has the power to
reassess. But reassessment has to be based on fulfilment of
certain preconditions and if the concept of " change of
opinion" is removed, as contended on behalf of the
ITA 356/2013 Page 13 of 32
Department, then, in the garb of reopening the assessment,
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 quoted hereinabove. Under the Direct Tax
Laws (Amendment) Act, 1987, Parliament not only deleted
the words " reason to believe" but also inserted the word "
opinion" in section 147 of the Act. However, on receipt of
representations from the companies against omission of the
words " reason to believe", Parliament reintroduced the
said expression and deleted the word " opinion" on the
ground that it would vest arbitrary powers in the Assessing
Officer.
14. 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
ITA 356/2013 Page 14 of 32
which goes to expose the falsity of the statement made by
the assessee at the time of original assessment is different
from drawing a fresh inference from the same facts and
material which was available with the ITO at the time of
original assessment proceedings. The two situations are
distinct and different. Thus, where the transaction itself
on the basis of subsequent information, is found to be a
bogus transaction, the mere disclosure of that transaction
at the time of original assessment proceedings, 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 Late Sanjay Mohan Aggarwal was
one of the oldest and the most savvy entry operators and had been providing
entries to several individuals and companies. It was also informed that S.M.
Aggarwal had been summoned and his statement had been recorded. Though
he had not accepted he was engaged in entry business but in an informal
chat he had admitted to carrying on entry business. The Investigation Wing
had detected the accounts and the entities, which were allegedly used for the
entry business. The same included Mahan Enterprises Ltd. as well as Richie
ITA 356/2013 Page 15 of 32
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
proceedings for reassessment is for the AO to form a reasonable belief on
tangible material that the income of the Assessee has escaped assessment. In
Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock Brokers
Pvt. Ltd.: 291 ITR 502, the Supreme Court explained the above in the
following words:-
"16. Section 147 authorises and permits the Assessing
Officer 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
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 with solicitude
for the public exchequer with an inbuilt idea of fairness to
taxpayers. As observed by the Supreme Court in Central
ITA 356/2013 Page 16 of 32
Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR
662, for initiation of action under section 147(a) (as the
provision stood at the relevant time) fulfilment 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 Assessing Officer is within the realm of
subjective satisfaction (see ITO v. Selected Dalurband Coal
Co. P. Ltd. [1996] 217 ITR 597 (SC) ; Raymond Woollen
Mills Ltd. v. ITO [1999] 236 ITR 34 (SC)."
18. In our view, 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 requirements, be entitled to
reopen a concluded assessment. The question whether the AO has reason to
believe that income has escaped assessment and is liable to be reopened
under Section 147 of the Act has also to be viewed from 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
ITA 356/2013 Page 17 of 32
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 beyond the period of four years. As indicated
hereinbefore, the same would not be permissible unless the condition as
specified in proviso to Section 147 was met and the income of the Assessee
had escaped assessment on account of Assessee's failure to disclose truly
and fully all material facts for assessment of its income. Indisputably, the
issue regarding unsecured loans from Richie Rich had been examined by the
AO in the initial assessment and the Assessee had provided all the necessary
evidences 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
ITA 356/2013 Page 18 of 32
to disclose fully and truly all material facts necessary for his assessment"
and observed as under:
"The words used are "omission or failure to disclose fully
and truly all material facts necessary for his assessment
for that year". It postulates a duty on every assessee to
disclose fully and truly all material facts necessary for his
assessment. What facts 'are material and necessary for
assessment will differ from case to case. In every
assessment proceeding, the assessing authority will, for
the purpose 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
legal inferences, and ascertain on a correct interpretation
of the taxing enactment, the proper tax leviable."
21. In CIT v. Burlop Dealers Ltd.: (1971) AIR 1635, the Supreme Court
referred to the above passage from its decision in Calcutta Discount
Company (supra) and held that if an Assessee has disclosed primary facts
relevant to the assessment, he is under no obligation to instruct the Income
Tax Officer about the inference, which the Income Tax Officer may draw
from those facts. The Court further held that :
ITA 356/2013 Page 19 of 32
"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 may later regard as erroneous."
22. The aforesaid decision was followed by the Supreme Court in a later
decision in ITO v. Madnani Engineering Works Ltd.: (1979) 118 ITR 1
(SC).
23. The aforesaid decisions of the Supreme Court in Burlop Dealers Ltd.
(supra) and ITO v. Madnani Engineering Works Ltd. (supra) were noticed
by this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd. (supra).
The Court has held that once the Assessee had disclosed all facts which have
been examined by the AO during 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
ITA 356/2013 Page 20 of 32
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 all material facts necessary for the assessment. The said
decision cannot be read as an authority for the proposition that if the AO,
based on tangible material obtained subsequent to the conclusion of the
assessment, forms a belief that the income of an Assessee has escaped
assessment on account of bogus entries passed by the Assessee in its books
of accounts, the AO would, nonetheless, be precluded from reopening of the
assessment after expiry of four years from the end of the relevant assessment
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 jurisdiction to reopen
assessment. But in cases where the primary facts as asserted by the Assessee
for framing of assessment are subsequently discovered as false, the
reopening of assessment may be justified.
ITA 356/2013 Page 21 of 32
25. In Phool Chand Bajrang Lal (supra), the Supreme Court had
observed as under:-
"The judgment in Burlop Dealers' case (supra)
cannot be understood as laying down any such proposition
that even where the ITO gets some fresh information which
was not available at the time of the original assessment,
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
facts and circumstances of the particular case.
26. The decision in the case of Burlop Dealers Ltd. (supra) had been
rendered in the context of Section 34(1)(a) of the Income Tax Act, 1922 and
the decision of the Supreme Court in Phool Chand Bajrang Lal (supra) was
delivered in the context of Section 147(a) of the Act as it existed prior to the
amendment introduced w.e.f. 1st April, 1989, which was similarly worded as
section 34(1)(a) of the 1922 Act.
27. Section 147 as it existed prior to 1st April 1989 read as under:-
ITA 356/2013 Page 22 of 32
"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 part of the
assessee, the Assessing Officer has in consequence of
information in his possession reason to believe that income
chargeable to tax has escaped assessment for any
assessment year,
he may, subject to the provisions of sections 148 to 153,
assess or reassess such income or recompute the loss or the
depreciation allowance, as the case may be, for the
assessment year concerned (hereafter in sections 148 to
153 referred to as the relevant assessment year).
Explanation 1: 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 income chargeable to tax has been under-
assessed; 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 Income-
tax Act, 1922 (11 of 1922); or
(d) where excessive loss or depreciation allowance
has been computed.
Explanation 2: Production before the Assessing
Officer of account books or other evidence from which
material evidence could with due diligence have been
discovered by the Assessing Officer will not necessarily
amount to disclosure within the meaning of this section."
ITA 356/2013 Page 23 of 32
28. Section 147 after the amendment w.e.f. 1st April, 1989 reads as
under:-
"147. 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 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 sub-
section (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 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 section 139 or in response to a notice issued
under sub-section(1) of section 142 or section 148 or to
disclose fully and truly all material facts necessary for his
assessment, for that assessment year.
Explanation 1: Production before the Assessing
Officer of account books or other evidence from which
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 assessable under
this Act during the previous year exceeded the maximum
ITA 356/2013 Page 24 of 32
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 Assessing Officer 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.]"
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 assessment and (b) that such
escapement is by reason of omission or failure on the part of the Assessee to
file a return or to disclose fully and truly all material facts necessary for his
assessment for that year. After the Amendment, only one singular
requirement is to be fulfilled under Section 147(a) and that is, that the AO
has reason to believe that income of an Assessee has escaped assessment.
However, the proviso to Section 147 of the Act provides a complete bar for
reopening an assessment, which has been made under Section 143(3) of the
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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
failure on the part of the Assessee to truly and fully disclose all material
facts must be concluded with certain level of certainty. It is in the aforesaid
context that this Court in M/s Haryana Acrylic Manufacturing Co. (P) Ltd.
(supra) explained that the ratio of the decision in Phool Chand Bajrang Lal
(supra) may not be entirely applicable since the same was in respect of
Section 147(a) as it existed prior to the amendment.
30. 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 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
ITA 356/2013 Page 26 of 32
revealed that the Assessee had not claimed to have received any funds from
Richie Rich as share capital. Further, the Assessee had also provided
confirmation of the loans received as well as other details, during the said
proceedings. It would also be relevant to note that the loans availed had been
returned through banking channels during the 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 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 mind to
the material available including the records of the earlier assessment
proceedings. This is also apparent from the fact that during the assessment
proceedings, the AO did not confront the Assessee with any new material or
examine any other evidence other than what was already available in the
ITA 356/2013 Page 27 of 32
initial assessment period.
32. There is yet another safeguard provided to the Assessee which was
sought to be side-stepped by the AO. The Supreme Court in the case of
G.K.N Driveshafts (India) Ltd. 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 letter dated
12th December, 2008 and requested the AO to drop the proceedings. The
Assessee by its letter dated 18th December, 2008 sent in response to another
notice, also provided its response in respect of the alleged accomodation
entries, which were reported by the Investigation Wing. However, the
objections filed by the Assessee were not disposed of by the AO and he
proceeded to frame the assessment. This Court in M/s Haryana Acrylic
Manufacturing Co. (P) Ltd. (supra) had observed that the requirements
ITA 356/2013 Page 28 of 32
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) would entail nullifying the
proceedings. Although the AO is required to provide reasons, receive
objections and pass a speaking order thereon, only after the notice under
Section 148 of the Act has been issued; these requirements are an integral
part of the safeguards which have been inbuilt for ensuring that the
assessments are reopened only for lawful reasons and in a transparent
manner. If the said safeguards are flouted, it would invalidate the exercise of
jurisdiction under Section 147 and 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
ITA 356/2013 Page 29 of 32
are unable to accept that it would be open for the AO to proceed on the basis
that income of the Assessee had escaped assessment on account of the
failure on the part of the Assessee to disclose fully and truly all material
facts necessary for its assessment for AY 2001-02.
35. 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.
36. The next issue to be examined is whether any addition could have
been made to the taxable income of the Assessee as unexplained credit
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 Assessee on the other hand produced ample evidence to indicate
that the entries in question were genuine. During the initial assessment, the
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Assessee had filed a copy of the agreement between the Assessee and
Mahan Enterprises Ltd., which indicated that certain activities of the
Assessee were to be funded by Mahan Enterprises Ltd. Mahan Enterprises
Ltd. had also directly filed a letter with the AO explaining an arrangement
and had also confirmed that it had arranged funds for the Assessee and
further, that the Assessee had also refunded sums to the extent of `1.07
crores. Indisputably, this included the amount obtained by the Assessee from
Richie Rich. The Assessee also produced a copy of the Account of Richie
Rich in its books, bank statements showing the transactions with Richie
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 returned several years
ago and there was no justification for the AO to insist on a fresh
confirmation. The Assessee had also produced the balance sheet and bank
account of Richie Rich reflecting the entries. On examination of the
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evidence, the CIT(A) rightly came to the conclusion that no addition under
Section 68 of the Act in respect of the transaction was sustainable. The
Tribunal also noted the evidence and material produced by the Assessee,
which remained uncontroverted, and upheld the order passed by the CIT(A).
38. In view of the above, the second question is answered in negative, in
favour of the Assessee and against the Revenue.
39. The appeal is, accordingly, dismissed.
40. In the circumstances, the parties are left to bear their own costs.
VIBHU BAKHRU, J
S. MURALIDHAR, J
SEPTEMBER 22, 2015
MK/RK
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