Referred Sections:
Section 147 of the I.T. Act, 1961.
Section 151 of the Act
Section 148 of the Income Tax Act,
Section 143(3) of the Act.
Section 143 (1) of the Act,
Referred Cases / Judgments:
Raymond Woollen Mills Ltd. vs ITO & Ors. [236 ITR 34]
Rakesh Gupta vs CIT [93 taxmann.com 271](P & H).
Coronation Agro Industries Ltd. vs DCIT [390 ITR 464](Bom.)
Harikishan Sunderlal Virmani vs DCIT [303 CTR (Guj.) 214]
PCIT vs Meenakshi Overseas (p.) Ltd. 395 ITR 677 (Del.)
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI `SMC' BENCH,
NEW DELHI
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER,
ITA No. 4558/DEL/2019
[Assessment Year: 2009-10]
Magan Behari Lal, DCIT,
S-89, Greater Kailash II, Circle-16(2), C.R. Building, I.P. Estate,
New Delhi-110048 New Delhi-110002
PAN-AAQPL1792A
Appellant Respondent
Assessee by Shri Salil Kapoor, Ms. Ananya Kapoor
& Shri Sumit Lal Chandani,
Revenue by Shri S.L. Anuragi
Date of Hearing 11/09/2019
Date of Pronouncement 16/09/2019
ORDER
This appeal by the assessee is preferred against the order of the CIT(A)-6, Delhi,
dated 28/03/2019, pertaining to Assessment Year 2009-10.
2. The grievance of the assessee is twofold. Firstly, the assessee is aggrieved by
the action of the CIT(A) to uphold the proceedings initiated u/s 148 of the Act as valid
and lawful proceedings and secondly, the assessee is aggrieved by the addition of
Rs.46,05,594/- made by the AO to the returned income of the assessee.
3. Representatives of both sides were heard at length. Case records were carefully
perused and the judicial decisions relied upon by the representatives were carefully
considered.
2 ITA No.4558/Del/2019
4. Briefly, stated the facts of the case are that the returned income of Rs.2,45,888/-
was accepted u/s 143(1) of the Act. Later on proceedings were initiated u/s 148 of the
Act the reasons for reopening of the assessment read as under:-
Reason for issue of Notice u/s 148 for the A.Y. 2009-10 in the case of Shri
Magan Behari Lal.
1. The assessee is a director of the company which was incorporated on
23.02.1998 under the Company Act, 1956. The business of the assessee company
not mentioned in the return of income for the assessment year 2009-10. The
details of the directors of the assessee company are hereunder:-
(a) Magan Behari Lal.
The assessee filed its return of income on 04.08.2009 for the assessment year
2009-10 declaring income of Rs.2,45,890/-. No security assessment was made in
this case.
Details of information received regarding escapement of income and
analysis:-
2. The information in this case has been received from the Pr. Director of
Income Tax (Investigation). Ahmedabad that the modification of the client codes is
a practice under which brokers change the client codes in sale and purchase
orders of securities after the trades are conducted. It is legally permitted to rectify
inadvertent errors in punching the orders, there were concerns that such
modifications could be misused for manipulative activities in the market. SEBI
conducted a probe into modification of client codes by brokers, pursuant to
observations by the Finance Ministry about many such modifications taking placed
in derivatives transactions at the National Stock Exchange during March, 2010.
The Ahmedabad Investigation Directorate, as an institutional response to be
orchestrated misuse for client code modification for tax evasion, carried out
coordinated limited purpose surveys u/s 133A of the I.T. Act, 1961 at the premises
of 12 brokers and few of their clients across India on 23.03.2015.
The survey repost has been prepared by the ADIT(Inv.) Unit-1(3), Ahmedabad on
the basis of data received from National Stock Exchange (NSE). After analysis of
data received from NSE and after considering the contention of brokers, it is
concluded by the ADIT that CCM has been used as a tool for tax evasion. The
genuine contentions of brokers have been duly addressed in the Survey Report.
Only settled trades have been considered to arrive at the beneficiaries.
The name of the assessee, Shri Magan Behari Lal, appears in the list of
beneficiaries who have taken accommodation entries in the garb of fictitious losses
/profit operated by the brokers. The accommodation entries have been taken
provided in lieu of certain percentage of commission paid, mostly in cash, by the
beneficiaries of such entries.
3 ITA No.4558/Del/2019
I have perused the information received from the Investigation Wing. The report
explains at length the modus operandi of the entry operators along with the
relevant evidence unearthed during the Survey u/s 133A of the I.T Act, 1961. The
report brings out the fact that the flow of funds from between these share broking
entities/concerns and the beneficiaries do not represent any genuine or actual
business transaction.
The aggregate reduction in income of the assessee comes to Rs.46,05,094/- on
account of such Client Code Modification. Having perused and considered the
information received from the Investigation Wingh, as discussed above and in the
circumstances of the case. I have reason to believe that income of the assessee to
the extent of Rs.46,05,094/- has escaped assessment and the case is fit for
issuing notice u/s 148 of the Income Tax Act, 1961.
Income Tax Return in the case for the A.Y. 2009-10 was filed by the assessee
company on 04.08.2009 declaring income of Rs.2,45,890/- vide acknowledgment
no.209. the assessee has intentionally avoided furnishing true and complete
particulars of this transaction. In view of the above, I therefore have reason to
believe that the income of Rs.46,05,094/- has escaped assessment as defined by
Section 147 of the I.T. Act, 1961.
Reasons for formation to belief.
10. Considering the information received from the Pr. Director of Income Tax
(Investigation), Ahmedabad and in the light of contents of the return of income filed
by the assessee for the assessment year under consideration, it is a case where
income to the extent to sum of Rs.46,05,094/- by way of shifting out the
ascertained profit of Rs. NIL and by way of shifting in ascertained loss of
Rs.46,05,094/- as appearing in the details supplied by the Investigation Wing
(Ahemdabad) has been suppressed in its books of accounts and return of income
for the year under consideration by the assessee with the connivance of the share
brokers in consideration of commission paid thereon in cash to the brokers. Hence,
I have reason to believe that the income of the assessee to the extent of
Rs.46,05,094/- has escaped assessment.
Prior to 1989 section 147 provided for two grounds to reopen concluded
assessments:-
i. On basis of information received by the Assessing Officer assessment could be
reopened. This had to be within four years.
ii. Where facts material for assessment are not disclosed in the course of
assessment, whether within or beyond four years.
Supervening these two requirements in the alternative, the initial condition is that
the Assessing Officer has reason to believe that there is escapement of income.
The first requirement regarding information is now dropped by 1989 amendment
and therefore for reopening of assessment within a period of 4 years form the end
of assessment year the only requirement is `'reason to believe''. For a period
beyond 4years in case where an original assessment by was made u/s 143(3),
further, requirement is the non-disclosure of material facts necessary for
assessment by the assessee. However, in cases where no scrutiny assessment
4 ITA No.4558/Del/2019
has been made even beyond period of 4years the only requirement is reason to
believe"
In this case return of income was filed for the year under consideration but no
Scrutiny assessment u/s 143(3) of the Act was made accordingly, in this case,
the only requirement to initiate proceedings u/s 147 is reason to believe as
recorded above. Since, the assessee has filed return of income for the year but no
scrutiny assessment was made clause (b) of explanation 2 to section 147 is
applicable and this is a deemed to be case where income chargeable to tax has
escaped assessment.
In this case the four years but not more than six years have elapsed from the end
of the assessment year under consideration and income chargeable to tax which
has escaped assessment is more than 1 lakh necessary sanction to issue notice
u/s 148 of the Act is being obtained separately from the Pr. Commissioner of
Income Tax-06, Delhi under amended provisions of section 151 of the Act w.e.f.
01.06.2015.
5. At the very outset, the counsel for the assessee drew my attention to the
aforementioned reasons recorded for the reopening of the assessment and pointed out
that the AO has simply relied upon the information received from Pr. DIT(Inv.),
Ahmeadabad without applying his own mind. It is the say of the counsel that in plethora
of judgments, the Hon'ble High Courts and the Tribunals have quashed the
reassessment proceedings on such stereo type reasons devoid of any application of
mind.
6. Per contra, the Ld. DR stated that at the stage of reopening the assessment all
that the AO has to see is whether there is a prima facie case. For this proposition, strong
reliance was placed on the decision of the Hon'ble Supreme Court in the case of
Raymond Woollen Mills Ltd. vs ITO & Ors. [236 ITR 34] and decision of the Hon'ble
Delhi High Court in the case of Paramount Communication (P.) Ltd. [392 ITR
444](Delhi). The Ld. DR also relied upon the decision of the Hon'ble Punjab & Haryana
High Court in the case of Rakesh Gupta vs CIT [93 taxmann.com 271](P & H).
5 ITA No.4558/Del/2019
7. I have given a thoughtful consideration to the orders of the authorities below qua
the issue. The reasons for reopening of assessment have been exhibited elsewhere. It
can be seen from the reasons that the assessment has been reopened solely on the
basis of information received from Pr. DIT(Inv.), Ahmedabad. It seems that the AO has
been carried away by the report of the investigation wing without making any
independent verification to justify the reopening. The Hon'ble High Court of Bombay in
the case of Coronation Agro Industries Ltd. vs DCIT [390 ITR 464](Bom.) had an
occasion to consider an identical issue with identical set of facts has held that notice u/s
148 of the Act is without jurisdiction. The relevant finding of the Hon'ble High Court is
read as under:-
"2. This petition challenges notice dated 31st March, 2016 issued
under Section 148 of the Income Tax Act, 1961. The impugned
notice seeks to reopen the assessment for Assessment Year
2009-10. The regular assessment proceedings were completed on
28th December, 2011 under Section 143(3) of the Act.
3. The reasons in support of the impugned notice relies upon the
information received from the Principal Director of Income Tax that
the petitioner has benefited from a client code modification by
which a profit of Rs.22.50 lakhs was shifted out by the petitioner's
broker, resulting in reduction of the petitioner's taxable income.
The only basis for forming the belief is the report from the Principal
Director of Income Tax and the application of mind to the report of
the Assessing Officer along with the record available with him.
This information and application of mind has led the Assessing
Officer to form a reasonable belief that there is not only an
escapement of income but there has been failure to truly and fully
disclose all material facts and information as the modus
operandi of shifting profits was not known to the Revenue as not
disclosed by the petitioner when the Assessing Officer passed the
order in regular assessment proceedings.
4. We note that the reasons in support of the impugned notice
accept the fact that as a matter of regular business practice, a
broker in the stock exchange makes modifications in the client
code on sale and / or purchase of any securities, after the trading
is over so as to rectify any error which may have occurred while
punching the orders. The reasons do not indicate the basis for the
6 ITA No.4558/Del/2019
Assessing Officer to come to reasonable belief that there has been
any escapement of income on the ground that the modifications
done in the client code was not on account of a genuine error,
originally occurred while punching the trade. The material
available is that there is a client code modification done by the
Assessee's broker but there is no link from there to conclude that it
was done to escape assessment of a part of its income. Prima
facie, this appears to be a case of reason to suspect and not
reason to believe that income chargeable to tax has escaped
assessment.
5. In the above view, prima facie, we are of the view that the
impugned notice is without jurisdiction as it lacks reason to believe
that income chargeable to tax has escaped assessment."
8. The Hon'ble High Court of Gujarat in the case of Harikishan Sunderlal Virmani vs
DCIT [303 CTR (Guj.) 214] again had the occasion to consider similar issue on identical
set of facts and has quashed the notice issued u/s 148 of the Act. The relevant findings
of the Hon'ble High Court read as under:-
"5.3. Thus from the reasons recorded, the reopening of the
assessment is on the information/data supplied by the office of the
Principal Director of Income Tax (Investigation), Ahmedabad and the
information received from the Principal Director of Income Tax
(Investigation), Ahmedabad vide his confidential letter dated 8/3/2016.
From the information received, it appears that though the client code
of the assessee with the broker - Guinness Securities Limited was
WW/2647, modified client code was found to be WW/2108 and
therefore, to verify the genuineness of the modification of the client
code, by applying Lavenshtein Distance Analysis or digit edit analysis
utility, distance was found to be 3 and therefore, it is believed that the
code is not wrongly typed and it is termed as deliberate change and
establishing non-genuineness and contrived nature of the code
change. From the reasons recorded, it does not appear that
verification of the material on record there is independent formation of
opinion by the A.O. and that any income has escaped assessment due
to any failure on the part of the assessee in not disclosing truly and
correct facts/material necessary for assessment. From the reasons
recorded, it appears that the impugned reopening proceedings are on
the borrowed satisfaction. No independent opinion is formed. On the
plain reading of the reasons recorded what emerges is that the A.O.
on considering the information received from the Principal Director of
Income Tax (Investigation), Ahmedabad, reassessment proceedings
have been initiated on the ground that the income escaped
assessment. However, there is no assertion regarding the basis on
which material on record, he has come to such conclusion. Therefore,
the material on the basis of which the A.O. seeks to assume the
7 ITA No.4558/Del/2019
jurisdiction under section 147 if the Act is the information received
from the external source viz. the Principal Director of Income Tax
(Investigation), Ahmedabad. It cannot be disputed that on the basis of
the information received from another agency, there cannot be any
reassessment proceedings. However, after considering the
information/material received from other source, A.O. is required to
consider the material on record in case of the assessee and thereafter
is required to form an independent opinion on the basis of the material
on record that the income has escaped assessment. Without forming
such an opinion, solely and mechanically relying upon the information
received from other source, there cannot be any reassessment for the
verification.
5.4 At this stage it is required to be noted that even in the reasons
recorded, there is no allegation that there was any failure on the part
of the assessee in not disclosing truly and fully material facts
necessary for assessment. Under the circumstances, the assumption
of the jurisdiction to reopen the assessment beyond the period of four
years in exercise of powers under section 147 of the Act is bad in law
and contrary to the provisions of section 147 of the Act. Under the
circumstances, on the aforesaid ground alone, the impugned
reassessment proceedings deserve to be quashed and set aside.
5.5 In view of the above and for the reasons stated above, present
petition succeeds. The impugned notice issued under section 148 of
the Income Tax Act, 1961 and reopening of the proceedings for A.Y.
2009-2010 cannot sustain and the same deserves to be quashed and
set aside and are hereby quashed and set aside. Rule is made
absolute accordingly. In the facts and circumstances of the case, there
shall be no order as to costs."
9. The Hon'ble High Court of Delhi in the case of PCIT vs Meenakshi Overseas (p.)
Ltd. 395 ITR 677 (Del.) was seized with the following question of law for consideration
as.
"Whether the ITAT erred in law and on facts in quashing the assessment
proceedings u/s 147/148 of the Act ?"
And the Hon'ble High Court answered the question in negative i.e. in favour of the
assessee and against the Revenue. The relevant findings of the Hon'ble High Court read
as under:-
"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
8 ITA No.4558/Del/2019
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 accommodation entry giver is not mentioned.
How he can be said to be "a known entry operator" is even more
mysterious. Clearly the source for all these conclusions, one after the
other, is the Investigation report of the DIT. Nothing from that report is
set out to enable the reader to appreciate how the conclusions flow
therefrom.
23. Thus, the crucial link between the information made available to
the AO and the formation of belief is absent. The reasons must be self
evident, they must speak for themselves. The tangible material which
forms the basis for the belief that income has escaped assessment
must be evident from a reading of the reasons. The entire material
need not be set out. However, something therein which is critical to the
formation of the belief must be referred to. Otherwise the link goes
missing.
24. The reopening of assessment under Section 147 is a potent power
not to be lightly exercised. It certainly cannot be invoked casually or
mechanically. The heart of the provision is the formation of belief by
the AO that income has escaped assessment. The reasons so
recorded have to be based on some tangible material and that should
be evident from reading the reasons. It cannot be supplied
subsequently either during the proceedings when objections to the
reopening are considered or even during the assessment proceedings
that follow. This is the bare minimum mandatory requirement of the
first part of Section 147 (1) of the Act.
25. At this stage it requires to be noted that since the original
assessment was processed under Section 143 (1) of the Act, and not
Section 143 (3) of the Act, the proviso to Section 147 will not apply. In
other words, even though the reopening in the present case was after
the expiry of four years from the end of the relevant AY, it was not
necessary for the AO to show that there was any failure to disclose
fully or truly all material facts necessary for the assessment.
26. The first part of Section 147 (1) of the Act requires the AO to have
"reasons to believe" that any income chargeable to tax has escaped
assessment. It is thus formation of reason to believe that is subject
matter of examination. The AO being a quasi judicial authority is
expected to arrive at a subjective satisfaction independently on an
objective criteria. While the report of the Investigation Wing might
constitute the material on the basis of which he forms 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."
9 ITA No.4558/Del/2019
10. Respectfully following the decision of the Hon'ble High Courts (supra), I am of the
considered view that the reasons recorded for reopening of the assessment are devoid
of any independent application of mind by the AO and therefore, the notice issued u/s
148 of the Act deserves to be quashed.
11. Since, the reopening of the assessment has been quashed by me thereby
making assessment order bad in law, I do not find it necessary to dwell into the merits of
the additions.
12. Before closing, I have to say that all the decisions relied upon by the Ld. DR are
misplaced as they are clearly distinguishable on the facts of the case in hand.
13. In the result, appeal filed by the assessee is allowed on the point of law.
The order is pronounced in the open court on 16/09/2019
Sd/- Sd/-
[SUCHITRA KAMBLE] [N.K. BILLAIYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Delhi; Dated: 16/09/2019.
f{x~{tÜ? fÜA P.S
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi
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