Versus: Efore Uralidhar AND Hander Hekhar

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Page 1 Wednesday, June 07, 2023

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2017 SCC OnLine Del 8691 : (2017) 395 ITR 677
In the High Court of Delhi at New Delhi

(BEFORE S. MURALIDHAR AND CHANDER SHEKHAR, JJ.)
Principal Commissioner of Income Tax-6 .….

Appellant
Mr. Rahul Chaudhary, Senior standing counsel.
Versus
Meenakshi Overseas Pvt. Ltd. .…. Respondent
Mr. Kapil Goel, Advocate.
ITA 692/2016
Decided on May 26, 2017
ORDER
S. MURALIDHAR, J.:— This appeal under Section 260A of the Income
Tax Act, 196 (‘Act’) by the Revenue is directed against the impugned
order dated 22nd March, 2016 passed by the Income Tax Appellate
Tribunal (‘ITAT) in ITA No. 3148/Del 2013 for the Assessment Year
(‘AY’) 2004-05.
2. Admit.
3. The following question of law is framed for consideration:
Whether the ITAT erred in law and on facts in quashing the
assessment proceedings under Section 147/148 of the Act?
4. The facts in brief are that the Assessee, Meenakshi Overseas
Private Limited, filed its return of income on 30th October, 2004 for the
AY 2004-05 declaring its income as Rs. 2,050. The return was
processed under Section 143(1) of the Act on 25th November, 2004.
5. It is stated that information was received from the Director of
Income Tax (Investigation), New Delhi [‘DIT(I)’] that during the year
under consideration, the Assessee had received accommodation entries.
Notice under Section 148 of the Act was issued after taking approval
from the Additional Commissioner of Income Tax (‘ACIT’) under Section
151(1) of the Act. Notice under Section 148 of the Act was thus issued
on 23rd/24th March, 2011 after recording the reasons for re-opening of
the assessment.
6. The said reasons as recorded by the Assessing Officer (‘AO’) read
as under:
“Reasons for the belief that income has escaped assessment:
In this case, information has been received from the Director of
Income Tax, (Investigation) New Delhi that the Assessee has
received amount of Rs. 5,00,000/- as follows:
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Beneficiary's Name Meenakshi Overseas P. Ltd.

Beneficiary Bank Name State Bank of Hyderabad
Beneficiary Bank Branch Karol Bagh
Value of entre taken 500,000
Instrument no. by which entry 8628
taken
Date on which entry taken 31.03.2004
Name of A/c Holder of entry Shubham Electronic & Electric
giving account
Bank from which entry given SBH
Branch of entry given bank KB
A/c No. Entry giving account 50038
Information so received has been gone through. The above said

instruments are in the nature of accommodation entry, which the
Assessee has taken after paying unaccounted cash to the
accommodation entry given, who is a known entry operator as per
the report of the Investigation Wing. In view of these facts, the
alleged transaction is not the bonafide one. Therefore, I have reason
to believe that an income of Rs. 5,00,000 has escaped assessment in
the AY 2004-05 due to failure on the part of the Assessee to disclose
fully and truly all material facts necessary for its assessment so far
as this amount is concerned. Therefore, this case is fit for issuing
notice under Section 148 of the Income Tax Act, 1961. In this case
the assessment was made under Section 143(1) not under Section
143(3) of the IT Act, 1961.
I am therefore, satisfied that the said income, on account of
accommodation entry worth Rs. 5,00,000 received by the Assessee
has escaped assessment and accordingly after recording the above
said reasons as laid down under the provisions of Section 148(2) of
the Income Tax Act, 1961 under Section 148 is being issued.”
7. In response to the said notice served on it, the Assessee wrote a
letter dated 25th April, 2011 stating that the original return of income
under Section 139 of the Act be treated as return filed in compliance
with the notice under Section 148 of the Act.
8. An assessment order was passed by the AO on 30th November
2011 under Section 143 (3) read with Section 147 of the Act treating
the credit received from Shubham Electronics & Electricals Pvt. Ltd. as
unexplained income under Section 68 of the Act. Besides from the
statement of the Assessee's bank account it was found that there were
other credit entries that “remained unverified, unsubstantiated and
unexplained.” As a result, “an amount of Rs. 74,50,000 after including
Rs. 5,00,000 in respect of Subham Electricals Pvt. Ltd.” was treated as
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unexplained credits under Section 68 of the Act and added to the total
income of the Assessee as income from undisclosed sources.
9. The Assessee then appealed before the Commissioner of Income
Tax (Appeals) [‘CIT(A)’] which appeal was dismissed by an order dated
12th February, 2013.
10. Thereafter, the Assessee filed an appeal before the ITAT. In the
first round, the ITAT by an order dated 18th March, 2015 held that the
requisite sanction had not been obtained by the AO from the
Competent Authority under Section 151 of the Act and, therefore,
invalidated the re-opening of the assessment under Section 147/148 of
the Act. The Revenue's appeal against the said order of the ITAT was
allowed by this Court. The appeal of the Assessee was restored to the
file of the ITAT to consider the other grounds relating to the validity
viz., ground Nos. 1(a) to 1(d).
11. Therefore, in the impugned order dated 22nd March 2016, only
those grounds were considered by the ITAT.
12. Perusing the reasons for re-opening of the assessment in the
present case, the ITAT came to the conclusion that it was apparent that
the AO proceeded to send a notice under Section 147/148 of the Act
“solely on the basis of information received from the DIT(I).” After
writing about information received, the AO “jumped to the conclusion
that said tabulated instrument are in the nature of accommodation
entry.” This was done without further verification, examination or any
other exercise. The ITAT also noted that the AO “has not mentioned
nature of transaction which was effected for alleged accommodation
entry and even without mentioning the date of recording of reasons.”
Following the decision of this Court in Commissioner of Income Tax v.
G&G Pharma (2015) 384 ITR 147 (Del.), the ITAT held that the AO had
not applied his mind at the time of initiating the proceedings of
reassessment under Section 147 of the Act. The ground Nos. 1(a) to 1
(d) of the Assessee's appeal were, accordingly, allowed.
13. Mr. Rahul Chaudhary, learned Senior standing counsel appearing
for the Revenue submitted that as the original return was processed
under Section 143(1) of the Act, the Revenue was only to demonstrate
the existence of tangible material which formed the basis of formation
of a belief by the AO that the income had escaped assessment. This
tangible material was in the form of an investigation report of the DIT
(I) which was mentioned in the reasons for re-opening the assessment.
Relying on the decisions in Signature Hotels Pvt. Ltd. v. Income Tax
Officer (2011) 338 ITR 51 (Del), AGR Investment Ltd. v. Additional
Commissioner of Income Tax (2011) 336 ITR 146 (Del.), AG Holding v.
Income Tax Officer (2013) 352 ITR 364 (Del), Mr. Chaudhary submitted
that the adequacy or sufficiency of the material of the basis on which
the belief was formed by the AO for reopening of the assessment could
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not be enquired into at this stage.

14. Mr. Chaudhary referred to the fact that it became apparent in
the assessment proceedings that credible information was received in
the case of one Mr. Mahesh Garg, accommodation entry provider.
Statements were made during investigation by former directors who
admitted that Mr. Garg was providing accommodation entries to various
persons including the Assessee. This itself shows the formation of belief
by the AO that the escaped assessment was justified.
15. Countering the above submissions, Mr. Kapil Goel, learned
counsel for the Respondent/Assessee first pointed out that the Court is
not obliged to examine the reasons with reference of any material that
may be disclosed subsequently by the Revenue either at the stage of
considering the objections by the Assessee to the reopening or during
the re-assessment proceedings. The reasons for the reopening as
penned by the AO had to speak for themselves. Secondly, it is
submitted that the reasons recorded by the AO in the present case
were based on a ‘borrowed satisfaction’ and on the directions of the
Investigation Wing without any independent application of mind. The
crucial link between the material and the formation of the belief was
missing. Thirdly, it is submitted that in G&G Pharma (supra) this Court
dealt with a similar instance of reopening of an assessment by the AO
on the basis of the report of the DIT(I) without making any effort to
discuss the material on the basis of which such belief was formed. The
reopening was invalidated by this Court and its decision was accepted
by the Revenue since no Special Leave Petition was filed by it.
16. Relying on the decision in Union of India v. Kaumudini Narayan
Dalal (2001) 10 SCC 231, Commissioner of Income Tax v. Narendra
Doshi (2004) 2 SCC 801, Berger Paints India Limited v. Commissioner
of Income Tax, Calcutta (2004) 12 SCC 42 and Commissioner of
Income Tax v. Shivsagar Estate (2004) 9 SCC 420 Mr. Goel submitted
that once the Revenue did not challenge the correctness of the law laid
down by the High Court and accepted it in case of one Assessee, it was
not open to the Revenue to challenge its correctness in the case of
another Assessee “without just cause.”
17. In support of his contention that the information received from
the Investigation Wing cannot constitute tangible material for re-
opening the assessment without the Assessee being informed what in
the report of the investigation wing constituted tangible material for
forming a belief, Mr. Goel placed reliance on the decisions in CIT v. SFIL
Stock Broking Limited (2010) 325 ITR 285 (Del.), Sarthak Securities
Co. Pvt. Ltd. v. ITO (2010) 329 ITR 110 (Del.), Signature Hotels Pvt.
Ltd. v. ITO (supra), CIT v. Insecticides (India) Limited (2013) 357 ITR
330 (Del.) and Krown Agro Foods (P) Ltd. v. Assistant Commissioner of
Income Tax, Circle 5(1) (2015) 375 ITR 460 (Del). Reliance was also
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placed on the decision of this Court dated 19th November, 2015 in ITA
No. 108 of 2013 (Commissioner of Income Tax-IV v. Independent Media
P. Limited), Oriental Insurance Company Limited v. Commissioner of
Income Tax (2015) 378 ITR 421 (Del), Rustagi Engineering Udyog (P.)
Limited v. DCIT (2016) 382 ITR 443 (Del), Agya Ram v. CIT (2016)
386 ITR 545 (Del) and Rajiv Agarwal v. ACIT (decision dated 16th
March, 2016 in Writ Petition (Civil) No. 9659 of 2015).
18. It must be noted at the outset that by an order dated 4th
November, 2016, this Court had directed that “the file by which reasons
to believe for the escapement of income was recorded by the AO for the
purpose of reassessment shall be produced for consideration by the
Court.” The said file has been produced today by Mr. Chaudhary,
learned counsel for the Revenue. It is seen that the reasons recorded
by the AO for re-opening the assessment has been extracted verbatim
by the ITAT in para 2 of the impugned order.
19. A perusal of the reasons as recorded by the AO reveals that
there are three parts to it. In the first part, the AO has reproduced the
precise information he has received from the Investigation Wing of the
Revenue. This information is in the form of details of the amount of
credit received, the payer, the payee, their respective banks, and the
cheque number. This information by itself cannot be said to be tangible
material.
20. Coming to the second part, this tells us what the AO did with the
information so received. He says:“The information so received has been
gone through.” One would have expected him to point out what he
found when he went through the information. In other words, what in
such information led him to form the belief that income escaped
assessment. But this is absent. 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
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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 precondition to the
assumption of jurisdiction under Section 147 of the Act. The reasons to
believe must demonstrate link between the tangible material and the
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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 information amount received is nothing but
accommodation entry and assessee is a beneficiary.”
28.2 The Annexure to the said proforma gave the Name of the
Beneficiary, the value of entry taken, the number of the instrument by
which entry was taken, the date on which the entry was taken, Name of
the account holder of the bank from which the cheque was issued, the
account number and so on.
28.3 Analysing the above reasons together with the annexure, the
Court observed:
“14. The first sentence of the reasons states that information had
been received from Director of Income-Tax (Investigation) that the
petitioner had introduced money amounting to Rs. 5 lacs during
financial year 2002-03 as per the details given in Annexure. The said
Annexure, reproduced above, relates to a cheque received by the
petitioner on 9th October, 2002 from Swetu Stone PV from the bank
and the account number mentioned therein. The last sentence
records that as per the information, the amount received was
nothing but an accommodation entry and the assessee was the
beneficiary.
15. The aforesaid reasons do not satisfy the requirements of
Section 147 of the Act. The reasons and the information referred to
is extremely scanty and vague. There is no reference to any
document or statement, except Annexure, which has been quoted
above. Annexure cannot be regarded as a material or evidence that
prima facie shows or establishes nexus or link which discloses
escapement of income. Annexure is not a pointer and does not
indicate escapement of income. Further, it is apparent that the
Assessing Officer did not apply his own mind to the information and
examine the basis and material of the information. The Assessing
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Officer accepted the plea on the basis of vague information in a

mechanical manner. The Commissioner also acted on the same basis
by mechanically giving his approval. The reasons recorded reflect
that the Assessing Officer did not independently apply his mind to
the information received from the Director of Income-Tax
(Investigation) and arrive at a belief whether or not any income had
escaped assessment.”
28.4 The Court in Signature Hotels Pvt. Ltd. v. Income Tax Officer
(supra) quashed the proceedings under Section 148 of the Act. The
facts in the present case are more or less similar. The present case is
therefore covered against the Revenue by the aforementioned decision.
29.1 The 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 entry taken, instrument number, date, name of the
account in which entry was taken and the account from where the entry
was given the details of those banks. The reasons then recorded:
“The transactions involving Rs. 27,00,000/-, mentioned in the
manner above, constitutes fresh information in respect of the
assessee as a beneficiary of bogus accommodation entries provided
to it and represents the undisclosed income/income from other
sources of the assessee company, which has not been offered to tax
by the assessee till its return filed.
On the basis of this new information, I have reason to believe that
the income of Rs. 27,00,000/- has escaped assessment as defined
by section 147 of the Income Tax Act. Therefore, this is a fit case for
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the issuance of the notice under section 148.”

29.3 The Court was not inclined to interfere in the above
circumstances in exercise of its writ jurisdiction to quash the
proceedings. A careful perusal of the above reasons reveals that the AO
does not merely reproduce the information but takes the effort of
revealing what is contained in the investigation report specific to the
Assessee. Importantly he notes that the information obtained was
‘fresh’ and had not been offered by the Assessee till its return pursuant
to the notice issued to it was filed. This is a crucial factor that went into
the formation of the belief. In the present case, however, the AO has
made no effort to set out the portion of the investigation report which
contains the information specific to the Assessee. He does not also
examine the return already filed to ascertain if the entry has been
disclosed therein.
30.1 In Commissioner of Income Tax, New Delhi v. Highgain Finvest
(P) Limited (2007) 164 Taxman 142 (Del) relied upon by Mr.
Chaudhary, the reasons to believe read as under:
“It has been informed by the Additional Director of Income Tax
(Investigation), Unit VII, New Delhi vide letter No. 138 dated 8th
April 2003 that this company was involved in the giving and taking
bogus entries/transactions during the financial year 1996-97, as per
the deposition made before them by Shri Sanjay Rastogi, CA during
a survey operation conducted at his office premises by the
Investigation Wing. The particulars of some of the transaction of this
nature are as under:
Date Particulars of Debit Amt. Credit Amt.
cheque
18.11.96 305002 5,00,000
Through the Bank Account 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.”
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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 that in the case, the Court came to the
conclusion that there was prima facie material for the AO to come to
the conclusion that the Assessee had not made a full and true
disclosure of all the material facts relevant for the assessment.
31. In Commissioner of Income Tax v. G&G Pharma (supra) there
was a similar instance of reopening of assessment by the AO based on
the information received from the DIT (I). There again the details of the
entry provided were set out in the ‘reasons to believe’. However, the
Court found that the AO had not made any effort to discuss the
material on the basis of which he formed prima facie view that income
had escaped assessment. The Court held that the basic requirement of
Section 147 of the Act that the AO should apply his mind in order to
form reasons to believe that income had escaped assessment had not
been fulfilled. Likewise in CIT-4 v. Independent Media P. Limited
(supra) the Court in similar circumstances invalidated the initiation of
the proceedings to reopen the assessment under Section 147 of the
Act.
32. In Oriental Insurance Company Limited v. Commissioner of
Income Tax 378 ITR 421 (Del) it was held that “therefore, even if it is
assumed that, in fact, the Assessee's income has escaped assessment,
the AO would have no jurisdiction to assess the same if his reasons to
believe were not based on any cogent material. In absence of the
jurisdictional pre-condition being met to reopen the assessment, the
question of assessing or reassessing income under Section 147 of the
Act would not arise.”
33. In Rustagi Engineering Udyog (P) Limited (supra), it was held
that “…the impugned notices must also be set aside as the AO had no
reason to believe that the income of the Assessee for the relevant
assessment years had escaped assessment. Concededly, the AO had no
tangible material in regard to any of the transactions pertaining to the
relevant assessment years. Although the AO may have entertained a
suspicion that the Assessee's income has escaped assessment, such
suspicion could not form the basis of initiating proceedings under
Section 147 of the Act. A reason to believe - not reason to suspect - is
the precondition for exercise of jurisdiction under Section 147 of the
Act.”
34. Recently in Agya Ram v. CIT (supra), it was emphasized that the
reasons to believe “should have a link with an objective fact in the form
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of information 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’. The reasons fail to demonstrate the link
between the tangible material and the formation of the reason to
believe that income has escaped assessment.
37. For the aforementioned reasons, the Court is satisfied that in the
facts and circumstances of the case, no error has been committed by
the ITAT in the impugned order in concluding that the initiation of the
proceedings under Section 147/148 of the Act to reopen the
assessments for the AYs in question does not satisfy the requirement of
law.
38. The question framed is answered in the negative, i.e., in favour
of the Assessee and against the Revenue. The appeal is, accordingly,
dismissed but with no orders as to costs.
———
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SCC Online Web Edition, © 2023 EBC Publishing Pvt. Ltd.

Page 1 Wednesday, June 07, 2023

2017 SCC OnLine Del 8691 : (2017) 395 ITR 677

In the High Court of Delhi at New Delhi

Principal Commissioner of Income Tax-6 .….

Beneficiary's Name Meenakshi Overseas P. Ltd.

Information so received has been gone through. The above said

not be enquired into at this stage.

paying “unaccounted cash” is another conclusion the basis for which is

Officer accepted the plea on the basis of vague information in a

the issuance of the notice under section 148.”

Through the Bank Account No. CA 4266 of M/s. Mehram Exports

30.2 The AO was not merely reproducing the information received

of information or materials on record…” It was further emphasized that

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