CA floated 90 companies for fake accommodation entries. However Reopening u/s 147 held bad as merely based on Investigation Wing Report

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CA floated 90 companies for fake accommodation entries. However Reopening u/s 147 held bad as merely based on Investigation Wing Report which is without application of mind.

CA floated 90 companies for fake accommodation entries

ABCAUS Case Law Citation:
1015 (2016) (09) ITAT

Brief Facts of the Case:
A search operation u/s 132 of the Income-tax Act, 1961 was conducted at the office premises of a chartered accountant (CA) by the Investigation Wing. During the course of search operation, it was established that the chartered accountant had floated about 90 companies for the purpose of providing fake accommodation entries. The persons who were made directors of those companies were former and present employees of the CA . The said CA had been using them for merely signing all the documents, bank cheques and also for transporting and exchanging cash and cheques in order to provide fake accommodation entries.

During the search operation, as per his statement the CA had accepted that he provided fake accommodation entries and said companies were used for this purpose. Summons were issued to the auditors of those companies and their statements were recorded on oath. The auditors of those companies confirmed that they had no knowledge about the directors of the companies and all the audits were done at the instructions of the CA.

The Assessing Officer in the instant case received a detailed list of beneficiaries of fake accommodation entries sent from Income Tax Investigation Wing. As per the information received from the Investigation wing, the appellant assessee company had introduced its own undisclosed income in the grab of share application money/bogus transaction/gifts through one of the companies flouted by the said Chartered accountant.

The AO, on the basis of such information recorded that he had reason to believe that income had escaped assessment within the meaning the section 147 of the Income Tax Act, 1961. Later the assessment was completed by the AO by making an addition  on account of share application money received u/s 68 of Income Tax Act, 1961.

On appeal the CIT(A) confirmed the action of AO in framing the reassessment u/s 147.

Aggrieved, the assessee approached the Tribunal seeking quashing of the reassessment contending it among other things as without recording valid reasons and without obtaining valid approval as per law and without complying with mandatory condition of section 147 to 151 as envisaged under the law.

Observations made by the ITAT:

The Tribunal noted that the Delhi High Court in the case of Signature Hotels Pvt. Ltd. held that issue of notice solely on the basis of a report from Investigation Wing is invalid where the AO did not examine the evidence. 

Further the Tribunal placed reliance on the judgment of the Delhi High Court in the case Principal Commissioner of Income Tax vs. G & G Pharma India Ltd. wherein it was held that the AO must apply his mind to the materials in order to have reasons to believe that the income of the assessee escaped assessment. In the said case, the AO had not undertaken any exercise, to make a reference to the manner the alleged accommodation entries were dealt with in the accounts of the assessee as per records filed along with income tax return. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to simply concluded that income has escaped assessment. It was categorically stated by the Delhi High Court that:

“Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity”

Held:
The assessment was quashed holding it without jurisdiction and bad in law.

CA floated 90 companies for fake accommodation entries

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