Duplication in alleged entries was a classic case of non-application of mind by AO for reopening – High Court

Duplication in alleged entries was a classic case of non-application of mind by AO as he persisted with  his belief that such amount had escaped assessment – Delhi High Court

non-application of mind

ABCAUS Case Law Citation:
ABCAUS 2002 (2017) (07) HC

The Question of Law framed for determination:
Did the ITAT and the CIT(A) fall into error in holding that the reassessment was not justified in law in the circumstances of the case?

Important Case Laws Cited/relied upon:
Pratibha Finvest Pvt. Ltd. v. ITO (Del)
A.G. Holdings Pvt. Ltd. v. Income Tax Officer [2013] 352 ITR 364 (Del).
Principal Commissioner of Income Tax-6 v. Meenakshi Overseas (P) Ltd. [2017] 82 taxmann.com 300 (Delhi)

Brief Facts of the Case:
The respondent assessee was a limited company which filed its return of income declaring total income of Rs.76,340 which was processed vide order u/s 143(1) of the Income Tax Act, 1961. Later the company was served with a notice u/s 148 stating that the Assessing Officer (AO) had the reasons to believe that income of Rs. 95,65,510 had escaped assessment which was based on a report of the Directorate of Income-Tax (Investigation).

The ‘reasons to believe’ as noted by the AO stated that The directorate of Income Tax (Inv.), had carried out a detailed enquiry about the persons /companies engaged in the business of providing accommodation entries to various companies. Information had been received along with the statements of persons who had admitted that they were in the business of providing accommodation entries and they were not doing any business but were engaged in the activity of providing accommodation entries to other concerns. These persons used to issue cheques in lieu of cash received after deducting their commission and these cheques were generally issued as share application money/ unsecured loans. As per the information received, the assessee had also received the accommodation entries amounting to Rs. 95,65,510 representing its own unaccounted money.

The objections raised by the Assessee were rejected by the AOand he passed an assessment order under Section 144 read with Section 147 of the Act making an addition of Rs.95,65,510 to the declared income of the Assessee.

The assessee went in appeal before the CIT(A), who allowed the appeal filed by the assessee. The CIT(A) held that the re-opening of the assessment was “without any satisfaction, without verifying the information received from Directorate of Investigation” and that the “AO had not applied his mind. There was no satisfaction on the part of the AO regarding escapement of any income.”

The Revenue went in appeal before the ITAT which was dismissed by the impugned order. The ITAT concurred with the CIT(A) that the jurisdictional requirement for re-opening of the assessment under Section 147 read with Section 148 of the Act had not been satisfied. In particular, the ITAT observed that the AO “has not given details what was stated by the so-called entry operators in respect of the entries related to the assessee”. Further, from the table of accommodation entries produced by the Assessee, the ITAT found that “there are five instances, where entries have been repeated.

Observations made by the High Court:
The Hon;ble High court observed that as already noticed by the ITAT, there was a repetition of at least five entries in the table of alleged accommodation entries . Thus, the total amount constituting the so-called accommodation entries would not work out to Rs.95,65,510.

This, in the opinion of the Court was non-application of mind by the AO and what was further unacceptable was that the AO persisted with his “belief” that the said amount had escaped assessment not only at the stage of rejecting the Assessee’s objections but also in the re-assessment proceedings where he proceeded to add the entire amount to the returned income of the Assessee. This was a classic case of non-application of mind by the AO.

The Hon’ble High Court noted that in a recent judgment on the issue of “reasons to believe” for alleged accommodation entry, it had observed as under:

‘’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 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.

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.

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.”

Held:
It was held that the reasons recorded for reopening the assessment under Section 147 did not meet the requirement of the law. The ITAT was perfectly justified in confirming the order of the CIT (A) and holding the reopening of the assessment to be bad in law.

non-application of mind by AO

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