Delhi High Court
Signature Hotels (P) Ltd. vs Income Tax Officer-Ward 8(4) & ... on 21 July, 2011
Author: Sanjiv Khanna
$~34.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ WRIT PETITON (CIVIL) NO. 8067/2010
Date of order: 21st July, 2011
SIGNATURE HOTELS (P) LTD. ..... Petitioner
Through Mr. Udaibir Singh Kocher,
Advocate.
versus
INCOME TAX OFFICER-WARD 8(4) & ANR.
..... Respondents
Through Ms. Suruchi Aggarwal,
Advocate.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE SANJIV KHANNA
1. Whether Reporters of local papers may be allowed to see the judgment?
2. To be referred to the Reporter or not ?
3. Whether the judgment should be reported in the Digest ?
SANJIV KHANNA, J.:
The petitioner is a company, which was incorporated on
30th September, 2002 and for the first year, i.e., the assessment
year 2003-04, had filed its return of income on 31st March, 2005.
The return was not selected for scrutiny. Subsequently, the
Assessing Officer issued two notices dated 22nd March, 2010
and 29th March, 2010 under Section 148 of the Income-Tax Act,
1961 (Act, for short) for assessment. The petitioner has
impugned these two notices on the ground that the pre-
W.P. (C) NO. 8067/2010 Page 1
conditions for issue of notice under Section 148 are not satisfied
and, therefore, the Assessing Officer is exceeding his
jurisdiction. The petitioner has also impugned the order dated
15th November, 2010 passed by the Income-Tax Officer, Ward
8(4), New Delhi rejecting their objections to initiation of
proceedings under Section 148 of the Act. The said order was
passed as the assessee had filed objections to the initiation of
proceedings under Section 148 and in terms of the decision of
the Supreme Court in GKN Driveshafts (India) Limited versus
Income Tax Officer and Others, [2003] 259 ITR 19 (SC).
2. The question, which arises for consideration, is whether
the proceedings initiated under Section 147/148 of the Act are
invalid for want of jurisdiction as the pre-conditions for initiation
of the said proceedings as stipulated in Section 147 of the Act
are not satisfied.
3. Section 147 of the Act reads as under:
"Section 147. INCOME ESCAPING
ASSESSMENT.
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
W.P. (C) NO. 8067/2010 Page 2
escaped assessment and which comes to
his notice subsequently in the course of the
proceedings under this section, or
recompute the loss or the depreciation
allowance or any other allowance, as the
case may be, for the assessment year
concerned (hereafter in 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
W.P. (C) NO. 8067/2010 Page 3
exceeded the maximum 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."
4. The aforesaid Section is wide but it is not plenary. We
have to consider and examine the crucial expression "reason to
believe" used in the said Section. The Assessing Officer must
have "reason to believe" that an income chargeable to tax has
escaped assessment. This is mandatory and the "reasons to
believe" are required to be recorded in writing by the Assessing
Officer. Sufficiency of reasons is not a matter, which is to be
decided by the writ court, but existence of belief is the subject
matter of the scrutiny. A notice under Section 148 can be
quashed if the "belief" is not bona fide, or one based on vague,
W.P. (C) NO. 8067/2010 Page 4
irrelevant and non-specific information. The basis of the belief
should be discernible from the material on record, which was
available with the Assessing Officer, when he recorded the
reason. There should be a link between the reasons and the
evidence/material available with the Assessing Officer.
However, as we are dealing with initiation of proceedings, it is
not necessary that the material should conclusively prove the
escapement. The "reasons to believe" would mean cause or
justification of the Assessing Officer to believe that the income
has escaped assessment and do not mean that the Assessing
Officer should have finally ascertained the said fact by legal
evidence or reached a conclusion, as this is determined and
decided in the assessment order, which is the final stage before
the Assessing Officer.
5. Before dealing with the facts of the case, we may notice
some judgments of the Supreme Court when proceedings under
Section 147/148 of the Act can be initiated on statements made
by third person on the account of "accommodation entry". In ITO
versus Lakhmani Mewal Das, [1976] 103 ITR 437 (SC), the
Supreme Court affirmed the decision of the High Court and held
that there was nothing to show in the confession made by a third
W.P. (C) NO. 8067/2010 Page 5
party related to the loan taken by the assessee much less a loan
which was shown to have advanced by that person to the
assessee and, therefore, live link or close nexus, which should
be there between the material and the belief formed by the
Assessing Officer was missing or was too tenuous to provide
legal sound basis for initiation of assessment proceedings under
Section 147. After referring to this judgment, a Division Bench
of Delhi High Court, in Income-Tax Officer, Special Civil No.
VII, New Delhi, and Another versus Dwarka Dass and
Brothers, [1981] 131 ITR 571 (Del) has held as under:
"....The Supreme Court, affirming the
decision of the High Court, held that there
was nothing to show that the confession of
M.K. related to a loan to the assessee, much
less to the loan which was shown to have
been advanced by that person to the
respondent and the live link or close nexus
which should be there between the material
before the ITO and the belief which he was
to form was missing or was, in any event,
too tenuous to provide a legally sound basis
for reopening the assessment....
The position in the present case falls
within the same category. At the time of the
original assessment all the facts relating to
the cash credits in question were fully
disclosed. This has been found by the
learned Judge at page 960 (of 118 ITR) and
indeed this is the accepted position on the
basis of which even the proposal of the ITO
to the Commissioner (set out at page 964)
W.P. (C) NO. 8067/2010 Page 6
proceeded. Thereafter, the only material
received by the ITO appears to be that the
revenue authorities had carried out certain
investigations, that they had discovered the
existence of bogus hundi brokers who were
allegedly lending their names to assessee
and that a list had been circulated to various
ITOs of the hundi brokers who were
allegedly indulging in malpractices. The
internal audit party appears to have
discovered that some of the creditors whose
credits had been accepted in the assessee's
case fell within this category and raised an
audit objection which was the immediate
provocation for the reopening of the
assessment. In this case also, as in the
case before the Supreme Court, there is no
live connection or link established between
the information or the facts, in the
possession of the ITO, and the genuineness
of the particular loans recorded in the
assessee's books. The mere fact that the
names of the some of the creditors figured in
a list made out by the department would be
too general and vague to lead to an
inference regarding the truth or otherwise of
the loans recorded by the assessee. We are
wholly unable to find any material point of
distinction between the facts of the present
case and those considered by the Supreme
Court in the case of Lakhmani Mewal Das
[1976] 103 ITR 437."
6. The view taken by the Supreme Court in Lakhmani Mewal
Das (supra) was followed in Ganga Saran and Sons Private
Limited versus Income-Tax Officer-I, [1981] 130 ITR 1 (SC).
The matter was again examined by the Supreme Court in Phool
Chand Bajrang Lal and Another versus Income-Tax Officer
W.P. (C) NO. 8067/2010 Page 7
and Another, [1993] (203) ITR 456 (SC). In the said case,
information was received by the Assessing Officer that the third
company had never actually advanced loans to any person and
the said third company was in the business consisting entirely of
name lending. Noticing the judgment in Lakhmani Mewal Das
(supra) it was held that the nature of information which was
available was vastly different. In the case of Lakhmani Mewal
Das (supra), the information was extremely vague and scanty
whereas in the case of Phool Chand Bajrang Lal (supra), the
information was specific, unambiguous and clear.
7. In the present case the undated reasons recorded by the
Assessing Officer for initiation of proceedings read as under:
" Information received from the office of
the DIT (Inv.)-VI, New Delhi revealed that
M/s Signature Hotels (P) Ltd. has introduced
unaccounted money in its books of account
during F.Y. 2002-03 through accommodation
entry from M/s Swetu Stone PV for Rs.5.00
lac.
In view of the above, I have reasons to
believe that taxable income to the tune of
Rs.5.00 lac has escaped assessment within
the meaning of section 147 of the I.T. Act,
1961."
8. However, the aforesaid reasons are not the same/identical
when we compare the reasons recorded by the Assessing
W.P. (C) NO. 8067/2010 Page 8
Officer in the approval proforma for initiation of action under
Section 147/148. The reasons recorded by the Assessing Officer
for approval of the Commissioner of Income-Tax Range-VIII, in
paragraph 11 of the said form/proforma read:
"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."
9. On the basis of the aforesaid reasons, the Commissioner
gave approval recording as under:
"Yes, I am satisfied on the reasons recorded
by the A.O. for approval & issue of notice u/s
148 of the I.T Act, 1961."
10. It is accepted that the Section 151(2) of the Act is
applicable in the present case as the proceeding under Section
148 were initiated after expiry of four years from the end of the
relevant assessment year. Therefore, the Assessing Officer was
required to take approval an officer not below the rank of the
Joint Commissioner of Income-Tax after recording reasons. In
the present case sanction has been taken from the
Commissioner. A Division Bench of Bombay High Court in N.D.
W.P. (C) NO. 8067/2010 Page 9
Bhatt IAC of IT versus IBM World Trade Corporation, [1995]
216 ITR 811(Bom.) has held as under:
"It is also well-settled that the reasons for
reopening are required to be recorded by the
assessing authority before issuing any notice
under section 148 by virtue of the provisions
of section 148(2) at the relevant time. Only
the reasons so recorded can be looked at for
sustaining or setting aside a notice issued
under section 148. In the case of Equitable
Investment Co. P. Ltd. v. ITO [1988] 174 ITR
714, a Division Bench of the Calcutta High
Court has held that where a notice issued
under section 148 of the Income-Tax Act,
1961, after obtaining the sanction of the
Commissioner of Income-tax is challenged,
the only document to be looked into for
determining the validity of the notice is the
report on the basis of which the sanction of
the Commissioner of Income-tax has been
obtained. The Income-tax Department
cannot rely on any other material apart from
the report."
(emphasis supplied)
11. The aforesaid paragraph in IBM World Trade
Corporation (supra) was cited with approval in Prashant S.
Joshi versus Income-Tax Officer and Another, 2010 (324)
ITR 154 (Bom.) and it was held as under:
"Section 147 provides that 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 163, assess or reassess such income and
also any other income chargeable to tax,
W.P. (C) NO. 8067/2010 Page 10
which has escaped assessment and which
comes to his notice subsequently in the
course of the proceedings under the section.
The first proviso to section 147 has no
application in the facts of this case. The
basis postulate which underlies section 147
is the formation of the belief by the
Assessing Officer that any income
chargeable to tax has escaped assessment
for any assessment year. The Assessing
Officer must have reason to believe that
such is the case before he proceeds to issue
a notice under section 147. The reasons
which are recorded by the Assessing Officer
for reopening an assessment are the only
reasons which can be considered when the
formation of the belief is impugned. The
recording of reasons distinguishes an
objective from a subjective exercise of
power. The requirement of recording
reasons is a check against arbitrary exercise
of power. For it is on the basis of the
reasons recorded and on those reasons
alone that the validity of the order reopening
the assessment is to be decided. The
reasons recorded while reopening the
assessment cannot be allowed to grow with
age and ingenuity, by devising new grounds
in replies and affidavits not envisaged when
the reasons for reopening an assessment
were recorded. The principle of law,
therefore, is well settled that the question as
to whether there was reason to believe,
within the meaning of section 147 that
income has escaped assessment, must be
determined with reference to the reasons
recorded by the Assessing Officer. The
reasons which are recorded cannot be
supplemented by affidavits. The imposition
of that requirement ensures against an
arbitrary exercise of powers under section
148."
W.P. (C) NO. 8067/2010 Page 11
12. In these circumstances, we are examining the reasons
given by the Assessing Officer in the proforma seeking
permission/approval of the Commissioner and whether the same
satisfy the pre-conditions mentioned in Section 147 of the Act.
13. Annexure attached to the said proforma placed on record
of the petitioner reads as under:
"
BENEFICIARY'S VALUE OF INSTRUMENT DATE ON
NAME ENTRY NO. BY WHICH
TAKEN WHICH ENTRY
ENTRY TAKEN
TAKEN
SIGNATURE HOTELS 500000 09-Oct-02
PVT LTD (AC NO-2I060)
NAME OF BANK FROM BRANCH OF A/C NO.
ACCOUNT WHICH ENTRY ENTRY
HOLDER OF ENTRY GIVING GIVING
ENTRY GIVEN BANK ACCOUNT
GIVING
ACCOUNT
SWETU STONE PV SBP DG 50I06"
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
W.P. (C) NO. 8067/2010 Page 12
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 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
W.P. (C) NO. 8067/2010 Page 13
information received from the Director of Income-Tax
(Investigation) and arrive at a belief whether or not any income
had escaped assessment.
16. It may be noted here that a company by the name of
Swetu Stone Pvt. Ltd. had applied for and was allotted shares in
the petitioner company on payment by cheque of Rs.5 lacs. As
noticed above, in the Annexure the name of the
company/account holder is mentioned as Swetu Stone PV. The
same is also mentioned in the undated reasons mentioned
above.
17. In the counter affidavit it is stated that M/s Swetu Stone
Pvt. Ltd. had applied for allotment of shares worth Rs.5 lacs and
the same were allotted by the petitioner. It is further stated that
statements of Mahesh Garg and Shubhash Gupta were
recorded by the Director of Income-Tax (Investigation) and on
the basis of the statements they have come to the conclusion
that the said persons were entry operators. Copy of the
statements of Mahesh Garg and Shubhash Gupta have not
been placed on record by the respondent. The petitioner, has,
however, enclosed copy of statements of Mahesh Garg and
Shubhash Gupta recorded on different dates. The said persons
W.P. (C) NO. 8067/2010 Page 14
have not specifically named the petitioner though other parties
have been named and details have been given and it is stated
that they were provided accommodation entries. However, it is
stated that the entries were made by giving cheque/DD/PO after
receiving cash and sometimes expenses entries were provided.
The reasons recorded by the Assessing Officer do not make
reference to any statement of Mahesh Garg or Shubhash Gupta.
This may not also be necessary, if the statements were on
record and it is claimed and prima facie established that they
were examined by the Assessing Officer before or at the time of
recording reasons. On the other hand, in the present case,
information as enclosed as Annexure, has been referred. This is
the only material relied upon by the Assessing Officer. The said
Annexure has been quoted above. In this connection, we may
notice that M/s Swetu Stone Pvt. Ltd. is an incorporated
company and the petitioner has pleaded and stated that the said
company has a paid-up capital of Rs.90 lacs. The company was
incorporated on 4th January, 1989 and was also allotted a
permanent account number in September, 2001. To this extent,
there is no dispute. In these circumstances, we feel the
judgments of the Delhi High Court in Commissioner of Income
W.P. (C) NO. 8067/2010 Page 15
Tax versus SFIL Stock Broking Limited, [2010] 325 ITR 285
(Delhi) and Sarthak Securities Company Private Limited
versus Income Tax Officer, 2010 (329) ITR 110 (Delhi), in
which CIT versus Lovely Exports (P) Limited, (2009) 216 CTR
195 (SC) has been applied and followed, are applicable. We
may notice here that the respondent in their counter affidavit
have stated that Swetu Stone Pvt. Ltd. is unidentifiable and,
therefore, the aforesaid decisions should not be applied and the
ratio of the decision dated 7th January, 2011 in Writ Petition
(Civil) No. 7517/2010, AGR Investment Limited versus
Additional Commissioner of Income Tax and Another should
be applied. In the said decision, decisions in the case of
Sarthak Securities Company Private Limited (supra) and
SFIL Stock Broking Limited (supra) was distinguished by
giving the following reasons:
"22. ....In SFIL Stock Broking Ltd. (supra),
the bench has interfered as it was not
discernible whether the assessing officer
had applied his mind to the information and
independently arrived at a belief on the basis
of material which he had before him that the
income had escaped assessment. In our
considered opinion, the decision rendered
therein is not applicable to the factual matrix
in the case at hand. In the case of Sarthak
Securities Co. Pvt. Ltd. (supra), the Division
Bench had noted that certain companies
W.P. (C) NO. 8067/2010 Page 16
were used as conduits but the Assessee
had, at the stage of original assessment,
furnished the names of the companies with
which it had entered into transaction and the
assessing officer was made aware of the
situation and further the reason recorded
does not indicate application of mind. That
apart, the existence of the companies was
not disputed and the companies had bank
accounts and payments were made to the
Assessee company through the banking
channel. Regard being had to the aforesaid
fact situation, this Court had interfered.
Thus, the said decision is also
distinguishable on the factual score."
18. The facts indicated above do not show that M/s Swetu
Stone Pvt. Ltd. is a non-existing and a fictitious entity/person.
Decision in AGR Investment Limited (supra), therefore, does
not help the case of the respondent.
19. For the reasons stated above, the present writ petition is
allowed and writ of certiorari is issued quashing the proceedings
under Section 148 of the Act. In the facts of the case, there will
be no order as to costs.
SANJIV KHANNA, J.
CHIEF JUSTICE
JULY 21, 2011
VKR
W.P. (C) NO. 8067/2010 Page 17
