Delhi High Court
Sarthak Securities Co. Pvt. Ltd. vs Income Tax Officer-Ward 7(3) on 18 October, 2010
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on: 9th September, 2010
% Judgment Pronounced on: 18th October, 2010
+ WP(C) No.6087/2010
SARTHAK SECURITIES CO. PVT. LTD. ..... Petitioner
Through: Mr. Udaibir Singh Kochar, Adv.
versus
INCOME TAX OFFICER-WARD 7(3) ..... Respondent
Through: Ms. Rashmi Chopra, Adv.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN
1. Whether reporters of the local papers be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
DIPAK MISRA, CJ
By this writ preferred under Article 226 of the Constitution of India,
the assessee-petitioner has prayed for issue of a writ of certiorari for
quashment of the notice dated 25th March, 2010, Annexure P-II, issued
under Section 148 of the Income Tax Act, 1961 (for brevity „the Act‟)
pertaining to the assessment year 2003-04 by the Income Tax Officer, the 1st
respondent herein.
WP(C) No.6087/2010 Page 1 of 15
2. The facts which are imperative to be unfurled are that the assessee-
petitioner filed its return for the assessment year 2003-04 on 31st March,
2004 declaring an income of Rs. 15,360/-. The said return was processed
and intimation under Section 143(1) was issued on 6 th April, 2004 accepting
the return. As put forth, the petitioner decided to issue shares in accordance
with its Memorandum and Articles of Association during the previous year
relevant to the assessment year 2003-04 and for the said purpose approached
a number of prospective investors. Four private limited companies, namely,
Nishant Finvest Pvt. Ltd., Shri Dinanath Luhhariwal Spinning Mills Pvt.
Ltd., Division Trading Pvt. Ltd and K.R. Fincap Pvt. Ltd., decided to invest
in the shares of the petitioner company. As pleaded, after observing all the
legal formalities, the assessee-petitioner allotted the shares to these four
companies on 31st March, 2003. The amount invested by the said companies
are Rs.2,50,000/-, Rs.2,50,000/-, Rs.3,00,000/- and Rs.2,50,000/-
respectively. The above-named companies were active as per the records of
the Registrar of Companies (ROC) and are assessed to income-tax and have
been allotted permanent account numbers by the Income Tax Department.
3. As pleaded, on 25th March, 2010, a notice under Section 148 of the
Act was issued by the respondent No.1 to the petitioner alleging that he had
reason to believe that the income chargeable to tax for the assessment year
2003-04 had escaped assessment within the meaning of Section 147 of the
Act and, accordingly, he required the petitioner to file the return for the said
assessment year. In response to the said notice, the assessee-petitioner
WP(C) No.6087/2010 Page 2 of 15
requested vide letter dated 28th April, 2010 to treat the return of income filed
on 31st March, 2004 to be the return which would deem to have been filed in
compliance with the notice. The assessee-petitioner also requested the
respondent to provide a copy of the reasons recorded under Section 148(2)
and the approval for issuance of notice. The respondent furnished the
reasons recorded by him vide letter dated 21st July, 2010. While furnishing
the reasons, the respondent also initiated assessment proceedings by issuing
formal notices. The assessee through his authorized representative raised
objections to the initiation of the proceedings under Section 147 of the Act
on the foundation that the same had not been initiated in accordance with
law. Be it noted, in the objections, many a ground was raised and reliance
was placed on the decision rendered by the Apex Court in CIT v. Lovely
Exports (P) Ltd., 216 CTR 195 (SC) and on the decision of this Court in
CIT v. SFIL Stock Broking Ltd. (ITA No.1056/2009).
4. The respondent No.1, by order dated 25th August, 2010, rejected the
objections raised by the petitioner and issued notices for fixing the hearing
to 27th August, 2010.
5. Be it noted, the matter was finally heard with the consent of the
learned counsel for the parties. We have heard Mr. Udaibir Singh Kochar,
learned counsel for the assessee-petitioner, and Ms. Rashmi Chopra, learned
counsel for the revenue.
WP(C) No.6087/2010 Page 3 of 15
6. It is contended by Mr. Kochar that the reasons recorded for initiation
of proceedings under Section 147(2) do not disclose the basis. The
proceedings have been initiated on the ground of information received from
the investigation wing but the order of the assessing officer does not reflect
any independent application of mind to the information so received. It is
urged that the respondent No.1 has failed to appreciate the ratio laid down in
the decision rendered in Lovely Exports (P) Ltd.BI (supra) when all the
requisite information was available with the assessing officer from the very
beginning.
7. Ms. Rashmi Chopra, learned counsel for the revenue, in support of the
order, submitted that the order passed by the assessing officer reflects
application of mind and the sufficiency of reasons cannot be gone into at this
stage.
8. The singular question that emerges for consideration is whether in the
case at hand, the initiation of proceedings under Section 147 is justified in
law or not.
9. The assessing officer, while issuing the notice, has stated thus:-
"Whereas I have reason to believe that your income
chargeable to tax for the assessment year 2003-2004 has
escaped assessment within the meaning of Section 147 of the
Income Tax Act, 1961.
I, therefore, propose to assess/reassess the income for the
said assessment year and I hereby require you to deliver to me
WP(C) No.6087/2010 Page 4 of 15
within 20 days from the date of service of this notice, a return
in the prescribed form of the income of your income in respect
of which you are assessable for the said assessment year."
10. After receipt of the said notice, the petitioner submitted that the return
of income, as filed earlier, should be treated as the return in compliance with
the notice under reference. In the said letter, he asked for reasons to enable
him to file the objections. After receipt of the said letter, the respondent
No.1, the assessing officer, sent a communication vide Annexure-XI
wherein it has been stated thus:-
"M/s Sarthak Securities P Ltd
AY 2003-04
19/3/2010 Information was received from the office of the
Addl DIT (Investigation) Unit - V that M/s Sarthak Securities
P Ltd had received bogus accommodation entries during the
FY 2002-03 relevant to the AY 2003-04 as per details placed
contra.
Beneficiary Beneficiary Beneficiary Value of Instrument Date on which Name of A/c Bank from Branch of entry
Name Bank Branch Entry No. by entry taken holder of which entry giving bank
which entry entry giving given
taken a/c
Sarthak OBC Saket 2500000/ 17/12/02 Nishant SBBJ NRR
Securities - Finvest
P. Ltd.
Do Do Do 2500000/ 18/9/ 02 Dinanath SBP DG
- Luhhari Wal
Spinning Mill
DO DO DO 2500000/ 16/12/02 K.R. Fincap P SBBJ NRR
- Ltd
DO DO DO 300000/- 12/3/ 03 Division BOR Rohtak Rd.
Trading P Ltd.
According to the information received from the DIT (Inv) the
accommodation entries are received as share application
money or as unsecured loan. The assessee's Balance sheet as
on 31/3/2003 showed that there is introduction of share capital
of Rs.284800/- and share premium of Rs.865000/-.
In this case return of income for the AY 2003-04 was
filed on declaring income of Rs.15360/- and as per records
asstt has not been completed u/s 143(3) of the I.T. Act.
WP(C) No.6087/2010 Page 5 of 15
As the assessee had received bogus accommodation entry
of Rs.1050000/- during the AY 2003-04, I have reason to
believe that income chargeable to tax has escaped assessment."
11. After receipt of the said communication, the assessee-petitioner filed
objections to the initiation of proceedings under Section 147 of the Act. We
think it apposite to reproduce the main part of the objections, which read as
follows:-
"1. The reasons do not disclose the basis on which the Addl.
DIT has termed the receipt of money by the assessee from four
incorporated bodies viz. Nishant Finvest (P) Ltd., Shri Dinanath
Luhariwala Spining Mills (P) Ltd., K.R. Fincap (P) Ltd. and
Division Trading (P) Ltd. towards share application money as
bogus accommodation entries. If any investigations were
carried out by Addl. DIT or any witnesses were examined by
him who implicated the assessee, the report of such
investigations or the statements of the witnesses do not form
part of the reasons
2. "............................"
3. Further, the alleged information provided by the Addl.
DIT has been accepted as gospel truth without any verification
by the A.O. The law postulates the A.O. (and not the Addl.
DIT) to have reason to believe. Blind acceptance of the
information furnished by the Addl. DIT cannot form reasons
leading to the belief by the A.O. of any escapement of income.
4. The A.O. has to independently apply his mind to the
information received from the Addl. DIT and arrive at the belief
that income has escaped assessment...............
In the instant case, the reasons recorded do not show any
application of mind nor the same show any belief independently
arrived at, which is the basic pre requisite for issuing notice
under Section 148.
5. At any rate, the alleged bogus shareholders are all
incorporated and active companies as per the records of
Registrar of Companies. Moreover, as per the alleged
information provided by the Addl. DIT himself, all of them had
bank accounts and payments were made by them to the assessee
WP(C) No.6087/2010 Page 6 of 15
company through banking channels. As such the identity of the
shareholders stands duly accepted even by the Addl. DIT on
whose information the proceedings have been initiated........
6. In the instant case, the names of the shareholders have
been provided by the Addl. DIT himself and are also
incorporated in the reasons recorded u/s 148. Hence, in case
the department feels that they were accommodation entry
providers, it is free to proceed against them."
12. The said objections have been rejected on 25 th August, 2010, mainly
stating, inter alia, as follows:-
"In this regard, I hereby bring to your notice that, further to the
information received from the Investigation Wing and on
subsequent detailed examination, inter alia, of Bank statements
on record, I have strong, reasons to form this honest and
reasonable belief that you have, during the financial year 2002-
03, transacted with:-
a) M/s Nishant Finvest on 17-12-2002 for an amount of
Rs.2,50,2000/-.
b) M/s Dinanath Luhhariwal Spinning Mill on 18-09-2002
for an amount of Rs.2,50,000/-
c) M/s K.R. Fincap Pvt Ltd on 16-12-2002 for an amount of
Rs.2,50,000/- and
d) M/s Division Trading Pvt Ltd on 12-3-2003 for an
amount of Rs.3,00,000/-
And have used the aforesaid entities as a conduit to absorb your
own unaccounted monies and as such have accommodated with
these entities."
After so stating, the assessing officer distinguished the decisions
relied on by the assessee and rejected the objections.
13. It is submitted by Mr. Singh, learned counsel for the petitioner, that
there has been no application of mind and further no new material has been
brought to his notice. It is contended by him that the assessing officer was
WP(C) No.6087/2010 Page 7 of 15
very much aware of the names of the existing four companies and that being
the position, the decision in Lovely Exports P. Ltd. (supra) gets squarely
attracted and not following the ratio of the said decision amounts to
improper exercise of power which makes the order vulnerable and totally
untenable.
14. In this context, we think it apt to refer to Section 147 of the Act,
which reads as under.
"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 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:
Provided further that the Assessing Officer may assess or
reassess such income, other than the income involving matters
which are the subject-matters of any appeal, reference or
revision, which is chargeable to tax and has escaped
assessment.
WP(C) No.6087/2010 Page 8 of 15
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 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.
Explanation 3.--For the purpose of assessment or reassessment
under this section, the Assessing Officer may assess or reassess
the income in respect of any issue, which has escaped
assessment, and such issue comes to his notice subsequently in
the course of the proceedings under this section,
notwithstanding that the reasons for such issue have not been
included in the reasons recorded under sub-section (2) of
section 148."
WP(C) No.6087/2010 Page 9 of 15
15. On scanning of the anatomy of the aforesaid provision, it is clear as
crystal that the formation of belief is a condition precedent as regards the
escapement of the tax pertaining to the assessment year by the assessing
officer. The assessing officer is required to form an opinion before he
proceeds to issue a notice. The validity of reasons, which are supposed to
sustain the formation of an opinion, is challengeable. The reasons to believe
are required to be recorded by the assessing officer.
16. In this regard, it is apt to reproduce a passage from N.D. Bhatt,
Inspecting Assistant Commissioner, Income Tax & Another. v. I.B.M.
World Trade Corporation, [1995] 216 ITR 811(Bombay): -
"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 reason 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. vs. 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."
17. In Hindustan Lever Ltd. v. R.B. Wadkar, [2004] 268 ITR 332 (Bom),
a Division Bench has opined thus:-
".... the reasons are required to be read as they were recorded
by the Assessing Officer. No substitution or deletion is
WP(C) No.6087/2010 Page 10 of 15
permissible. No additions can be made to those reasons. No
inference can be allowed to be drawn based on reasons not
recorded. It is for the Assessing Officer to disclose and open his
mind through reasons recorded by him. He has to speak through
his reasons. It is for the Assessing Officer to reach to the
conclusion as to whether there was failure on the part of the
assessee to disclose fully and truly all material facts necessary
for his assessment for the concerned assessment year. It is for
the Assessing Officer to form his opinion. It is for him to put
his opinion on record in black and white. The reasons recorded
should be clear and unambiguous and should not suffer from
any vagueness. The reasons recorded must disclose his mind.
Reasons are the manifestation of mind of the Assessing Officer.
The reasons recorded should be self-explanatory and should not
keep the assessee guessing for the reasons. Reasons provide the
link between conclusion and evidence. The reasons recorded
must be based on evidence. The Assessing Officer, in the event
of challenge to the reasons, must be able to justify the same
based on material available on record. He must disclose in the
reasons as to which fact or material was not disclosed by the
assessee fully and truly necessary for assessment of that
assessment year, so as to establish the vital link between the
reasons and evidence. That vital link is the safeguard against
arbitrary reopening of the concluded assessment. The reasons
recorded by the Assessing Officer cannot be supplemented by
filing an affidavit or making an oral submission, otherwise, the
reasons which were lacking in the material particulars would
get supplemented, by the time the matter reaches to the court,
on the strength of affidavit or oral submissions advanced."
[underlining is ours]
18. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock
Brokers P. Ltd, [2007] 291 ITR 500 (SC), it has been ruled thus:-
"Section 147 authorises and permits the Assessing Officer to
assess or reassess income chargeable to tax if he has reason to
believe that income for any assessment year has escaped
assessment. The word "reason" in the phrase "reason to
believe" would mean cause or justification. If the Assessing
Officer has cause or justification to know or suppose that
income had escaped assessment, it can be said to have reason to
believe that an income had escaped assessment. The expression
cannot be read to mean that the Assessing Officer should have
finally ascertained the fact by legal evidence or conclusion. The
WP(C) No.6087/2010 Page 11 of 15
function of the Assessing Officer is to administer the statute
with solicitude for the public exchequer with an inbuilt idea of
fairness to taxpayers. As observed by the Supreme Court in
Central Provinces Manganese Ore Co. Ltd. v. ITO, [1991] 191
ITR 662, for initiation of action under Section 147(a) (as the
provision stood at the relevant time) fulfillment of the two
requisite conditions in that regard is essential. At that stage, the
final outcome of the proceeding is not relevant. In other words,
at the initiation stage, what is required is "reason to believe",
but not the established fact of escapement of income. At the
stage of issue of notice, the only question is whether there was
relevant material on which a reasonable person could have
formed a requisite belief. Whether the materials would
conclusively prove the escapement is not the concern at that
stage. This is so because the formation of belief by the
Assessing Officer is within the realm of subjective
satisfaction."
[Emphasis supplied]
19. In this context, we may refer with profit to a Division Bench decision
of this Court in ITA No.1056/2009 (The Commissioner of Income Tax III
v. SFIL Stock Broking Ltd.) decided on 27th April, 2010 wherein the Bench
was dealing with the validity of the proceedings under Section 147 of the
Act. The Bench reproduced the initial issuance of notice and thereafter
referred to the reasons for issue of notice under Section 148 which was
provided to the assessee. Thereafter, the Bench referred to the decisions in
CIT v. Atul Jain, 299 ITR 383 (Del), Rajesh Jhaveri Stock Brokers Pvt.
Ltd (supra), Jay Bharat Maruti Ltd. v. CIT, 223 CTR 269 (Del) and CIT v.
Batra Bhatta Company, 174 Taxman 444 (Del) and eventually held thus: -
"9. In the present case, we find that the first sentence of
the so-called reasons recorded by the Assessing Officer is mere
information received from the Deputy Director of Income Tax
(Investigation). The second sentence is a direction given by the
very same Deputy Director of Income Tax (Investigation) to
issue a notice under Section 148 and the third sentence again
comprises of a direction given by the Additional Commissioner
WP(C) No.6087/2010 Page 12 of 15
of Income Tax to initiate proceedings under Section 148 in
respect of cases pertaining to the relevant ward. These three
sentence are followed by the following sentence, which is the
concluding portion of the so-called reasons:-
"Thus, I have sufficient information in my
possession to issue notice u/s 148 in the case of
M/s SFIL Stock Broking Ltd. on the basis of
reasons recorded as above."
10. From the above, it is clear that the Assessing Officer
referred to the information and the two directions as „reasons'
on the basis of which he was proceeding to issue notice under
Section 148. We are afraid that these cannot be the reasons for
proceeding under Section 147/148 of the said Act. The first
part is only an information and the second and the third parts of
the beginning paragraph of the so-called reasons are mere
directions. From the so-called reasons, it is not at all
discernible as to whether the Assessing Officer had applied his
mind to the information and independently arrived at a belief
that, on the basis of the material which he had before him,
income had escaped assessment. Consequently, we find that
the Tribunal has arrived at the correct conclusion on facts. The
law is well settled. There is no substantial question of law
which arises for our consideration."
[Emphasis is ours]
20. On a perusal of the aforesaid decisions, it is graphically clear that
once the ingredients of Section 147 are fulfilled, the assessing officer is
competent in law to initiate the proceedings under Section 147. To put it
differently, the conditions precedent as engrafted in the said provision are to
be satisfied.
21. At this juncture, it is profitable to refer to the authority in GNK
Driveshafts (India) Ltd. v. Income Tax Officer and Others, (2003) 179 C54
(SC) 11 wherein their Lordships of the Apex Court have held thus:-
WP(C) No.6087/2010 Page 13 of 15
"5. We see no justifiable reason to interfere with the order
under challenge. However, we clarify that when a notice under
Section 148 of the Income Tax Act is issued, the proper course
of action for the notice is to file return and if he so desires, to
seek reasons for issuing notices. The assessing officer is bound
to furnish reasons within a reasonable time. On receipt of
reasons, the notice is entitled to file objections to issuance of
notice and the assessing officer is bound to dispose of the same
by passing a speaking order. In the instant case, as the reasons
have been disclosed in these proceedings, the assessing officer
has to dispose of the objections, if filed, by passing a speaking
order, before proceeding with the assessment in respect of the
abovesaid five assessment years."
22. In Lovely Exports (P) Ltd. (supra), the Apex Court held thus:-
"2. Can the amount of share money be regarded as undisclosed
income under Section 68 of Income Tax Act, 1961? We find no
merit in this Special Leave Petition for the simple reason that if
the share application money is received by the assessee
company from alleged bogus shareholders, whose names are
given to the assessing officer, then the department is free to
proceed to reopen their individual assessments in accordance
with law. Hence, we find no infirmity with the impugned
judgment."
23. The obtaining factual matrix has to be tested on the anvil of the
aforesaid pronouncement of law. In the case at hand, as is evincible, the
assessing officer was aware of the existence of four companies with whom
the assessee had entered into transaction. Both the orders clearly exposit
that the assessing officer was made aware of the situation by the
investigation wing and there is no mention that these companies are
fictitious companies. Neither the reasons in the initial notice nor the
communication providing reasons remotely indicate independent application
of mind. True it is, at that stage, it is not necessary to have the established
WP(C) No.6087/2010 Page 14 of 15
fact of escapement of income but what is necessary is that there is relevant
material on which a reasonable person could have formed the requisite
belief. To elaborate, the conclusive proof is not germane at this stage but the
formation of belief must be on the base or foundation or platform of
prudence which a reasonable person is required to apply. As is manifest
from the perusal of the supply of reasons and the order of rejection of
objections, the names of the companies were available with the authority.
Their existence is not disputed. What is mentioned is that these companies
were used as conduits. In that view of the matter, the principle laid down in
Lovely Exports (P) Ltd. (supra) gets squarely attracted. The same has not
been referred to while passing the order of rejection. The assessee in his
objections had clearly stated that the companies had bank accounts and
payments were made to the assessee company through banking channel.
The identity of the companies was not disputed. Under these circumstances,
it would not be appropriate to require the assessee to go through the entire
gamut of proceedings. It is totally unwarranted.
24. Resultantly, the initiation of proceedings under Section 147 and
issuance of notice under Section 148 of the Act are hereby quashed. In the
facts and circumstances of the case, there shall be no order as to costs.
CHIEF JUSTICE
OCTOBER 18, 2010/vk MANMOHAN, J.
WP(C) No.6087/2010 Page 15 of 15
