Delhi High Court
Agr Investment Ltd. vs Addl. Commissioner Of Income Tax & Anr. on 7 January, 2011
Author: Dipak Misra
Bench: Chief Justice, Manmohan
* HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on: 9th November, 2010
% Judgment Pronounced on: 7th January, 2011
+ WP(C) No.7517/2010
AGR INVESTMENT LTD. ..... Petitioner
Through: Mr. S. Ganesh, Sr. Adv. with
Mr. Satyen Sethi, Mr. Arta Trana,
Advocates
Versus
ADDL. COMMISSIONER OF INCOME TAX
AND ANOTHER ....Respondents
1
Through: Mr. M.P. Sharma , Advocate
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 petition preferred under Article 226 of the Constitution of
India, the petitioner has prayed for issue of a writ of certiorari for quashment
of the notice dated 25th February, 2010 issued under Section 148 of the
Income Tax Act, 1961 (for brevity „the Act‟) for the assessment year 2003-
04 and further to quash the order dated 28th June, 2010 whereby the
objections raised by the petitioner have been rejected.
1 th
Corrected vide order dated 18 February, 2011.
WP(C) No. 7517/2010 Page 1 of 23
2. It is submitted by Mr. S. Ganesh, learned senior counsel along with
Mr. Satyen Sethi and Mr. Arta Trana, learned counsel appearing for the
petitioner, that the assessing officer has assumed jurisdiction to initiate the
proceedings under Section 147 and issued notice under Section 148 of the
Act solely on the basis of certain statements recorded by the Directorate of
Investigation without forming an independent opinion. It is urged by him
that the expression used in Section 147 of the Act is „reason to believe‟ and
not „reason to suspect‟ and it is the settled legal position that there should be
direct nexus or live link between the materials relied upon by the revenue
and the belief that income has escaped assessment. It is contended that on a
bare reading of the reason to believe, it is evident that the jurisdiction to
reassess the income has been assumed on the basis of unspecific and vague
information which cannot justify the formation of the belief or the reason to
believe that income has escaped assessment. The entire foundation of the
belief that the income has escaped assessment is that "certain investigations
were carried out by the Directorate of Investigation, Jhandewalan" though
no particulars had been given on what basis the Directorate of Investigation
had come to the conclusion that accommodation entries were given to the
petitioner. It is urged that no details of the persons who supposedly alleged
that the transactions of the petitioner were bogus were provided and further
the nature of the alleged accommodation entries have not been referred to in
the reason to believe. In essence, the submission in this regard is that there
is complete absence of material which can be said to have a live link with or
be the basis of formation of the purported belief or reason to believe that the
WP(C) No. 7517/2010 Page 2 of 23
petitioner‟s income had escaped assessment. The allegation that the
transactions entered into by the petitioner were bogus is totally without any
substance in the absence of any materials/details provided. It is further
submitted by the learned counsel for the petitioner that the reasons recorded
must show application of mind by the assessing officer to the material
produced before him on the basis of which the reason to believe is formed
that income has escaped assessment and in the absence of such application
of mind which is evincible from the reasons recorded, the order is vulnerable
in law. It is contended by him that the assessing officer has merely blindly
accepted what was allegedly intimated to him by the Directorate of
Investigation without even attempting to ascertain the basis of the
Directorate‟s assertion that accommodation entries were given to the
petitioner. It is his further submission that the objections raised by the
petitioner have not been disposed of in conformity with the decision
rendered by the Apex Court in GKN Driveshafts (India) Ltd. v. Income Tax
Officer & Ors., (2003) 179 CTR 11 (SC) inasmuch as there is no
consideration of the basic and fundamental objections raised by the
petitioner which go to the very root of the matter and would clearly reveal
that no addition whatsoever could have been made to the petitioner‟s
income. It is canvassed by him that the decision of the Apex Court in GKN
Driveshafts (India) Ltd. (supra) requires that the assessee‟s objections to the
reopening should be considered and disposed of in conformity with the rules
of natural justice.
WP(C) No. 7517/2010 Page 3 of 23
3. To bolster his submissions, the learned counsel for the petitioner has
commended us to the decisions in ITO v. Lakhmani Mewal Das, [1976] 103
ITR 437 (SC), General Mrigendra Shum Sher Jung Bahadur Rana v.
ITO, [1980] 123 ITR 329, United Electrical Co. Pvt. Ltd. v. CIT, [2002]
258 ITR 317, CIT v. SFIL Stock Broking Ltd., [2010] 325 ITR 285 (Del),
Siemens Engineering & Manufacturing Co. of India Ltd. v. Union of
India, AIR 1976 SC 1785 and Union of India v. Mohan Lal Capoor, AIR
1974 SC 87.
4. Mr. M.P. Sinha, learned counsel appearing for the revenue, supported
the order passed by the competent authority contending, interalia, that the
assessing officer has applied his independent mind and has not been solely
guided by the information given by the Directorate of Investigation. It is
proponed by him that the objections raised by the petitioner has been
appositely dealt with and by no stretch of imagination it can be said to be a
cryptic order passed in a mechanical manner. The learned counsel for the
revenue would submit that what is basically contended by the learned
counsel for the assessee - petitioner pertains to sufficiency of material which
should not be gone into at this stage. It is put forth by him that the same has
to be delved into at the time of assessment and the petitioner would be
afforded adequate opportunity of hearing to explain the same. The learned
counsel has further submitted that the decisions which have been placed
reliance upon by the learned counsel for the petitioner are distinguishable on
facts and, hence, the same really do not render much assistance to him.
WP(C) No. 7517/2010 Page 4 of 23
5. To appreciate the controversy, it is appropriate to refer to the initial
notice dated 25th February, 2010 which was sent by the assessing officer.
On a perusal of the said notice, it is evident that there has been escapement
of taxable income for the assessment year 2003-04 within the meaning of
Section 147 of the Act. It is worth noting, there is a cavil between the
revenue and the petitioner how the objections have been dealt with by the
competent authority of the revenue. It is averred in the petition that the
petitioner, on receipt of the notice, submitted that the return of income filed
under Section 139(1) of the Act may be treated as filed in response to the
notice under Section 148 of the Act and the reasons recorded for assuming
jurisdiction to re-assess the income be furnished so that objections referring
to the assumption of jurisdiction may be filed. On 15th March, 2010, the
reason to believe, as recorded, was provided to the petitioner wherefrom it is
reflectible that the jurisdiction was assumed on the basis of the report of the
Directorate of Investigation that certain persons had given statement that the
petitioner had received accommodation entries. On 20 th May, 2010, the
assessee requested to provide copies of the statement and the report of the
DIT (Investigation) to enable him to raise objections. However, as is
manifest, by letter dated 21st June, 2010, the petitioner raised the following
objections:
"(i) During the year the petitioner has neither received any
gift nor any share application money nor any loan.
(ii) There was no change in share capital during the year as
compared to immediately preceding year. The petitioner
being a public limited listed company is regulated by the
WP(C) No. 7517/2010 Page 5 of 23
rules and regulations of SEBI and cannot accept share
application money or issue share capital except with the
prior approval of SEBI.
(iii) Neither any loan was borrowed nor has any payment
been repaid during the year. Reference was made to
clause 23(a) of Tax Audit Report.
(iv) It was explained that during the year, investment in
shares held by the petitioner was sold. From the audited
balance sheet, it is evident that the petitioner was having
shares of three limited companies, namely, Lakshmi
Float Glass Limited, Bawa Float Glass Limited and KPF
Finances Limited of the face value of Rs.1,40,00,000/-.
It was these shares that were sold at the face value only.
It is out of sale of these shares that sale to the extent of
Rs.27,00,000/- has been alleged in the reasons as
accommodation entry.
(v) Amount received on sale of investments was utilized to
give loans and the same appear in the balance sheet under
the head „loans and advances‟."
6. Upon receipt of the said objections, the same were dealt with vide
Annexure P-2 dated 28th June, 2010. In paragraph 3, the authority concerned
referred to its earlier decision and reproduced the same. We think it
appropriate to reproduce the relevant portion of the same whereby the
objections have been rejected:
"REASONS RECORDED IN WRITING FOR
REOPENING THE CASE UNDER SECTION 148
M/s AGR INVESTMENT LTD.
ASSESSMENT YEAR 2003-04
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:
WP(C) No. 7517/2010 Page 6 of 23
"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:
Beneficiary‟s Beneficiary‟s Beneficiary‟s Value
Name Bank Name Bank Name Entry Taken
AGR Investment Ltd. SBI Pahar Ganj 400000
AGR Investment Ltd. SBI Pahar Ganj 300000
AGR Investment Ltd. SBI Pahar Ganj 300000
AGR Investment Ltd. SBI Pahar Ganj 500000
AGR Investment Ltd. SBI Pahar Ganj 700000
AGR Investment Ltd. SBI Pahar Ganj 500000
Total 2700000
Instrument No. by Date on which Name of Account
which entry taken Entry taken Holder of entry
giving account
141581 23-May-02 SAAR Enterprises
Pvt. Ltd.
141852 28-May-02 SAAR Enterprises
Pvt. Ltd.
141957 28-May-02 Tulip Engg. Pvt.
Ltd.
141854 9-Jun-02 SAAR Enterprises
Pvt. Ltd.
141955 9-Jun-02 Tulip Engg. Pvt.
Ltd.
141959 20-Jun-02 Tulip Engg. Pvt.
Ltd.
Bank from which Branch of A/c No. entry giving
entry given entry giving account
bank
Corpn. Bank Paschim Vihar 52116
Corpn. Bank Paschim Vihar 52116
Corpn. Bank Paschim Vihar 52174
Corpn. Bank Paschim Vihar 52116
Corpn. Bank Paschim Vihar 52174
Corpn. Bank Paschim Vihar 52174
WP(C) No. 7517/2010 Page 7 of 23
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 the issuance of the
notice under section 148.
xxx
xxx
i) The reasons recorded by the Assessing Officer
amply "demonstrate" that income has escaped
assessment, there is adequate "reason to believe" that
income has escaped assessment, as the report of DIT(Inv)
has specifically pointed out that the receipts are bogus;
they are mere accommodation entries and this channel
has been utilized by the assessee to introduce its own
unaccounted money in its books of accounts. In this
respect, it would be pertinent to cite here the case of
IPCA Laboratories Ltd. vs. DCIT (2001) 251 ITR 420
(Bombay).
ii) It would be pertinent to state here as under:-
Assessee must disclose all primary facts fully and truly -
The words „omission or failure to disclose fully and truly
all material facts necessary for his assessment for that
year‟ postulate a duty on every assessee to disclose fully
and truly all material facts necessary for his assessment.
What facts are material and necessary for assessment will
differ from case to case. There can be no doubt that the
duty of disclosing all the primary facts relevant to the
decision on the question before the assessing authority
lies on the assessee - Calcutta Discount Co. Ltd. vs. ITO
[1961] 41 ITR 191 (SC); Indian Oil Corporation v. ITO
[1977] 106 ITR 1 (SC); ITO v. Lakhmani Mewal Das
(supra)."
WP(C) No. 7517/2010 Page 8 of 23
7. The questions that emerge for consideration are whether there has
been application of mind or change of opinion, whether the objections have
been properly dealt with and whether there is a mere suspicion or reason to
believe. Regard being had to the aforesaid issues, we think it appropriate to
refer to certain citations in the field.
8. In Raymond Woolen Mills Ltd. v. Income Tax Officer & Ors.,
[1999] 236 ITR 34 (SC), while dealing with the validity of commencement
of re-assessment proceedings under Section 147 of the Act, the Apex Court
has held that there is prima facie some material on the basis of which the
Department could re-open the case. The sufficiency or correctness of the
material is not a thing to be considered at that stage.
9. The High Court of Gujarat in Praful Chunilal Patel v. Assistant
Commission of Income Tax, [1999] 236 ITR 832 has opined that in terms
of the provision contained in Section 147, the Assessing Officer should have
reason to believe that any income chargeable to tax has escaped assessment.
The word „reason‟ in the phrase „reason to believe‟ would mean cause or
justification. If the assessing officer has a cause or justification to think or
suppose that income has escaped assessment, he can be said to have a reason
to believe that such income had escaped assessment. The words „reason to
believe‟ cannot mean that the assessing officer should have finally
ascertained the facts by legal evidence. They only mean that he forms a
belief from the examination he makes and if he likes from any information
that he receives. If he discovers or finds or satisfies himself that the taxable
WP(C) No. 7517/2010 Page 9 of 23
income has escaped assessment, it would amount to saying that he had
reason to believe that such income had escaped assessment. The
justification for his belief is not to be judged from the standards of proof
required for coming to a final decision. A belief, though justified for the
purpose of initiation of the proceedings under Section 147, may ultimately
stand altered after the hearing and while reaching the final conclusion on the
basis of the intervening enquiry. At the stage where he finds a cause or
justification to believe that such income has escaped assessment, the
assessing officer is not required to base his belief on any final adjudication
of the matter.
10. In Ganga Saran & Sons P. Ltd. v. ITO & Ors., [1981] 130 ITR 1
(SC), it has been held thus:
"It is well settled as a result of several decisions of this
Court that two distinct conditions must be satisfied
before the ITO can assume jurisdiction to issue notice
under S. 147(a). First, he must have reason to believe that
the income of the assessee has escaped assessment and,
secondly, he must have reason to believe that such
escapement is by reason of the omission or failure on the
part of the assessee to disclose fully and truly all material
facts necessary for his assessment. If either of these
conditions is not fulfilled, the notice issued by the ITO
would be without jurisdiction. The important words
under S.147(a) are "has reason to believe" and these
words are stronger than the words "is satisfied". The
belief entertained by the ITO must not be arbitrary or
irrational. It must be reasonable or in other words it must
be based on reasons which are relevant and material. The
Court, of course, cannot investigate into the adequacy or
sufficiency of the reasons which have weighed with the
ITO in coming to the belief, but the Court can certainly
examine whether the reasons are relevant and have a
bearing on the matters in regard to which he is required
to entertain the belief before he can issue notice under
WP(C) No. 7517/2010 Page 10 of 23
S.147(a). It there is no rational and intelligible nexus
between the reasons and the belief, so that, on such
reasons, no one properly instructed on facts and law
could reasonably entertain the belief, the conclusion
would be inescapable that the ITO could not have reason
to believe that any part of the income of the assessee had
escaped assessment and such escapement was by reason
of the omission or failure on the part of the assessee to
disclose fully and truly all material facts and the notice
issued by him would be liable to be struck down as
invalid."
11. In Birla VXL Ltd. v. Assistant Commissioner of Income Tax, [1996]
217 ITR 1 (Guj.), a Division Bench of the Gujarat High Court has opined
thus:
"Explanation 2 to Section 147 of the Act, as appended to
newly substituted section 147 makes certain provisions,
where in certain circumstances, the income is deemed to
have escaped assessment giving jurisdiction to the
Assessing Officer to act under the said provision.
Another requirement which is necessary for assuming
jurisdiction is that the Assessing Officer shall record his
reasons for issuing notice. This requirement necessarily
postulates that before the Assessing Officer is satisfied to
act under the aforesaid provisions, he must put in writing
as to why in his opinion or why he holds belief that
income has escaped assessment. "Why" for holding such
belief must be reflected from the record of reasons made
by the Assessing Officer. In a case where Assessing
Officer holds the opinion that because of excessive loss
or depreciation allowance income has escaped
assessment, the reasons recorded by the Assessing
Officer must disclose that by what process of reasoning
he holds such a belief that excessive loss or depreciation
allowance has been computed in the original assessment.
Merely saying that excessive loss or depreciation
allowance has been computed without disclosing reasons
which led the assessing authority to hold such belief, in
our opinion, does not confer jurisdiction on the Assessing
Officer to take action under sections 147 and 148 of the
Act. We are also of the opinion that, howsoever wide the
scope of taking action under section 148 of the Act be, it
does not confer jurisdiction on a change of opinion on the
WP(C) No. 7517/2010 Page 11 of 23
interpretation of a particular provision from that earlier
adopted by the assessing authority. For coming to the
conclusion whether there has been excessive loss or
depreciation allowance or there has been
underassessment at a lower rate or for applying the other
provisions of Explanation 2, there must be material that
have nexus to hold opinion contrary to what has been
expressed earlier. The scope of section 147 of the Act is
not for reviewing its earlier order suo motu irrespective
of there being any material to come to a different
conclusion apart from just having second thoughts about
the inferences drawn earlier.
[Emphasis added]
12.\ In Sheo Narain Jaiswal & Ors. v. Income Tax Officer & Ors., [1989]
176 ITR 352 (Patna), it was held that reassessment proceedings can be
initiated under Section 147(a) of the Act if the Income-tax Officer has
reason to believe that there has been escapement of income and that the said
income escaped assessment by reason of the omission or failure on the part
of the assessee to disclose fully and truly all material facts necessary for the
assessment for that period or year. Both the conditions are conditions
precedent for the assumption of jurisdiction under Section 148 of the Act.
13. In Phool Chand Bajrang Lal & Anr. v. Income Tax Officer & Anr.,
[1993] 203 ITR 456 (SC), the Apex Court has held thus:
"From a combined review of the judgments of this Court,
it follows that an Income-tax Officer acquires jurisdiction
to reopen an assessment under Section 147(a) read with
Section 148 of the Income-tax Act, 1961, only if on the
basis of specific, reliable and relevant information
coming to his possession subsequently, he has reasons,
which he must record, to believe that, by reason of
omission or failure on the part of the assessee to make a
true and full disclosure of all material facts necessary for
his assessment during the concluded assessment
proceedings, any part of his income, profits or gains
WP(C) No. 7517/2010 Page 12 of 23
chargeable to income-tax has escaped assessment. He
may start reassessment proceedings either because some
fresh facts had come to light which were not previously
disclosed or some information with regard to the facts
previously disclosed comes into his possession which
tends to expose the untruthfulness of those facts. In such
situations, it is not a case of mere change of opinion or
the drawing of a different inference from the same facts
as were earlier available but acting on fresh information.
Since the belief is that of the Income-tax Officer, the
sufficiency of reasons for forming the belief is not for the
Court to judge but it is open to an assessee to establish
that there in fact existed no belief or that the belief was
not at all a bona fide one or was based on vague,
irrelevant and non-specific information. To that limited
extent, the Court may look into the conclusion arrived at
by the Income-tax Officer and examine whether there
was any material available on the record from which the
requisite belief could be formed by the Income-tax
Officer and further whether that material had any rational
connection or a live link for the formation of the requisite
belief..."
[Emphasis supplied]
14. In Anant Kumar Saharia v. Commissioner of Income Tax & Ors.,
[1998] 232 ITR 533 (Gauhati), it was held as follows:
"The belief is that of the Assessing Officer and the
reliability or credibility or for that matter the weight that
was attached to the materials naturally depends on the
judgment of the Assessing Officer. This court in exercise
of power under Article 226 of the Constitution of India
cannot go into the sufficiency or adequacy of the
materials. After all the Assessing Officer alone is
entrusted to administer the impugned Act and if there is
prima facie material at the disposal of the Assessing
Officer that the income chargeable to income-tax escaped
assessment this court in exercise of power under Article
226 of the Constitution of India should refrain from
exercising the power. In the instant case, the case of the
petitioner was fairly considered and thereafter the above
decision is taken."
[Underlining is ours]
WP(C) No. 7517/2010 Page 13 of 23
15. In Bombay Pharma Products v. Income Tax Officer, [1999] 237 ITR
614 (MP), it was held as follows:
It is also established that the notice issued under Section
148 of the Act should follow the reasons recorded by the
Income-tax Officer for reopening of the assessment and
such reasons must have a material bearing on the
question of escapement of income by the assessee from
assessment because of his failure or omission to disclose
fully and truly all material facts. Whether such reasons
are sufficient or not, is not a matter to be decided by the
court. But the existence of the belief is subject to scrutiny
if the assessee shows circumstances that there was no
material before the Income-tax Officer to believe that the
income had escaped assessment."
[Emphasis added]
16. In H.A. Nanji & Co. v. Income Tax Officer, [1979] 120 ITR 593
(Calcutta), it has been held that at the time of issue of notice of
reassessment, it is not incumbent on the ITO to come to a finding that
income has escaped assessment by reason of the omission or failure of the
assessee to disclose fully and truly all material facts necessary for
assessment. It has been further held that the belief which the ITO entertains
at that stage is a tentative belief on the basis of the materials before him
which have to be examined and scrutinised on such evidence as may be
available in the proceedings for reassessment. The Division Bench held that
there must be some grounds for the reasonable belief that there has been a
non-disclosure or omission to file a true or correct return by the assessee
resulting in escapement of assessment or in under-assessment. Such belief
must be in good faith, and should not be a mere pretence or change of
opinion on inferential facts or facts extraneous or irrelevant to the issue and
WP(C) No. 7517/2010 Page 14 of 23
the material on which the belief is based must have a rational connection or
live link or relevant bearing on the formation of the belief.
17. In N.D. Bhatt, Inspecting Assistant Commissioner, Income Tax
& Another. v. I.B.M. World Trade Corporation, [1995] 216 ITR
811(Bombay), it has been held thus:
"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."
18. 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 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
WP(C) No. 7517/2010 Page 15 of 23
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."
[underlining is ours]
19. 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 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
WP(C) No. 7517/2010 Page 16 of 23
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]
20. In this context, we may refer with profit to a Division Bench decision
of this Court in SFIL Stock Broking Ltd. (supra), 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
WP(C) No. 7517/2010 Page 17 of 23
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 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]
WP(C) No. 7517/2010 Page 18 of 23
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:-
"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."
21. In Sarthak Securities Co. Pvt. Ltd. v. ITO, Writ Petition
No.6087/2010, decided on 18th October, 2010, a Division Bench of this
Court, after reproducing Section 147 of the Act and relying on certain
decisions in the field, expressed the view as follows:
"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
WP(C) No. 7517/2010 Page 19 of 23
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 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."
22. The present factual canvas has to be scrutinized on the touchstone of
the aforesaid enunciation of law. It is worth noting that the learned counsel
for the petitioner has submitted with immense vehemence that the petitioner
had entered into correspondence to have the documents but the assessing
officer treated them as objections and made a communication. However, on
a scrutiny of the order, it is perceivable that the authority has passed the
order dealing with the objections in a very careful and studied manner. He
WP(C) No. 7517/2010 Page 20 of 23
has taken note of the fact that transactions involving Rs.27 lakhs mentioned
in the table in Annexure P-2 constitute fresh information in respect of the
assessee as a beneficiary of bogus accommodation entries provided to it and
represents the undisclosed income. The assessing officer has referred to the
subsequent information and adverted to the concept of true and full
disclosure of facts. It is also noticeable that there was specific information
received from the office of the DIT (INV-V) as regards the transactions
entered into by the assessee company with number of concerns which had
made accommodation entries and they were not genuine transactions. As we
perceive, it is neither a change of opinion nor does it convey a particular
interpretation of a specific provision which was done in a particular manner
in the original assessment and sought to be done in a different manner in the
proceeding under Section 147 of the Act. The reason to believe has been
appropriately understood by the assessing officer and there is material on the
basis of which the notice was issued. As has been held in Phool Chand
Bajrang Lal (supra), Bombay Pharma Products (supra) and Anant Kumar
Saharia (supra), the Court, in exercise of jurisdiction under Article 226 of
the Constitution of India pertaining to sufficiency of reasons for formation of
the belief, cannot interfere. The same is not to be judged at that stage. 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
WP(C) No. 7517/2010 Page 21 of 23
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 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
transactions 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.
23. In the case at hand, as we find, the petitioner is desirous of an
adjudication by the writ court with regard to the merits of the controversy.
In fact, the petitioner requires this Court to adjudge the sufficiency of the
material and to make a roving enquiry that the initiation of proceedings
under Sections 147 and 148 of the Act is not tenable. The same does not
come within the ambit and sweep of exercise of power under Article 226 of
the Constitution of India. It is open to the assessee to participate in the re-
assessment proceedings and put forth its stand and stance in detail to satisfy
the assessing officer that there was no escapement of taxable income. We
may hasten to clarify that any observation made in this order shall not work
to the detriment of the plea put forth by the assessee during the re-
assessment proceedings.
WP(C) No. 7517/2010 Page 22 of 23
24. Consequently, the writ petition, being sans substratum, stands
dismissed without any order as to costs.
CHIEF JUSTICE
MANMOHAN, J.
JANUARY 7, 2011 Pk/dk WP(C) No. 7517/2010 Page 23 of 23