WP(C) No.6087/2010 Page 1 of 15 * 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 2 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 6th 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 3 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 4 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 5 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 Name Beneficiary Bank Beneficiary Branch Value of Entry Instrument No. by which entry taken Date on which entry taken Name of A/c holder of entry giving a/c Bank from which entry given Branch of entry giving bank Sarthak Securities P. Ltd. OBC Saket 2500000/ - 17/12/02 Nishant Finvest SBBJ NRR Do Do Do 2500000/ - 18/9/ 02 Dinanath Luhhari Wal Spinning Mill SBP DG DO DO DO 2500000/ - 16/12/02 K.R. Fincap P Ltd SBBJ NRR DO DO DO 300000/- 12/3/ 03 Division Trading P Ltd. BOR Rohtak Rd. 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 6 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 7 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 25th 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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