AVSL Securities Pvt. Ltd. vs DCIT, Central Circle-32

“1.

The Ld. CIT(A) erred in confirming the Assessment Order without appreciating the legal and factual submissions of the Appellant.

A. Jurisdictional Grounds (Invalidity of Reassessment)

1.

Invalid Reassessment u/s 147/148A: That the Ld. CIT(A) erred in law and on facts by upholding the jurisdiction assumed by the Assessing Officer u/s 147/148A, ignoring that the original assessment was completed u/s 143(3) on 22.09.2021, and the current reopening is based on the same material that was available during the scrutiny proceedings.

2.

Change of Opinion: That the reopening is merely a "Change of Opinion" which is impermissible in the case of a completed scrutiny assessment, and the Ld. CIT(A) failed to apply the settled judicial precedents on this matter.

3.

No Tangible Material: That the Ld. CIT(A) erred in holding that the AO had "tangible material" to form the belief that income escaped assessment, when in fact, the material was merely information already available with the department and was not subjected to fresh independent application of mind.

B. Substantive Grounds (Merits of Addition).

4.

Addition u/s 69A: That the Ld. CIT(A) erred in confirming the addition of Rs. 1,77,77,720/-made by the AO u/s 69A of the Act, by wrongly treating the loan transaction with M/s Vagabound Tradex Pvt. Ltd as "unexplained money" or "fictitious purchases".

5.

Genuine Loan Transaction: That the Ld. CIT(A) failed to appreciate that the transaction with M/s Vagabound Tradex Pvt. Ltd was a genuine short-term loan taken to meet working capital requirements for the share brokerage business, which was subsequently repaid in full through banking channels, and therefore, no addition u/s 69A or Section 68 was warranted.

6.

Consequential Additions: That the consequential additions of commission income made by the AO, being directly related to the unsustainable addition u/s 69A, must also be deleted.

C. Violation of Natural Justice Grounds

7.

Denial of Cross-Examination: That the Ld. CIT(A) erred in confirming the additions when the Assessing Officer committed a grave error by relying upon the statements of third parties (alleged entry providers) recorded during the search proceedings without affording the Appellant the mandatory opportunity of cross-examination, thereby violating the principles of Natural Justice.”

“1.

During the course of search & seizure action on 25.03.2017, the statement of Sh. Pankaj Goel was recorded u/s 132(4) of the Income Tax Act, 1961, in which he stated that he was working as a share broker in M/s Asian Bulls Capital Pvt. Ltd. and collected cash of Rs. 25,00,000/-from his clients. In his statement, he admitted that he regularly routes cash in form of accommodation entries to the bank account of M/s Asian Bulls Capital Pvt. Ltd. On further enquiry it was found that Shri Deepak Goel, brother of Sh. Pankaj Goel was managing and controlling the company M/s Asian Bulls Capital Pvt. Ltd. In view of the same, Sh. Deepak Goel as further examined on 31.01.2019 and in his statement recorded u/s 131(1A) of the I.T. Act, Shri Deepak Goel admitted that the transaction in the company i.e. M/s Asian Bulls Capital Pvt Ltd were done at the behest of another share broker Sh. Vikas Gupta, who was also a director in M/s AVSL Securities Pvt Ltd. He also admitted that sale purchase of shares in Asian bulls Capital Pvt Ltd was done in cash, which was routed in the account of M/s Asian Bulls Capital Pvt Ltd in the form of RTGS through shell companies/concerns operated by accommodation entry providers.

1.

In the view of confession of Sh. Deepak Goel, a survey operation was carried out on M/s AVSL Securities Pvt Ltd, M/s Asian Bulls Capital Pvt Ltd and M/s Vagabound Tradex Pvt Ltd on 01.02.2019 at the premises 802, 8th Floor, GDITL Tower, A-09 Building, Netaji Subhash Place, New Delhi on 01.02.2019. Various documents/Books of A/C, etc were found and statements of various persons were recorded.

1.

Further as per the statement recorded during the course of survey proceedings, Shri Vikas Gupta, Director of M/s AVSL Securities Pvt. Ltd., admitted that he and Shri Deepak Goel received the cash from the clients who were interested to purchase shares in cash. He also explained that the cash taken from clients was introduced into their companies M/s Asian Bulls Capital Pvt Ltd, M/s Vagabound Tradex Pvt Ltd and M/s Kinshuk Stock Brokers etc. through the accommodation entry providers for a commission of 0.25 to 0.50%. As per the information the assessee company M/s AVSL Securities Pvt Ltd has made fictitious purchases of Rs. 2,52,340/- and Rs. 1,75,25,380/- from M/s Vagabound Tradex Pvt Ltd. (AACCV9203D) which is a paper company.”

“5.

It is contended that the original assessment was completed after filing of Return, when the net income was declared as Rs.98,850/-. Soon thereafter, proceedings under Section 148 were initiated culminating by substantial acceptance of the Assessee's arguments and not resulting in any noticeable addition - by an order dated 31.12.2007. The Assessee has produced the copy of that Assessment Order. It refers to a letter of the Directorate of Enforcement dated 28.03.2006, mentioning about some transactions by the Assessee. The Revenue appears to have issued a fresh notice under Section 148 on 23.02.2012 and recounted virtually the same facts.

6.

In this case, the Assessing Officer (A.O.) appears to have completely ignored the earlier re-assessment order - framed under Section 148/143(3) on 31.12.2007. The first re-assessment order noticed all the relevant facts and accepted the net income at Rs.1,03,890/- . The assessment made in the course of assessment proceeding, in the present case, does not refer to any subsequent material other than the Directorate of Enforcement's letter of 28.03.2006; instead the A.O. appears to have just made a Chart as the basis even while acknowledging that the earlier re-assessment proceedings were concluded on 31.12.2007, clearly stated that "perusal in assessment records reveals that the remittances received are not considered in the return of income filed by the Assessee and in the course of the assessment proceedings for the Assessment Years 2003-2004 & 2006-2007". That clearly shows that the A.O. ignored that the material, which led the Revenue to re-open the Assessment, in the first instance, was the same that he sought to resuscitate in order to make substantial additions.

7.

Having regard to these facts, the Court is of the opinion that no substantial question of law arises.

8.

The Appeal is, therefore, dismissed.”

27.

“At this stage, we may briefly refer to the relevant legal provisions.

28.

Section 147 of the Act deals with "income escaping assessment". Section 147 says 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 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 section 147 of the Act.

28.1

The first proviso to section 147 is important. As per this proviso, where an assessment under sub-section(3) of section 143 or section 147 has been made for the relevant assessment year, no action shall be taken under section 147 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.

28.2

Section 149 deals with time limit for notice under section 148. As per clause (a) of sub-section (1), no notice under section 148 shall be issued for the relevant assessment year, if four years have elapsed from the end of the relevant assessment year unless the case falls under clause (b) or clause (c). Clause (b) says that no notice shall be issued if four years have elapsed but not more than six years have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year. Clause (c) deals with a situation where limitation is extended upto sixteen years but the escaped income must relate to any asset located outside India.

29.

Insofar the present case is concerned, the assessment year is 2012-13. The assessment year ends on 31-3-2013. In this case impugned notice under section 148 of the Act was issued on 31-3-2019. Therefore, it is a case of re-opening of assessment under section 149 (1) (b) of the Act after expiry of four years but before expiry of six years.

29.1

Of course the limitation point though pleaded in the writ petition, has been given up by the Petitioner following filing of affidavit by the Respondents which clearly shows that the re-opening notice was issued within the limitation period of six years.

30.

In such a case, the first condition for invoking section 147 is that the Assessing Officer must have reason to believe that income chargeable to tax has escaped assessment for the relevant assessment year. The second condition is that the Assessing Officer must arrive at the satisfaction that income chargeable to tax has escaped assessment for the said assessment year by reason of the failure on the part of the assessee to make a return under section 139 or to respond to a notice under section 142(1) or section 148 or due to the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year.

31.

The key or crucial expressions appearing in section 147 are "reason to believe" and "failure to disclose fully and truly all material facts necessary for assessment".

31.1

Before dilating on these two expressions, it would be apposite to refer to section 148 of the Act, which deals with issue of notice where income has escaped assessment. As per sub-section (1), before making the assessment, re-assessment or re-computation under section 147, a notice in the prescribed form is required to be served upon the assessee by the Assessing Officer, calling upon him to file return of income in terms of such notice within the period specified and in such event the return so filed would be construed to be a return filed under section 139. As per sub-section (2) of the said section, the Assessing Officer shall before issuing any notice under section 148, record his reasons for doing so.

31.2

In GKN Driveshafts (India) Ltd. (supra), Supreme Court held that when a notice under section 148 of the Act is issued, the proper course of action for the assessee is to file the return and if he so desires, to seek the reasons for issuing the notice. If sought for, Assessing Officer is bound to furnish the reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to the notice in which event the Assessing Officer would be under an obligation to dispose of the same by passing a speaking order.

32.

Reverting back to the two expressions as noticed above, we may mention that these two expressions were examined and interpreted in great detail by the Supreme Court in Income-tax Officer v. Lakhmani Mewal Das[1976] 103 ITR 437. That was also a case where notice under section 148 of the Act was put to challenge. Though provisions of section 147 of the Act as it existed then have since been reconstructed and have undergone change, the two key expressions continue to retain their relevance in so far section 147 of the Actis concerned. It may further be noticed that in Lakhmani Mewal Das (supra), Supreme Court was considering validity of notice under section 148 in respect of an assessment beyond the period of four years but within a period of eight years from the end of the relevant year. Supreme Court observed that in such a case, two conditions would have to be satisfied before an Income-tax Officer acquires jurisdiction to issue notice. These two conditions are -1. He must have reason to believe that income chargeable to tax has escaped assessment; and2. He must have reason to believe that such income has escaped assessment by reason of the omission or failure on the part of the assessee to make a return under section 139 for the assessment year under consideration or to disclose fully and truly all material facts necessary for his assessment for that year.

32.1

Both the two conditions must co-exist in order to confer jurisdiction on the Income-tax Officer. Supreme Court observed that duty is cast upon the assessee to make a true and full disclosure of the primary facts at the time of the original assessment. Production before the Income-tax Officer the books of account or other evidence from which material evidence with due diligence could have been discovered by the Income-tax Officer will not necessarily amount to disclosure contemplated by law but the duty of the assessee in any case does not extend beyond making a true and full disclosure of primary facts. Once he has done that, his duty ends. It is for the Income-tax Officer to draw the correct inference from the primary facts. If the Income-tax Officer draws an inference, which appears subsequently to be erroneous, it would amount to change of opinion and mere change of opinion with regard to that inference would not justify initiation of action for re-opening assessment.

32.2

The grounds or reasons which led to formation of the belief that income chargeable to tax has escaped assessment must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exists reasonable grounds for the Income-tax Officer to form the above belief that would be sufficient to clothe him with jurisdiction to issue notice. However, sufficiency of the grounds is not justiceable. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant. To this limited extent, initiation of proceedings in respect of income escaping assessment is open to challenge in a court of law.

32.3

Dilating further, Supreme Court held that reasons for formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. But it has to be borne in mind that it is not any and every material howsoever vague and indefinite or distant, remote and far-fetched which would warrant formation of the belief relating to escapement of income. Moreover, powers of the Income-tax Officer to reopen assessment, though wide are not plenary. The words of the statute are "reason to believe" and not "reason to suspect". Reopening of assessment after the lapse of many years is a serious matter.

33.

It may be mentioned here that the proposition of law enunciated in Lakhmani Mewal Das (supra) has withstood the test of time and is being consistently applied while examining challenge to a notice issued undersection 148 of the Act.

34.

In Prashant S. Joshi v. ITO [2010] 189 Taxman 1/324 ITR 154, this Court observed that the basic postulate which underlines section 147 is formation of the belief by the Assessing Officer that any income chargeable to tax has escaped assessment for any assessment year. In other words, the Assessing Officer must have reason to believe that income chargeable to tax for a particular assessment year has escaped assessment for the relevant assessment year before he proceeds to issue notice under section 148. The reasons which are recorded by the Assessing Officer for re-opening an assessment are the only reasons which can be considered when the formation of the belief is impugned. Recording of reasons distinguishes an objective from a subjective exercise of power and is a check against arbitrary exercise of power. The reasons which are recorded cannot be supplemented subsequently by affidavits. 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. Even in a case where only an intimation is issued under section 143(1), the touchstone to be applied is as to whether there was reason to believe that income had escaped assessment.

35.

Having discussed the above, we may once again revert back to the reasons furnished by Respondent No. 2for re-opening of assessment under section 147 of the Act. After referring to the information received following search and seizure action carried out in the premises of Shri Naresh Jain, it was stated that information showed that Petitioner had traded in the shares of M/s. Scan Steels Ltd., and was in receipt of Rs.23,98,014.00 and therefore, Respondent No. 2 concluded that he had reasons to believe that this amount had escaped assessment within the meaning of section 147 of the Act.

36.

First of all it would be evident from the materials on record that Petitioner had disclosed the above information to the Assessing Officer in the course of the assessment proceedings. All related details and information sought for by the Assessing Officer were furnished by the petitioner. Several hearings took place in this regard where-after the Assessing Officer had concluded the assessment proceedings by passing assessment order under section 143 (3) of the Act. Thus it would appear that Petitioner had disclosed the primary facts at its disposal to the Assessing Officer for the purpose of assessment. He had also explained whatever queries were put by the Assessing Officer with regard to the primary facts during the hearings.

37.

In such circumstances, it cannot be said that Petitioner did not disclose fully and truly all material facts necessary for the assessment. Consequently, Respondent No. 2 could not have arrived at the satisfaction that he had reasons to believe that income chargeable to tax had escaped assessment. In the absence of the same, Respondent No. 2 could not have assumed jurisdiction and issued the impugned notice under section 148 of the Act.”

33.

“In our view the assessee disclosed all the primary facts necessary for assessment of its case to the assessing officer. What the revenue urges is that the assessee did not make a full and true disclosure of certain other facts. We are of the view that the assessee had disclosed all primary facts before the assessing officer and it was not required to give any further assistance to the assessing officer by disclosure of other facts. It was for the assessing officer at this stage to decide what inference should be drawn from the facts of the case. In the present case the assessing officer on the basis of the facts disclosed to him did not doubt the genuiness of the transaction set up by the assessee. This the assessing officer could have done even at that stage on the basis of the facts which he already knew. The other facts relied upon by the revenue are the proceedings before the DRP and facts subsequent to the assessment order, and we have already dealt with the same while deciding Issue No.1. However, that cannot lead to the conclusion that there is non-disclosure of true and material facts by the assessee.”

“ the assessing officer has no power to review; he has the power to re-assess, but re-assessment has to be based on fulfilment of certain pre -condition and if the concept of ‘change of opinion’ is removed, then, in the garb of re-opening the assessment, the review would take place. One must treat the concept of ‘Change of opinion’ as an in-built test to check abuse of power by the assessing officer.”