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Judgment
PER MANISH AGARWAL, AM :
The present appeal is filed by assessee against the order dated 26.05.2023 of Ld. Commissioner of Income Tax (A), Lucknow-3 [“Ld. CIT(A)”] in Appeal No. CIT(A) Lucknow-3/10509/2018-19 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of assessment order dated 30.12.2018 passed u/s 147 r.w.s. 143(3) of the Act for Assessment Year 2011-12.
The assessee is a private limited company and e-filed its return of income declaring total income of INR 43,504/-. The case of the assessee was re-opened in terms of notice issued u/s 148 dated 30.03.2018. As per the reasons recorded, the AO on the basis of information supplied by the Investigation Wing Kolkata recorded the satisfaction that assessee has received unsecured loans from two companies namely M/s Gemini Vinimay Pvt. Ltd. and M/s Arham Vyapar Pvt. Ltd. which are paper companies and managed from a small office and therefore, the total unsecured loans taken from these two companies amounting to INR 4,85,00,000/- during the previous year was held as introduced by the assessee out of its undisclosed income and thus has escaped assessment. In response to notice u/s 148 of the Act, assessee filed return of income on 16.11.2018, declaring same income as was declared in the return of income filed u/s 139(1) of the Act. After considering the submission filed by the assessee, AO passed the reassessment order wherein it is alleged that the assessee has obtained accommodation entry of unsecured loan of INR 6.00 crores and by holding the same as unexplained cash credit, addition was made u/s 68 of the Act.
Against the said order, the assessee has filed an appeal before Ld. CIT(A) who dismissed the appeal of the assessee.
Aggrieved by the said order, assessee is in appeal before the Tribunal wherein various grounds of appeal were raised. During the course of hearing vide letter dated 20.06.2025, the assessee has raised one additional ground of appeal which reads as under:
“That the ld. AO has erred in law as well as on the facts in reopening the case under section 148 of the Income Tax Act based on borrowed satisfaction and wrong facts.”
Ld. AR submits that additional ground of appeal now taken is purely legal in nature and goes to the root of the matter and requires no investigation or verification thus, the same be admitted for adjudication. He placed reliance on the judgement of hon’ble Supreme Court in the case of NTPC Ltd. vs. CIT reported in (1998) 229 ITR 0383 (SC) and prayed for the admission of additional ground of appeal.
On the other hand, Ld. Sr. DR for the Revenue submits that additional ground of appeal require verification on the part of the AO therefore, the same should not be admitted at this stage.
After considering the submissions and perused the additional ground of appeal taken, we find that the assessee has challenged the reopening of assessment under section 148 of the Act as the reason recorded are based on borrowed satisfaction and no enquiry was made prior to reopening the case of the assessee. IN support the assessee filed the copy of the reason recorded before us thus no further fact is required to be verified from the AO. Therefore, by respectfully following the judgement of Hon’ble Supreme Court as relied upon by the assessee, additional ground of appeal taken by the assessee is admitted for adjudication.
First, we take additional Ground of appeal raised by the assessee.
Before us ld. AR for the assessee submits that the AO in the reason recorded the satisfaction that assessee received unsecured loans of Rupees 2.85 crores from M/s Gemini Vinimay Private Limited and of Rupees 2.00 crores from M/s Arham Vyapar Pvt. Ltd. whereas actually assessee received loan of Rupees 3.75 crores from M/s Gemini Vinimay Private Limited and of Rupees 2.25 crores from M/s Arham Vyapar Pvt. Ltd. This observations of the assessee are based on the information provided by the Investigation Wing, Kolkata which was available to the AO through insight portal. The submits that the AO had not made any inquiry or investigation before reaching to the satisfaction that assessee has received loans alleged bogus, had the AO made any inquiry from the parties or from the assessee itself, the correct figure of loans taken from both the lenders would have come to the surface. In the light of above it is submitted that the satisfaction recorded by the for initiation of reassessment proceedings are based on wrong facts and without conducting independent inquiry to verify the information supplied by the Investigation Wing, thus the satisfaction recorded by the assessing officer was borrowed satisfaction.
Per contra, the ld. Sr. DR vehemently supported the orders of the lower authorities and submits that the AO has proceeded on the basis of the information available and after making enquires, made the addition of accommodation entries of unsecured loan from two lender companies whose financial statements are doubtful. Ld. Sr. DR for the Revenue further submits that AO has passed the reassessment order after making necessary verification of the facts and after following the due procedure as provided under the statute therefore, the reassessment proceedings concluded were the valid proceedings. He therefore, prayed that the AO has rightly reopened the assessment and prayed accordingly.
In rejoinder, Ld.AR submits that from the perusal of the reasons recorded as available at pages 2 & 3 of the paper book, it could be seen that AO has not even stated the correct figure of the loans taken by the assessee. He submits that in the reasons recorded, it is alleged that assessee has Introduced its unaccounted money in 2 books of accounts Recorded the reason to believe the sum of Rs. 4.85 crores has escaped assessment. However, In the assessment the AO observe that the correct figure of loans was of Rs. 6.00 crores and accordingly, made the addition of the same. He therefore, submits that the reasons recorded itself are not correct and the AO has not applied his mind while recording the reasons for re-opening.
Heard the contentions of both the parties and perused the material available on record. In the instant case, it is seen that AO has re-opened the assessment of the assessee by alleging that the assessee has received accommodation entries of unsecured loans from two companies namely M/s Gemini Vinimay Private Limited (Rs. 2.85 crores) and from M/s Arham Vyapar Pvt. Ltd. (Rs. 2.00 crores). However, in the assessment order after verifying the facts, the AO himself has observed that the correct amount of loans from M/s Gemini Vinimay Private Limited was of Rs. 3.75 crores and from M/s Arham Vyapar Pvt. Ltd. was of Rs. 2.25 crores and made the addition for the same by holding as unexplained cash credits u/s 68 of the Act. It is thus clear that the AO has proceeded to reopen the assessment based on borrowed satisfaction without making any independent enquiry or verification of fact on the material available on record.
On going through the reasons recorded it is observed that there was information received by the AO from the Investigation Wing of escapement of income as per the provisions of section 147 of the Income Tax Act, 1961. As per the information, the assessee has received unsecured loans to the tune of INR 4.85 crores from two Kolkata based companies which are operated from small office in which offices of so many companies were managed. During the course of reassessment proceedings, before proceeding further, the AO recorded his reasons to believe that income has escaped assessment to the tune of INR 4.85 crores. The AO has simply recorded that the assesses has received accommodation entries by way of receiving unsecured loans during the financial year 2010-11 for introducing it’s unaccounted money in the books of accounts for which action under section 147 of the Act is proposed. However, except so called information, there was no any reference of tangible material or any concrete or cogent material to link the allegation with the appellant with the conclusions. The reasons recorded were also found incorrect and without any application of mind. It is not sufficient for the AO to mention that he has applied his mind and formed his independent opinion. It should be reflected in the reasons recorded by bringing all the relevant tangible material and findings of independent inquiries conducted by AO on record which we believe is missing in the reasons recorded. The AO failed to establish the nexus between the tangible material available and the reason to believe that income has escaped the assessment. Even the figure of escapement of income was stated at Rs. 4.85 crores as per the investigation report was not found correct. The correct figure of unsecured loans received by the assessee from the two companies was of Rs. 6.00 crores. This shows that the AO has not applied his mind and not conducted independent inquiry before drawing his reason to believe that income has escaped assessment. It is a settled law that in the absence of tangible material and without conducting any independent inquiry, reasons recorded on the basis of borrowed satisfaction, the reasons recorded and the assessment proceedings reopened thereon are invalid. The Hon’ble Delhi High Court in the case of Well Trans Logistics India (P.) Ltd. v. Addl. Commissioner of Income-tax reported in [2024] 166 taxmann.com 72 (Delhi), has held as under:-
25.“In the present case, as may be seen, there is no "close nexus" or "live link" between tangible material and the reason to believe that income has escaped assessment. The information received from the Investigating Unit of the Revenue cannot be the sole basis for forming a belief that income of the assessee has escaped assessment. Having received information from the Investigating Wing, it was incumbent upon the Assessing Officer to take further steps, make further enquiries and garner further material and if such material indicate that the income of the assessee has escaped assessment and then form a belief that the income of the assessee has escaped assessment.
26.Clearly, in this case, the Assessing Officer has not acquired any material to form such belief. There is not even a line of reason which may justify the formation of the belief. Consequently, we are satisfied that reopening of assessment for the assessment year in question by the Assessing Officer does not satisfy the requirement of law in terms of Section 147 & 148 of the Act.”
Further in the case of Movish Realtech (P.) Ltd. vs. Deputy Commissioner of Income-tax reported in [2023] 152 taxmann.com 666 (Delhi), the hon’ble jurisdictional high court in the head note of the decision held as under:
"Where reassessment proceedings, was initiated against assessee pursuant to a search conducted at AFL Ltd. whereby it was alleged by revenue that bogus accommodation entry was provided by AFL Ltd. to assessee and said fact was confirmed by accommodation entry provider, 'R', since foundation for triggering reassessment proceedings qua assessee was statement of 'R' and said statement, by itself did not lend any clarity as to whether Assessing Officer had underlying material available with him for reaching a conclusion that income chargeable to tax qua assessee had escaped assessment, reassessment proceeding was to be set aside"
In the case of Principal Commissioner of Income-tax-6 vs. Meenakshi Overseas (P.) Ltd. reported in [2017] 82 taxmann.com 300 (Delhi), the Hon’ble Jurisdictional High Court has held as under:
24.“The reopening of assessment under Section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the AO that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of Section 147 (1) of the Act.
25.At this stage it requires to be noted that since the original assessment was processed under Section 143 (1) of the Act, and not Section 143 (3) of the Act, the proviso to Section 147 will not apply. In other words, even though the reopening in the present case was after the expiry of four years from the end of the relevant AY, it was not necessary for the AO to show that there was any failure to disclose fully or truly all material facts necessary for the assessment.
26.The first part of Section 147 (1) of the Act requires the AO to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject matter of examination. The AO being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre- condition to the assumption of jurisdiction under Section 147 of the Act. The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment. ….. ……
36.In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the AO one after the other. There is no independent application of mind by the AO to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the AO are at best a reproduction of the conclusion in the investigation report. Indeed it is a ‘borrowed satisfaction’. The reasons fail to demonstrate the link between the tangible material and the formation of the reason to believe that income has escaped assessment.”
The Hon’ble Supreme Court in the case of DCIT vs Rakesh Ramanlal Shah reported in 477 ITR 296 (SC) has held that AO reopened the assessment on borrowed satisfaction without establishing the live link between the information and material on record and dismissed the SLP filed by the Revenue. The Hon’ble Jurisdictional Delhi High Court in the case of Sanjay Kaul vs ITO in Writ Petition (C) No.11198/2019 dated 30.05.2025 has held that re-opening based on general information from the Report of Investigation Wing is bad in law.
In view of the above discussion and respectfully following the above-mentioned decisions of Hon’ble Supreme Court and of the Jurisdictional High Court, we are of the considered view that the reasons recorded by the AO are based on incorrect facts and figures. The AO has also failed to establish the nexus between the tangible material available and the reason to believe that income has escaped the assessment. Accordingly, the reasons recorded by the AO are declared as invalid and the subsequent reassessment proceedings are liable to be set aside and quashed. Hence, the additional ground of appeal is allowed.
Since we have allowed the additional legal ground of appeal raised by the assessee, thus the other grounds of appeal taken on the merits of the additions are not adjudicated.
In the result, appeal of the assessee is allowed.