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Judgment
PER VIMAL KUMAR, JM:
The appeal filed by the assessee is against order dated 24.07.2025 of the Ld. Commissioner of Income Tax (Appeals)-30, New Delhi (hereinafter referred to as ‘the Act’) under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) arising out of assessment order dated 31.03.2024 of Ld. Assessing Officer / ACIT, Central Circle-32, New Delhi u/s 147/143(3) of the Act for A.Y. 2019-20.
Brief facts of the case are that the assessee filed return of income on 28.10.2019 declaring income of Rs. 2,44,70,056/- and book profit of Rs. 2,45,17,783/- u/s 139 of the Act. The case of assessee High Risk CRIU/VRU information received on the basis of search u/s 132 of the Act conducted on 17.11.2021 on Galaxy Group, Shri Pradeep Indra Prasad Agrawalla and entry providers Shri Deepak Agarwal and Shri Himanshu Verma. The documents seized during the search contained information showing that the assessee had obtained accommodation entry to the tune of Rs. 5,00,000/- from the entities controlled by above stated entry operators. The case of assessee was selected for reopening of assessment u/s 148 of the Act. The order u/s 147 of the Act dated 31.03.2024 was passed. An addition of Rs. 5,00,000/- u/s 68 for accommodation entries, addition of Rs. 15,000/- on account of commission paid for obtaining accommodation entries u/s 69C of the Act and Rs. 20,096/- on account of interest payable on accommodation entry u/s 36(1)(iii) of the Act were made total addition of Rs. 5,35,096/-. The assessee filed appeal against order dated 31.03.2024 u/s 147 of the Act.
Against order dated 31.03.2024 of ld. AO, the assessee filed appeal before Ld. CIT(A) which was partly allowed. The additions were sustained. Ld. AO was directed to verify the demand.
Being aggrieved, the appellant/assessee preferred present appeal on following grounds:
“1.That the learned Commissioner of Income Tax (Appeals)-30, New Delhi has erred both in law and on facts in upholding the validity of reopening of assessment u/s 147/148 of the Act, despite the fact that the initiation of proceedings was based solely on borrowed satisfaction from the Investigation Wing without any independent application of mind by the Assessing Officer.
1.1That the learned CIT(A) has failed to appreciate that no cogent material or incriminating evidence relating to the appellant company was ever brought on record to justify the reopening; reliance merely on third-party information renders the assumption of jurisdiction bad in law.
1.2That the learned CIT(A) has further erred in upholding the order despite the fact that the appellant company was never provided with the statements or material relied upon, nor was any opportunity of cross-examination granted, thereby vitiating the reassessment proceedings in violation of principles of natural justice.
1.3That the learned CIT(A) has erred in not appreciating that the entire assessment is based upon surmises, conjectures and assumptions drawn from third party statements, without affording any effective opportunity of rebuttal or cross-examination, rendering the order illegal and void.
2.That the learned CIT(A) has erred in sustaining the addition of ₹5,00,000/-u/s 68 of the Act by treating the loan from M/s LVS Financial Services Pvt Ltd. as unexplained cash credit, ignoring the documentary evidences placed on record, and without appreciating that no independent adverse material was available against the appellant company.
2.1That the learned CIT(A) has failed to appreciate that the alleged loan of Rs. 5,00,000/- from M/s LVS Financial Services Pvt. Ltd. stood fully repaid before the date of search, and therefore, no adverse inference could be drawn against the appellant company on the basis of subsequent statements or investigation material. The addition sustained is contrary to facts and unsustainable in law.
3.That the mandatory time period of 7 days for reply to Show Cause Notice u/s 144 was not granted; the notice provided less than the statutory time and hence the assessment order is bad in law.
4.That there exists a variance between the show cause notice and the assessment order, rendering the assessment order bad in law.
4.1That In the show cause notice, the Assessing Officer merely proposed to treat ₹5,00,000/- as unexplained income, without specifying the section or sharing any evidence with the appellant company.
4.2However, in the final assessment order, the AO made a total addition of 25,35,096/- by including commission u/s 69C and interest disallowance u/s 36(1)(iii), which was never put to notice to the appellant company. Such material variation without prior notice and opportunity constitutes a breach of natural justice, and hence the additions made are illegal and void ab initio.
5.That the learned CIT(A) has further erred in sustaining the addition of 15,000/-u/s 69C on account of alleged commission for accommodation entry, by merely relying on general statements of alleged entry operators without any specific evidence against the appellant company.
6.That the learned CIT(A) has erred in sustaining the addition of ₹20,096/- u/s 36(1)(iii) by disallowing interest, mechanically holding the loan as bogus, without appreciating that once the loan is genuine, interest is an allowable business deduction for the appellant company.
7.That the learned CIT(A) has erred in dismissing the grounds relating to levy of interest u/s 234A, 234B & 234C of the Act, ignoring that such levy was consequential to unjustified additions sustained against the appellant company.”
Ld. Authorized Representative for appellant/assessee submitted that ground of appeal No. 1 to 1.3 were regarding reopening u/s 147/148 of the Act. Ld. CIT(A) erred in upholding the validity of reopening of assessment u/s 147/148 of the Act, despite the fact that initiation of proceedings was based solely on borrowed satisfaction from the Investigation Wing without any independent application of mind by the Ld. Assessing Officer. The so-called information relied upon by the Ld. AO pertains to a search conducted on third parties, namely entities allegedly controlled by certain entry operators. However, no material whatsoever belonging to or relating to the appellant was found during such search. The reasons recorded do not disclose any tangible material having a live nexus with the appellant. Ld. AO had not applied his own mind for reopening of the assessment and simply replying upon the information of the investigation wing. The principle that reopening triggered solely by borrowed satisfaction without any live link to the appellant’s own books or records is constitutionally and legally impermissible. Reliance was placed on judgment in written submissions in case of GKN Driveshafts (India) Ltd. vs. DCIT (2003) 259 ITR 19 (SC) observed as under:
“Reopening of case under for assessment u/s 147 after expiry of 4 years cannot be justified unless the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to disclose all true & material facts necessary for his assessment.”
Ld. CIT(A) failed to appreciate that Ld. AO had not supplied any reasons recorded for reopening the assessment, nor has he furnished any material or evidence relied upon for forming the belief that income chargeable to tax and escaped assessment. The notice issued under section 148 and the consequent assumption of jurisdiction have thus been made in a purely mechanical manner, without any independent application of mind which is contrary not the settled position of law. On this ground alone, the reassessment proceedings are liable to be quashed. Vide notice issued u/s 142(1) dated 30.09.2023, the ld. AO merely stated that, based on information received from the Investigation Wing pursuant to a search conducted on third parties, the appellant had allegedly received an accommodation entry of Rs. 5,00,000/- from M/s. LVS Financial Services Pvt. Ltd. The said notice only contains a general and vague allegation. The Notice is enclosed herewith (page 233-238 of paper book). A show cause notice u/s 144 dated 09.03.2024 was issued to treat the amount of Rs. 5,00,000/- as unexplained income. The ld. AO granted only three days’ time to submit a reply, which itself demonstrates the mechanical and predetermined manner in which the reassessment proceedings were carried out, without affording a reasonable opportunity of being heard. After submission of the reply to the show cause notice, the ld. AO issued a notice dated 21.03.2024, wherein certain third-party ledgers allegedly belonging to entities controlled by Sh. Deepak Agarwal and Sh. Himanshu Verma were shared along with approval under section 151 of the Act. However, even at this belated stage, the reasons recorded for reopening were never furnished to the appellant (page 264-271 of PB). The non-supply of reasons recorded during reassessment proceedings strikes at the very root of jurisdiction. The failure to furnish reasons recorded vitiates the reassessment proceedings ab initio. Reliance in this regard is placed on the following judicial decisions:
“The Delhi High Court in the case of Pr. CIT v. Jagat Talkies Distributors [2017] 85 taxmann.com 189 after observing that "failure to furnish the reasons for reopening of the assessment was a clear violation of the procedure laid down by the Supreme Court in GKN Driveshafts (India) Ltd.'s (supra) and the decision in Haryana Acrylic Mfg. Co. v. CIT [2008] 175 Taxman 262 (Delhi) reiterated that it was mandatory for the Assessing Officer to supply reasons for reopening the assessment and this had to be done within a reasonable time." quashed the whole assessment proceedings passed under section 143(3), read with section 148 of the Act.”
Ld. CIT(A) failed to appreciate that apart from above no information or evidence or statement relied upon by the Ld. AO while framing assessment was not shared with the appellant during the entire proceedings. The principle that in the absence of any incriminating material or evidence found during the course of search or otherwise, no addition can be made and no reassessment can be validly sustained, had been firmly and consistently upheld by various Courts including the Hon’ble Supreme Court and High Courts. In this regard is placed on the following judicial pronouncements:
(i)Pr. Commissioner of Income Tax Central 3 vs. Abhisar Buildwell P. ltd. [2023] 149 taxmann.com 399(SCC)
(ii)CIT vs. Kabul Chawla (2016) 380 ITR 573 (Del HC) held that no addition can be made in absence of incriminating material unearched during search.
Ld. CIT(A) failed to appreciate that Ld. AO had not referred to or relied upon various alleged evidences in the assessment order framed by him, however no such evidence was ever shared or confronted to the appellant during the entire course of assessment proceedings. It is submitted that material collected behind the back of the assessee, documents, and relied upon without granting an opportunity of rebuttal or cross-examination, cannot be relied upon as evidence and had no evidentiary value. It is a well-settled legal principle that loose sheets, unsigned papers or third-party records seized during search do not constitute “books of account” and cannot be treated as admissible evidence on their own. Such material, being in the nature of hearsay, must be corroborated by independent and cogent evidence, failing which it remains legally feeble and unreliable. Various judicial pronouncements are being produced:
CBI v. V.C. Shukla & Others (1998) 3 SCC 410 (SC)
"Loose sheets, diaries, or entries found in third-party possession cannot be treated as substantive evidence against an assessee or accused unless corroborated by independent evidence."
Common Cause v. UOI [2017] 394 ITR 220 (SC)
"It is apparent from the aforesaid discussion that loose sheets of paper are wholly irrelevant as evidence being not admissible U/s 34 so as to constitute evidence with respect to the transactions mentioned therein being of no evidentiary value.
Ld. CIT(A) failed to appreciate that the statements relied upon were not related to the assessee. Ld. AO relied upon the statements of Shri Rasik Agarwal (son of Sh. Deepak Agarwal) and Smt. Sonia Sharma (employee of Sh. Deepak Agarwal) for reopening the assessment as well as for making the impugned additions in the case of the assessee. A lawful assessment had to be based on material and such assessment cannot be done merely on the basis of admission. A Judicial pronouncement is being produced:
“Commissioner of Income Tax vs. S. Khader Khan Son (2013) 352 ITR 480 (SC): In this case, the Supreme Court held that retracted statements made during search operations under Section 132(4) of the Income Tax Act cannot be relied upon unless corroborated by independent evidence. The court emphasized that such statements, if retracted, should not form the sole basis for assessment or penalty.”
Ld. Authorized Representative for appellant/assessee submitted that Ground No. 2 and 2.1 related to addition u/s 68 of the Act. Loan was fully explained creditworthiness were established and loan were repaid before the date of search. It was submitted that the unsecured loan taken from from M/s. LVS Financial Services Pvt. Ltd. through proper banking channels and that the entire loan along with interest was repaid much prior to the date of search, and therefore, no adverse inference could be drawn against the appellant on the basis of subsequent third-party material. The assessee had furnished the confirmation of account of the lender along with the appellant’s ledger account, copies of which are enclosed at pages 278-279 of the paper book and the record the bank statement of the assessee reflecting receipt and repayment of the loan through banking channels, enclosed at pages 275-277 of the paper book. The assessee submitted the duly executed and signed loan agreement entered into with M/s. LVS Financial Services Pvt. Ltd. enclosed at pages 272-274 of paper book. the bank statement of the lender company, namely M/s LVS Financial Services Pvt. Ltd., for the relevant period in which the loan was advanced to the appellant, was also furnished and enclosed at pages 280-281 of the Paper Book, clearly demonstrating that the loan was advanced out of explained banking funds. in order to conclusively establish the creditworthiness of the lender company, the appellant had placed on record the acknowledgements of income-tax returns of M/s LVS Financial Services Pvt. Ltd. for A.Y. 2018-19 and A.Y. 2019-20, copies of which are enclosed at pages 282-283 of the Paper Book.
The appellant had also furnished the audited balance sheets of the lender company for financial years 2016-17 to 2022-23, copies of which are enclosed in the Paper Book Page284-408. The share capital and substantial reserves and surplus reflected therein clearly demonstrate the financial strength and creditworthiness of the lender company. These undisputed financials establish beyond doubt that the lender was fully capable of advancing the loan of ₹5,00,000/- to the appellant.
The appellant had also placed on record the fact that there was a substantial change in the ownership and management of the lender company, M/s LVS Financial Services Pvt. Ltd., after the loan was taken by the appellant. The details evidencing the change in shareholding pattern of the lender company were duly furnished and are enclosed at pages 409-419 of the Paper Book. From the said records, it is evident that a major change in ownership took place in F.Y. 2020-21, and significantly, the entire loan along with interest was repaid by the appellant in the same financial year, much prior to the date of search.
The appellant has also furnished a year-wise tabular summary of the change in shareholding of the lender company, which clearly depicts that over the years the shareholding pattern underwent substantial changes and that by F.Y. 2020-21 only five shareholders remained. These facts clearly establish that the appellant had no connection or relationship with the subsequent management or shareholders of the lender company, and therefore, any statements or allegations pertaining to the later management cannot be fastened upon the appellant. The learned CIT(A) failed to appreciate this crucial factual aspect while sustaining the impugned addition.
When the appellant had taken the loan from the lender company, M/s LVS Financial Services Pvt. Ltd., the said company was being managed and controlled for several years by Mr. Chander Kumar Goyal and Mr. Ravinder Joshi, who were experienced directors and were managing the affairs of the company in a professional manner. Subsequently, after about one year from the date of availing the loan, the earlier directors were removed one by one and new directors were inducted. A table showing the details of appointment and removal of directors is enclosed herewith, along with the relevant statutory forms, at pages 420-448 of the Paper Book, as under:
That the appellant had repaid the entire loan amount along with applicable interest on 24.09.2020, much prior to the date when the management and control of the lender company underwent change. At the time when the loan was availed and subsequently repaid, the lender company was managed by its earlier directors, with whom the appellant had a regular and genuine business relationship.
Ld. Authorized Representative for appellant/assessee submitted that Ground no. 3 was regarding show cause notice u/s 144 of the Act with less than 7 days to reply, show cause notice dated 09.03.2024 u/s 144 of the Act required the assessee to filed reply on or before 12.03.2024 at 11.30 AM thereby granting 3 days’ time to respond. It is a settled principle of law that grant of reasonable opportunity is not an empty formality, and where the statute or settled judicial interpretation mandates a minimum time period of seven days to respond to a show cause notice, failure to adhere to the same renders the notice void ab initio, and any order passed pursuant thereto unsustainable in law. The Ld. CIT(A) failed to appreciate this fatal procedural infirmity and erred in sustaining the impugned assessment. Reliance was placed on following judgment:
“(Refer pages 559 to 567 of Judgement PB) Cheftalk Food and Hospitality Services Pvt. Ltd. vs Income Tax Officer Writ Petition NO. 2919 OF 2024 Dated 13th of August, 2024 held that: It may be observed that the SOP, as issued under the provisions of Section 144B(6)(xi) of the Act, in paragraph N.1.3 clearly provides a August 13, 2024 Shraddha Talekar PS 904-WP-2919-2024.DOC response time of seven days from the issuance of the Show Cause Notice to the assessee to submit his reply. In the present case, the Show Cause Notice was issued on 22 March, 2024. It is also clear that sufficient time was available to the Assessing Officer to pass an assessment order even if he was to grant seven days time to the Petitioner to file reply to the Show Cause Notice. However, the Assessing Officer granted only two days time at the first instance and thereafter extended the same by another two days, which apart from being not sufficient, was certainly, not in accordance with the time to respond the Show Cause Notice, as prescribed under the SOP (supra). The Assessing Officer, therefore, appears to have arbitrarily exercised jurisdiction by granting an extension of only two days. In our opinion, such approach on the part of the Respondents was clearly in breach of the SOP, which has also resulted in breach of the principles of natural justice, which guaranteed to the Petitioner a fair and reasonable opportunity to respond to the Show Cause Notice under the procedure prescribed, in undertaking the assessment proceedings. This has surely caused a prejudice to the Petitioner.”
Ld. Authorized Representative for appellant/assessee submitted that there were variations of amount in the show cause notice and in the assessment order, show cause notice was regarding accommodation entry to the tune of Rs. 5 lacs from one of the entities controlled by Sh. Deepak Agarwal and Sh. Himanshu Verma. In this regard, the assessment order travelled beyond the scope of the show casue notice by making additions on account of accommodation entries, commission paid for obtaining accommodation entry and interest payable on accommodation entries.
Ld. Authorized Representative submitted that Ground no. 5 and 6 regarding payment of commission of Rs. 15,000/- u/s 69C and levy of interest amounting to Rs. 20,096/- u/s 36(1)(iii) of the Act were consequential. Ground HNo. 7 was consequential.
Ld. Departmental Representative relied on impugned order.
From examination of record in the light of aforesaid rival contention, it is crystal clear that the Ld. CIT(A) confirmed the action of reopening of assessment u/s 147/148 of the act on the basis of proceedings and report from Investigation Wing. No material belonging to the assessee was found during the search. Therefore, the principle of reopening triggered solely by borrowed satisfaction without any levy link to the assessee’s own books or record which is illegal. Reference to judgement in GKN Driveshafts (India) Ltd. case (supra) is important.
Notice u/s 142(1) of the Act dated 30.09.2023 pertained to accommodation entry of Rs. 5 lacs from M/s. LVS Financial Services Pvt. Ltd. , show cause notice u/s 144 of the Act dated 09.03.2024 by Ld. AO granted 3 days time to the assessee to reply. Hon’ble High Court of Delhi has observed that there is violation of principle of natural justice.
Ld. AO failed to share incriminating material and statements during the assessment proceedings found during the search, therefore, the assessment order was bad in law. Reference to judgment in PCIT vs. Abhisar Buildwell P. Ltd. and CIT vs. Kabul Chawla (2016) 380 ITR 573 (Del. HC) that no addition in absence of incriminating material is important. Accordingly, the ground of appeal Nos. 1 and 1.3 are accepted.
The unsecured loan taken from M/s. LVS Financial Services Pvt. Ltd., banking channel along with interest was repaid earlier to the date of search confirmation of account of lender with assessee’s ledger of account are at page nos. 778 to 779 of paper book. The bank statement of assessee reflecting receipt and repayment through banking channel are at page no. 275 to 277 of paper book, bank statement of lender company M/s. LVS Financial Services Pvt. Ltd. at page No. 280 to 281 of paper book. Conclusively, established creditworthiness of lender company audited balance sheet of lender company from the financial years 2016-17 to 2022-23 at page No. 284 to 408. As per pages No. 409 to 419 of paper book, it is evident that a major change in ownership took place in FY 2020-21 and the entire loan alongwith interest was repaid by the appellant prior to date of search. Therefore, the addition of Rs. 5 lacs being illegal, is deleted. Accordingly, Ground of Appeal No. 2 is allowed.
The show cause notice dated 09.03.2024 u/s 144 of the Act provided three days’ time to the assessee to reply by 12.03.2024 which is illegal. Therefore, ground of appeal No. 3 is accepted.
Ground of appeal No. 4 to 7 being consequential in nature are accepted.
In the result, the appeal filed by the assessee is allowed.