OJAS IMPEX PRIVATE LIMITED vs INCOME TAX OFFICER

“8.1

As noted from the impugned order and stated above, during the F.Y. 2011-12 relevant to A.Y. 2012-13, the assessee company had received Rs. 50,00,000/- from an accommodation providing company M/s Divyadrishti Merchants Pvt. Ltd., The notice u/s 133(6) of Act was issued to M/s Divyadrishti Traders Pvt. Ltd. on 07.11.2019 requesting to furnish the details such as nature of business, nature of transactions with assessee, bank statements etc., however no reply was received from the said company. [Emphasis added] In response to the notices issued u/s 142(1) of the Act, the assessee filed copies of its bank statements and confirmation from the above party. The show cause notice dated 16.12.2019 was therefore issued to assessee giving him final opportunity to explain as to why the amount of Rs.50,00,000/- received from M/s Divyadrishti Traders Pvt. Ltd. may not be treated as his unexplained income u/s. 68 of the Act. However, reply was received from the assessee. In absence of any satisfactory explanation by the assessee, the AO held that the assessee company failed to establish identity and creditworthiness of the M/s Divyadrishti Traders Pvt. Ltd. and genuineness of the loan transaction. Hence, the amount of Rs.50,00,000/-was treated as unexplained income of the assessee u/s 68 of the Act. The relevant para of the finding of the AO is as under: ……………..

8.10

The finding of the AO is that the assessee had received loan through the above shell company and multiple layering of the transfers from one company to another. In closely held companies where unsecured loan is raised from close knit circles mostly known to directors/owners, onus required u/s 68 is very heavy on such companies to prove identity as well as creditworthiness of lenders and genuineness of transaction; mere submission of name and address of creditor, confirmation from the creditors is not sufficient. The assessee is not able to discharge its onus as is casted u/s 68 as the assessee could not prove genuineness of the unsecured loan taken and underneath sources. The assessee no doubt has produced confirmation of the entity from which the money found its place in the bank account of the assessee but the genuineness of these transactions could not be proved as the assessee did not bring on record cogent evidences to substantiate the unsecured loans taken. Merely bringing confirmations and showing that the payments were made through banking channel is not sufficient.

8.11

Further, ongoing through the return of income filed by the assessee for the AY 2012-13, AY 2013-14 and 2014-15 it is found that the assessee had not paid any interest during these years. No genuine person will lend huge amount of sum of Rs.50,00,000/- to other person without charging any interest on it. This fact also points towards the non-genuineness of the above transaction.

8.12

The assessee has contended that the statement of third party and opportunity to cross examine the above party was not provided by the AO. In this case, the Information received from the investigation wing and statement of third party indicates the fact that the assessee had received Rs.50,00,000/- from the above party which is involved in providing accommodation entry. The said information was sufficient to reopen the case of the assessee as stated above. Thereafter, the onus is on the assessee to establish the identity and creditworthiness of that lender and genuineness of the said transaction. However, as stated above the assessee has failed to discharge such onus. Therefore, there is no error on part of the AO in not providing the statement of third party and opportunity to cross-examine the above party to the assessee. The assessee has failed to even furnish its bank account statement and audited financial statement for FY 2011-12, as well as copy of bank statement, return of income and audited financial statement of M/s Divyadrishti Traders Pvt. Ltd. or failed to produce the above party as his witness to substantiate his claim. The repayment of loan taken does not establish the genuineness of said transaction and creditworthiness of the lender.”

 “That the information available with the Department constituted material which required examination in the hands of the assessee. On the basis of such information, the Assessing Officer recorded reasons and formed the requisite belief that income chargeable to tax had escaped assessment and consequently issued notice under section 148 on 31.03.2019.

 That it is important to appreciate that the original return had only been processed u/s 143(1) of the Act and there had been no scrutiny assessment u/s 143(3). Therefore, there was no earlier assessment order in which the issue relating to the impugned credit had been examined and accepted by the Assessing Officer.

 That consequently, the reopening cannot be said to constitute a mere change of opinion. The reassessment proceedings were initiated on the basis of information available with the Department and were thereafter followed by specific enquiry during the reassessment proceedings.”

 “That the subsequent conduct of the proceedings is also relevant.

The assessee furnished confirmation and bank statements and explained the receipt as an unsecured loan. Thus, the transaction was not accepted merely on the basis of the information which had triggered the reopening: rather, the assessee was called upon to explain the credit during the reassessment proceedings.

 That after considering the explanation furnished by the assessee, the Assessing Officer ultimately concluded that the credit of ₹50,00,000/-remained unexplained and accordingly made the addition under section 68. The assessment order was passed on 19.12.2019.”

 “That the assessee has sought to challenge the reopening primarily on the ground that the reasons recorded contained references a transaction which, according to the assessee, did not actually take place in the manner stated therein.

 That, however, the validity of reopening has to be examined on the basis of the reasons recorded at the time of initiation of proceedings and the material available with the Assessing Officer at that stage, and not merely on the basis of the ultimate explanation furnished by the assessee during reassessment.

 That the information available with the Department indicated possible accommodation-entry transactions and warranted examination of the assessee's financial records. The Assessing Officer, therefore, cannot be said to have acted without any material whatsoever.

 That the subsequent clarification furnished by the assessee that the amount represented an unsecured loan does not, by itself, invalidate the initiation of reassessment. Rather, it was precisely the reassessment proceedings which enabled the Assessing Officer to examine the nature, genuineness and source of the credit.

 That it is also significant that the assessee's return had originally been processed under section 143(1). There had been no scrutiny assessment in which the impugned credit had been examined and accepted. Thus, the objection of change of opinion does not arise on the facts of the present case.”

 “That the assessee has placed considerable emphasis on the fact that the reasons referred to alleged bogus LTCG and DDMPL, whereas the addition ultimately made by the Assessing Officer was in respect of an unsecured loan received from DDT.

 That the Department respectfully submits that the mere fact that the final nature of the transaction examined during reassessment was different from the manner in which it was initially described in the information received cannot, by itself, be treated as conclusive proof that the Assessing Officer had no basis whatsoever for reopening the assessment  That the purpose of reassessment proceedings is precisely examine whether the information available with the Department has any bearing upon the income of the assessee. The subsequent enquiry may reveal the precise nature of the transaction and the manner in which the same is required to be assessed.

 That the assessee was admittedly called upon to explain the ₹50 lakh credit and was given an opportunity to furnish supporting evidence. The assessee itself produced confirmation and bank statements and claimed the amount to be an unsecured loan.

 That therefore, the proceedings cannot be characterized as mere mechanical reproduction of an Investigation Wing report. The reassessment proceedings culminated only after the Assessing Officer called for the relevant information and considered the explanation furnished by the assessee.”

“6.

However, when we put specific query to learned counsel for the appellant as to whether the aforesaid facts particularly, the fact that M/s. Rathi Ispat Ltd. was not a loss making undertaking and it had paid the taxes on the amount received from the assessee herein, it could not be disputed by the learned counsel. Thus, we find from this that the very basis for initiating proceedings under section 147 is on wrong premise as it is neither factually correct that M/s. Rathi Ispat Ltd. was a loss making company and on the other hand it also stands established that the payment was received by M/s. Rathi Ispat Ltd. for the services rendered by it to the assessee which had been shown as income in its return and duly taxed by the Income-tax Department.”

“11.

In the considered view of the Court, neither of the above two cases come to the aid of the Revenue in the present case where the facts speak for themselves. The reasons for reopening the assessment have already t out hereinbefore. The Court has again perused Annexure-B thereto. As already noticed by the ITAT, there is repetition of at least five entries. In other words the total amount constituting the so-called accommodation entries would therefore not work out to Rs.95,65,510/-. On the face of it, therefore, there is a non-application of mind by the AO. What is further unacceptable is that the AO persisted with his "belief" that the said amount had escaped assessment not only at the stage of rejecting the Assessee's objections but also in the re-assessment proceedings where he proceeded to add the entire amount to the returned income of the Assessee. This is a classic case of non-application of mind by the AO

12.

In a recent decision in Pr. CIT v. Meenakshi Overseas (P) Ltd. [2017] 82 taxmann.com 300/395 ITR 677 (Delhi), this Court observed as under:

"22.

As rightly pointed out by the ITAT, the ‘reasons to believe’ are not in fact reasons but only conclusions, one after the other. The expression ‘accommodation entry’ is used to describe the information set out without explaining the basis for arriving at such a conclusion. The statement that the said entry was given to the Assessee on his paying “unaccounted cash” is another conclusion the basis for which is not disclosed. Who is the accommodation entry giver is not mentioned. How he can be said to be “a known entry operator” is even more mysterious. Clearly the source for all these conclusions, one after the other, is the Investigation report of the DIT. Nothing from that report is set out to enable the reader to appreciate how the conclusions flow therefrom.

23.

Thus, the crucial link between the information made available to the AO and the formation of belief is absent. The reasons must be self evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing.

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 subsequent cither 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."

13.

In view of the said decision, the Court has hesitation in concluding in the present case that the reasons recorded by the AO for reopening the assessment under section 147 of the Act do not meet the requirement of the law. The ITAT was, therefore, perfectly justified in confirming the order of the CIT (A) and holding the reopening of the assessment to be bad in law.”