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TMI Blog2018 (5) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... R. AVNEESH JHINGAN, J. For The Petitioner : Mrs. Radhika Suri, Senior Advocate, with Mr. M.S. Kanda, Advocate For The Respondents : Mr. Yogesh Putney, Senior Standing Counsel ORDER The petitioner is an assessee under the Income Tax Act, 1961 (for short, the Act'). This petition has been filed challenging the notice dated 31.03.2016 for re-assessment, and the order dated 07.10.2016 rejecting the objections raised for re-opening. 2. For the assessment year 2009-10, the petitioner filed his return showing his income to be Nil'. There was a deemed acceptance of return under Section 143 (1) of the Act. The petitioner during the relevant year was engaged in trading in shares through his broker M/s Competent Finman Pvt. Ltd. A trading loss of ₹ 46,56,820/- was claimed. 3. The Principal Director of Income Tax (Investigation), Ahmedabad, conducted a survey under Section 133-A of the Act at the premises of twelve brokers. During investigation, it was found that Client Code Modification (CCM) was being used as a tool for tax evasion. The losses were being shifted out of the profit of the clients. A detailed investigation report was sent to respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 2009-10 is being issued in the case. 6. A notice dated 05.09.2016 was issued fixing the case for hearing on 26.09.2016. The petitioner was called upon to furnish various documents. 7. The petitioner by a letter dated 07.09.2016 raised objections as to the jurisdiction of the respondent for issuing the notice under Section 147 of the Act. By the impugned order dated 07.10.2016, the respondent rejected the objections. It was held that re-opening was justified. The respondent held that there was sufficient material to form the belief that the income of the assessee had escaped assessment. The petitioner was directed to submit his reply and to avail the opportunity of being heard. 8. Mrs. Suri, the learned Senior Counsel appearing on behalf of the petitioner submitted that the assumption of jurisdiction was without there being reason to believe that the income has escaped assessment; that the proceedings were merely on the directions of the Principal Director of Income Tax (Investigation), Ahmedabad; that the AO had acted only upon borrowed satisfaction, instead of satisfying himself and the satisfaction recorded by the Principal Commissioner of Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished; or ( iii) in respect of a deduction, where such deduction exceeds specified statutory limit which may have been expressed as monetary amount or percentage or ratio or fraction; ( b) the acknowledgement of the return shall be deemed to be the intimation in a case where no sum is payable by, or refundable to, the assessee under clause (c), and where no adjustment has been made under clause (a). x x x ...... x x x ......... x x x .......... 147. 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 subsection (3) of section 143 or this section h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment had to be passed. After the amendment, under Section 143 (1) of the Act no assessment order is required to be passed but the intimation sent under Section 143 (1) of the Act was deemed to be an assessment order. It is only in cases selected for scrutiny that assessment under Section 143 (3) of the Act is passed. 11. During the relevant assessment year, in order to initiate proceedings under Section 147 of the Act, in case assessed under Section 143 (1) of the Act, the AO should have reason to believe that the income chargeable to tax has escaped assessment. The petitioner was assessed under Section 143 (1) of the Act. The only requirement is that the AO had reason to believe that there is escapement of income chargeable to tax. 12. Before considering Mrs. Suri's submissions, especially as to whether the respondent himself had reason to believe that income had escaped assessment or whether it was on borrowed satisfaction on his part, it is necessary to examine the material that was before the respondent. 13. In this regard, a letter dated 08.03.2016 from the Principal Director of Income-Tax (Investigation) Ahmedabad, is of vital importance. The letter was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange; analysis of CCM data done at CFL, Ahmedabad, and details of trades and shifting of contrived profits in respect of each transaction for the particular day. Annexure S contained submissions, survey folders and annexures. Annexure T contained the PAN details of each beneficiary and an analysis of the utilisation of the modified client data. Paragraphs 7 and 8 of the letter read as under :- 7. The beneficiaries pertaining to your jurisdiction may be segregated by using the Sort Filter tools of MS Excel on Column NO. 7 Jurisdictional Pr. CCIT . The data for F.Ys 2008-09 to 2011-12 starts from column No. O to AA of Annexure-B whereas net effect in all the four years is mentioned in column AA of Annexure-B. 8. The reopening of cases for FY 2008-09 is getting barred by limitation of time on 31.03.2016. You are, therefore, requested to initiate necessary action in the case of the beneficiary clients pertaining to your jurisdiction noted in the Pen Drive. These cases may also be closely monitored as huge revenue stake is involved. 14. Based on the above information, details regarding the petitioner were tabulated. The table contained several details regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the relevant period had shifted-in losses amounting to about ₹ 46,56,820/- through his broker and thereby had reduced his profits. In other words, the respondent was satisfied that the information received revealed the said facts. It is important to note that the said letter dated 08.03.2016 addressed by the Principal Director of Income-Tax (Investigation) Ahmedabad, does not refer to any particular client or broker. Nor did it refer to any particular transaction or transactions. It has supplied the material in a 128 GB pen drive. It is obviously from this material that the respondent tabulated the transactions regarding the petitioner. As we noted earlier, the table at Annexure R-2 contained 74 such alleged errors. The details of each of these have been tabulated. It is obvious, therefore, that the respondent himself analysed the material pertaining to the petitioner and pursuant thereto initiated proceedings under sections 147 and 148 of the Act. 17. Mrs. Suri relied upon a letter dated 27.10.2016, by which the respondent sought certain information from the broker of the petitioner, including the Client Code of the assessee during the Financial Year 2008- 09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon by Mrs. Suri, the Supreme Court held :- In our judgment, the law laid down by this court in the above case is fully applicable to the facts of the present case. There can be no manner of doubt that the words reason to believe suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the Income-tax Officer may act on direct or circumstantial evidence but not on mere suspicion, gossip or rumour. The Income-tax Officer would be acting without jurisdiction if the reason for his belief that the conditions are satisfied does not exist or is not material or relevant to the belief required by the section. The court can always examine this aspect though the declaration or sufficiency of the reasons for the belief cannot be investigated by the court. It is important to note that the Supreme Court found in that case that there was no material or fact which had been stated in the reasons for starting the proceedings for re-opening the assessment. In the case before us, as already discussed, this is not so. 22. As we will now indicate it is not necessary that the AO must know or be certain that income has escaped asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 147 (b) of the Act whereby the assessee was informed that the Income Tax Officer had the reason to believe that assessee's income chargeable to tax for the assessment year 1969-70 had escaped assessment and, therefore, the assessing authority proposed to reassess the income for the said assessment year and the assessee was required to deliver to him a return in the prescribed form of his income for the said year. Feeling aggrieved by the said notice, the assessee filed Writ Petition No. 1177 of 1974 in the Rajasthan High Court. x x x On the basis of the information contained in the letter of Shri Bagai and the documents annexed to it, the Income Tax Officer could have had reason to believe that the fair market value of the shares was far more than the sale price and the market quotations from Calcutta Stock Association shown by the assessee at the time of original assessment were manipulated ones and as a result income chargeable to tax had escaped assessment. It could not be said that the information that was contained in paragraph 2 of the letter of Shri Bagai was not definite information and it could not be acted upon by the Income Tax Officer for taking act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. We respectfully agree with this view. 25. The AO had in his possession information collected by a Wing of the department, specially constituted for the purpose of collecting information. The data concerning the assessee was part of the information received. The information was specific and not vague. In challenge to initiation of proceedings the Court has to prima facie satisfy itself regarding existence of reasons to believe. It is not for this Court to go into the sufficiency of the reasons. Even the final outcome of the proceedings is not relevant. Reliance was rightly placed on the following decisions of the Hon'ble Apex Court to justify the proceedings under Sections 147/148 in view thereof. 26. In M/s Kantamani Venkata Narayana and Sons Vs. First Additional Income Tax Officer, Rajahmundry, 1967 AIR (SC) 587, the Supreme Court held as under :- The High Court has pointed out that no final decision about failure to disclose fully and truly all material facts bearing on the assessment of income and consequent escapement of income from assessment and tax could be recorded in the proceedings before them. It certainly was not within the province of the Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here will be no order as to costs. 29. In Assistant Commissioner of Income-Tax Vs. Rajesh Jhaveri Stock Brokers P. Ltd., (2007) 291 ITR 500 (SC), relied upon by Mr. Putney, the Supreme Court held :- 16 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 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) fulfilment of the two re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Builders P. Ltd. Vs. Deputy Commissioner of Income-Tax, (2006) 280 ITR 77 (Allahabad) does not support the petitioner's case. The Allahabad High Court set aside the re-opening as rejection of the account books for the assessment year 1996-97 was being made a basis to determine the profit percentage for the assessment year 1995-96 without there being any material for the relevant assessment year. 34. Mrs. Suri relied upon the following observations of the Supreme Court in Income Tax Officer, Calcutta and Ors. Vs. Lakhmani Mewal Das, (1976) 3 SCC 757 = (1976) 103 ITR 437 (SC) : 11. As stated earlier, the reasons for the 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. It is no doubt true that the Court cannot go into the sufficiency or adequacy of the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the formation of the belief that the income of the assessee respondent had escaped assessment because of his failure or omission to disclose fully and truly all material facts. We would, therefore, uphold the view of the majority and dismiss the appeal with costs. Mr. Putney did not and indeed could not dispute any of the observations. He however rightly contended that they do not apply to the present case. In the case before us, there is a direct nexus or live link between the material coming to the notice of the AO, namely the said material submitted by the Investigation Wing, and the formation of the AO's belief that there has been escapement of income. We have already referred to this aspect of the matter. Suffice it to recollect that details of the CCM were furnished in the information. The information was in respect of several brokers. The information pertaining to the petitioner's broker was culled out and tabulated. There were 74 cases of the petitioner's broker having modified the petitioner's transactions. The information was directly on the issue of the transactions. It cannot by any stretch of imagination be said to be vague, indefinite or distant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding that the ITO had not set out any reasons for coming to the conclusion that it was a fit case to issue notice under section 148. The material on the basis of which the proceedings had been initiated was not mentioned in the record. The reasons only referred to certain communications without adverting to the facts contained therein. The ITO had not even come to a prima facie conclusion that the transactions were not genuine. It was also observed that the ITO had only a vague feeling that the transactions may be bogus. It is in these circumstances that the Supreme Court held that the ITO could not have reason to believe that by reason of the omission to disclose fully and truly all the material facts necessary for assessment for the year in question, income chargeable to tax had escaped assessment. This decision, therefore, is distinguishable and does not support the petitioner's case. 39. Mrs. Suri's contention that information from the broker was sought after issuance of the notice shows that there was no enquiry prior to the issuance of the notice and hence, the proceedings are bad is not well founded. Once it is held that the proceedings under Sections 147 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x (Investigation), Ahmedabad it is noticed that assessee carried out share trading through the broker, Guinness Securities Limited. And as per the guidelines of the SEBI the client code of the assessee with the aforesaid broker was WW/2647. In order to verify the genuineness of the modification of client code in the case of the assessee, by applying Levenshtein distance analysis or digit edit analysis utility, in those cases where the assessee is original client and transactions were carried out from assessee s client code then subsequently client code was modified to other client the details of such case are as under :- OC OCC MC MCC Distance as per Levenshte in distanced analysis Net reduction in income due to CCM Harikishan Sunderlal Virmani WW/2647 Nomau R.Chaturvedi WW/2108 3 ₹ 1,19,848 In order to verify the genuineness of the error, the Levenshtein distance analysis or digit edit analysis utility is also provided by the investi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfaction. No independent opinion is formed. On the plain reading of the reasons recorded what emerges is that the Assessing Officer on considering the information received from the Principal Director of Income-tax (Investigation), Ahmedabad, reassessment proceedings have been initiated on the ground that the income escaped assessment. However, there is no assertion regarding the basis on which material on record, he has come to such conclusion. Therefore, the material on the basis of which the Assessing Officer seeks to assume the jurisdiction under section 147 of the Act is the information received from the external source viz. the Principal Director of Income-tax (Investigation), Ahmedabad. It cannot be disputed that on the basis of the information received from another agency, there cannot be any reassessment proceedings. However, after considering the information/material received from other source, the Assessing Officer is required to consider the material on record in case of the assessee and thereafter is required to form an independent opinion on the basis of the material on record that the income has escaped assessment. Without forming such an opinion, solely and mech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect, unable to agree with the finding of the Gujarat High Court that the reopening was on borrowed satisfaction and that no independent opinion had been formed. Nor do we subscribe to the view that there was no assessment regarding the material on record on the basis of which the AO had come to the conclusion. The material, the information received was analysed and the decision was based thereon pursuant to an independent application of mind. The AO had considered the material on record and formed an independent opinion on the basis thereof. In the circumstances, we are, with respect, unable to agree with the decision of the Gujarat High Court. 42. Even if in the case before us, the AO had to establish that the income had escaped assessment on account of the failure on the part of the assessee in disclosing truly and fully the material facts necessary for assessment, the test would be met. Admittedly, there was no analysis or application of mind in respect thereof. The assessment was under Section 143 (1) in any event. Thus, in any view of the matter, the decision to reopen the assessment is valid and well founded. 43. This brings us to Mrs. Suri's contention that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) are name lenders and the transactions are bogus . He has not even come to a prima facie conclusion that the transactions to which he referred are not genuine transactions. He appears to have had only a vague feeling that they may be bogus transactions. Such a conclusion does not fulfil the requirements of Section 151 (2). What that provision requires is that he must give reasonsfor issuing a notice under Section 148. In other words he must have some prima facie grounds before him for taking action under Section 148. Further his report mentions : Hence proper investigation regarding these loans is necessary. In other words his conclusion is that there is a case for investigating as to the truth of the alleged transactions. That is not the same thing as saying that there are reasons to issue notice under Section 148. Before issuing a notice under Section 148, the Income-tax Officer must have either reasons to believe that by reason of the omission or failure on the part of these assessee to make a return under Secton 139 for any assessment year to the Income-tax Officer or to disclose fully and truly all material facts necessary for his assessment for that year,income charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment does not support the petitioner's case. It is clearly distinguishable. As noted in the earlier part of paragraph 9, the Supreme Court held that the reasons recorded by the ITO for initiating proceedings under Sections 147 and 148 were not in accordance with law. As in that case, the Commissioner merely accorded permission under Section 151 without stating any reason himself it is axiomatic that his order would also not be in accordance with Section 151. The case before us is entirely different. We have found that the reasons recorded by the AO justify the initiation of proceedings under Sections 147 and 148. As the Principal Commissioner agreed with these reasons, it was not necessary for him in his order according sanction to reiterate the reasons furnished by the AO. There is nothing that indicates that he did not apply his mind to the reasons furnished by the AO. 45. Reasons to believe are there. The reasons are based on tangible material. The return and account books of assessee had not undergone scrutiny at the time of assessment. The information is specific and not vague. A reasonable person can form an opinion on the basis of the material. The information re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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