PRINCIPAL COMMISSIONER OF INCOME TAX-6 Vs. MEENAKSHI OVERSEAS PVT. LTD.
June, 05th 2017
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 692/2016
PRINCIPAL COMMISSIONER OF INCOME TAX-6 ...Appellant
Through: Mr. Rahul Chaudhary, Senior standing
MEENAKSHI OVERSEAS PVT. LTD. .... Respondent
Through: Mr. Kapil Goel, Advocate.
JUSTICE S. MURALIDHAR
JUSTICE CHANDER SHEKHAR
Dr. S. Muralidhar, J.
1. This appeal under Section 260A of the Income Tax Act, 196 (,,Act) by
the Revenue is directed against the impugned order dated 22nd March, 2016
passed by the Income Tax Appellate Tribunal (,,ITAT) in ITA N o.
3148/Del2013 for the Assessment Year (,,AY) 2004-05.
3. The following question of law is framed for consideration:
Whether the ITAT erred in law and on facts in quashing the
assessment proceedings under Section 147/148 of the Act?
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4. The facts in brief are that the Assessee, Meenakshi Overseas Private
Limited, filed its return of income on 30th October, 2004 for the AY 2004-05
declaring its income as Rs. 2,050. The return was processed under Section
143(1) of the Act on 25th November, 2004.
5. It is stated that information was received from the Director of Income Tax
(Investigation), New Delhi [,,DIT(I)] that during the year under
consideration, the Assessee had received accommodation entries. Notice
under Section 148 of the Act was issued after taking approval from the
Additional Commissioner of Income Tax (,,ACIT) under Section 151(1) of
the Act. Notice under Section 148 of the Act was thus issued on 23rd/24th
March, 2011 after recording the reasons for re-opening of the assessment.
6. The said reasons as recorded by the Assessing Officer (,,AO) read as
"Reasons for the belief that income has escaped assessment:
In this case, information has been received from the Director of
Income Tax, (Investigation) New Delhi that the Assessee has received
amount of Rs. 5,00,000/- as follows:
Beneficiarys Name Meenakshi Overseas P. Ltd.
Beneficiary Bank Name State Bank of Hyderabad
Beneficiary Bank Branch Karol Bagh
Value of entre taken 500,000
Instrument no. by which
entry taken 8628
Date on which entry taken 31.03.2004
Name of A/c Holder of
entry giving account Shubham Electronic & Electric
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Bank from which entry given SBH
Branch of entry given bank KB
A/c No. Entry giving account 50038
Information so received has been gone through. The above said
instruments are in the nature of accommodation entry, which the
Assessee has taken after paying unaccounted cash to the
accommodation entry given, who is a known entry operator as per the
report of the Investigation Wing. In view of these facts, the alleged
transaction is not the bonafide one. Therefore, I have reason to believe
that an income of Rs. 5,00,000 has escaped assessment in the AY
2004-05 due to failure on the part of the Assessee to disclose fully and
truly all material facts necessary for its assessment so far as this
amount is concerned. Therefore, this case is fit for issuing notice
under Section 148 of the Income Tax Act, 1961 . In this case the
assessment was made under Section 143 (1) not under Section 143 (3)
of the IT Act, 1961.
I am therefore, satisfied that the said income, on account of
accommodation entry worth Rs. 5,00,000 received by the Assessee
has escaped assessment and accordingly after recording the above
said reasons as laid down under the provisions of Section 148 (2) of
the Income Tax Act, 1961 under Section 148 is being issued."
7. In response to the said notice served on it, the Assessee wrote a letter
dated 25th April, 2011 stating that the original return of income under
Section 139 of the Act be treated as return filed in compliance with the
notice under Section 148 of the Act.
8. An assessment order was passed by the AO on 30th November 2011
under Section 143 (3) read with Section 147 of the Act treating the credit
received from Shubham Electronics & Electricals Pvt Ltd. as unexplained
income under Section 68 of the Act. Besides from the statement of the
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Assessee's bank account it was found that there were other credit entries that
"remained unverified, unsubstantiated and unexplained." As a result, "an
amount of Rs. 74,50,000 after including Rs. 5,00,000 in respect of Subham
Electricals Pvt. Ltd." was treated as unexplained credits under Section 68 of
the Act and added to the total income of the Assessee as income from
9. The Assessee then appealed before the Commissioner of Income Tax
(Appeals) [,,CIT(A)] which appeal was dismissed by an order dated 12th
10. Thereafter, the Assessee filed an appeal before the ITAT. In the first
round, the ITAT by an order dated 18th March, 2015 held that the requisite
sanction had not been obtained by the AO from the Competent Authority
under Section 151 of the Act and, therefore, invalidated the re-opening of
the assessment under Section 147/148 of the Act. The Revenues appeal
against the said order of the ITAT was allowed by this Court. The appeal of
the Assessee was restored to the file of the ITAT to consider the other
grounds relating to the validity viz., ground Nos. 1(a) to 1(d).
11. Therefore, in the impugned order dated 22nd March 2016, only those
grounds were considered by the ITAT.
12. Perusing the reasons for re-opening of the assessment in the present
case, the ITAT came to the conclusion that it was apparent that the AO
proceeded to send a notice under Section 147/148 of the Act "solely on the
basis of information received from the DIT(I)." After writing about
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information received, the AO "jumped to the conclusion that said tabulated
instrument are in the nature of accommodation entry." This was done
without further verification, examination or any other exercise. The ITAT
also noted that the AO "has not mentioned nature of transaction which was
effected for alleged accommodation entry and even without mentioning the
date of recording of reasons." Following the decision of this Court in
Commissioner of Income Tax v. G&G Pharma (2015) 384 ITR 147 (Del.),
the ITAT held that the AO had not applied his mind at the time of initiating
the proceedings of reassessment under Section 147 of the Act. The ground
Nos. 1(a) to 1(d) of the Assessees appeal were, accordingly, allowed.
13. Mr. Rahul Chaudhary, learned Senior standing counsel appearing for the
Revenue submitted that as the original return was processed under Section
143(1) of the Act, the Revenue was only to demonstrate the existence of
tangible material which formed the basis of formation of a belief by the AO
that the income had escaped assessment. This tangible material was in the
form of an investigation report of the DIT(I) which was mentioned in the
reasons for re-opening the assessment. Relying on the decisions in
Signature Hotels Pvt. Ltd. v. Income Tax Officer (2011) 338 ITR 51 (Del),
AGR Investment Ltd. v. Additional Commissioner of Income Tax (2011)
336 ITR 146 (Del.), AG Holding v. Income Tax Officer (2013) 352 ITR
364 (Del), Mr. Chaudhary submitted that the adequacy or sufficiency of the
material of the basis on which the belief was formed by the AO for re-
opening of the assessment could not be enquired into at this stage.
ITA 692/2016 Page 5 of 18
14. Mr Chaudhary referred to the fact that it became apparent in the
assessment proceedings that credible information was received in the case of
one Mr. Mahesh Garg, accommodation entry provider. Statements were
made during investigation by former directors who admitted that Mr Garg
was providing accommodation entries to various persons including the
Assessee. This itself shows the formation of belief by the AO that the
escaped assessment was justified.
15. Countering the above submissions, Mr. Kapil Goel, learned counsel for
the Respondent/Assessee first pointed out that the Court is not obliged to
examine the reasons with reference of any material that may be disclosed
subsequently by the Revenue either at the stage of considering the objections
by the Assessee to the reopening or during the re-assessment proceedings.
The reasons for the reopening as penned by the AO had to speak for
themselves. Secondly, it is submitted that the reasons recorded by the AO in
the present case were based on a ,,borrowed satisfaction and on the
directions of the Investigation Wing without any independent application of
mind. The crucial link between the material and the formation of the belief
was missing. Thirdly, it is submitted that in G&G Pharma (supra) this
Court dealt with a similar instance of reopening of an assessment by the AO
on the basis of the report of the DIT(I) without making any effort to discuss
the material on the basis of which such belief was formed. The reopening
was invalidated by this Court and its decision was accepted by the Revenue
since no Special Leave Petition was filed by it.
ITA 692/2016 Page 6 of 18
16. Relying on the decision in Union of India v. Kaumudini Narayan Dalal
(2001) 10 SCC 231, Commissioner of Income Tax v. Narendra Doshi
(2004) 2 SCC 81, Berger Paints India Limited v. Commissioner of Income
Tax, Calcutta (2004) 12 SCC 42 and Commissioner of Income Tax v.
Shivsagar Estate (2004) 9 SCC 420 Mr Goel submitted that once the
Revenue did not challenge the correctness of the law laid down by the High
Court and accepted it in case of one Assessee, it was not open to the
Revenue to challenge its correctness in the case of another Assessee
"without just cause."
17. In support of his contention that the information received from the
Investigation Wing cannot constitute tangible material for re-opening the
assessment without the Assessee being informed what in the report of the
investigation wing constituted tangible material for forming a belief, Mr
Goel placed reliance on the decisions in CIT v. SFIL Stock Broking
Limited (2010) 325 ITR 285 (Del.), Sarthak Securities Co. Pvt. Ltd. v. ITO
(2010) 329 ITR 110 (Del.), Signature Hotels Pvt Ltd v. ITO (supra), CIT v.
Insecticides (India) Limited (2013) 357 ITR 330 (Del.) and Krown Agro
Foods (P) Ltd v. Assistant Commissioner of Income Tax, Circle 5(1)
(2015) 375 ITR 460 (Del). Reliance was also placed on the decision of this
Court dated 19th November, 2015 in ITA No. 108 of 2013 (Commissioner of
Income Tax-IV v. Independent Media P. Limited), Oriental Insurance
Company Limited v. Commissioner of Income Tax (2015) 378 ITR 421
(Del), Rustagi Engineering Udyog (P.) Limited v. DCIT (2016) 382 ITR
443 (Del), Agya Ram v. CIT (2016) 386 ITR 545 (Del) and Rajiv Agarwal
ITA 692/2016 Page 7 of 18
v. ACIT (decision dated 16th March, 2016 in Writ Petition (Civil) No. 9659
18. It must be noted at the outset that by an order dated 4th November, 2016,
this Court had directed that "the file by which reasons to believe for the
escapement of income was recorded by the AO for the purpose of
reassessment shall be produced for consideration by the Court." The said file
has been produced today by Mr. Chaudhary, learned counsel for the
Revenue. It is seen that the reasons recorded by the AO for re-opening the
assessment has been extracted verbatim by the ITAT in para 2 of the
19. A perusal of the reasons as recorded by the AO reveals that there are
three parts to it. In the first part, the AO has reproduced the precise
information he has received from the Investigation Wing of the Revenue.
This information is in the form of details of the amount of credit received,
the payer, the payee, their respective banks, and the cheque number. This
information by itself cannot be said to be tangible material.
20. Coming to the second part, this tells us what the AO did with the
information so received. He says: "The information so received has been
gone through." One would have expected him to point out what he found
when he went through the information. In other words, what in such
information led him to form the belief that income escaped assessment. But
this is absent. He straightaway records the conclusion that "the abovesaid
instruments are in the nature of accommodation entry which the Assessee
had taken after paying unaccounted cash to the accommodation entry given
ITA 692/2016 Page 8 of 18
(sic giver)". The AO adds that the said accommodation was "a known entry
operator" the source being "the report of the Investigation Wing".
21. The third and last part contains the conclusion drawn by the AO that in
view of these facts, "the alleged transaction is not the bonafide one.
Therefore, I have reason to be believe that an income of Rs. 5,00,000 has
escaped assessment in the AY 2004-05 due to the failure on the part of the
Assessee to disclose fully and truly all material facts necessary for its
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
ITA 692/2016 Page 9 of 18
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 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
ITA 692/2016 Page 10 of 18
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
27. Each case obviously turns on its own facts and no two cases are
identical. However, there have been a large number of cases explaining the
legal requirement that requires to be satisfied by the AO for a valid
assumption of jurisdiction under Section 147 of the Act to reopen a past
28.1 In Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra), the
reasons for reopening as recorded by the AO in a proforma and placed
before the CIT for approval read thus:
"11. Reasons for the belief that income has escaped assessment.-
Information is received from the DIT (Inv.-1), New Delhi that the
assessee has introduced money amounting to Rs. 5 lakh during the
F.Y. 2002-03 relating to A.Y. 2003-04. Details are contained in
Annexure. As per information amount received is nothing but
accommodation entry and assessee is a beneficiary."
28.2 The Annexure to the said proforma gave the Name of the Beneficiary,
the value of entry taken, the number of the instrument by which entry was
taken, the date on which the entry was taken, Name of the account holder of
the bank from which the cheque was issued, the account number and so on.
ITA 692/2016 Page 11 of 18
28.3 Analysing the above reasons together with the annexure, the Court
"14. The first sentence of the reasons states that information had been
received from Director of Income-Tax (Investigation) that the
petitioner had introduced money amounting to Rs. 5 lacs during
financial year 2002-03 as per the details given in Annexure. The said
Annexure, reproduced above, relates to a cheque received by the
petitioner on 9th October, 2002 from Swetu Stone PV from the bank
and the account number mentioned therein. The last sentence records
that as per the information, the amount received was nothing but an
accommodation entry and the assessee was the beneficiary.
15. The aforesaid reasons do not satisfy the requirements of Section
147 of the Act. The reasons and the information referred to is
extremely scanty and vague. There is no reference to any document or
statement, except Annexure, which has been quoted above. Annexure
cannot be regarded as a material or evidence that prima facie shows or
establishes nexus or link which discloses escapement of income.
Annexure is not a pointer and does not indicate escapement of
income. Further, it is apparent that the Assessing Officer did not apply
his own mind to the information and examine the basis and material
of the information. The Assessing Officer accepted the plea on the
basis of vague information in a mechanical manner. The
Commissioner also acted on the same basis by mechanically giving
his approval. The reasons recorded reflect that the Assessing Officer
did not independently apply his mind to the information received from
the Director of Income-Tax (Investigation) and arrive at a belief
whether or not any income had escaped assessment."
28.4 The Court in Signature Hotels Pvt. Ltd. v. Income Tax Officer (supra)
quashed the proceedings under Section 148 of the Act. The facts in the
present case are more or less similar. The present case is therefore covered
against the Revenue by the aforementioned decision.
ITA 692/2016 Page 12 of 18
29.1 The above decision can be contrasted with the decision in AGR
Investment v. Additional Commissioner of Income Tax (supra), where the
'reasons to believe' read as under:
"Certain investigations were carried out by the Directorate of
Investigation, Jhandewalan, New Delhi in respect of the
bogus/accommodation entries provided by certain
individuals/companies. The name of the assessee figures as one of the
beneficiaries of these alleged bogus transactions given by the
Directorate after making the necessary enquiries. In the said
information, it has been inter-alia reported as under:
"Entries are broadly taken for two purposes:
1. To plough back unaccounted black money for the purpose of
business or for personal needs such as purchase of assets etc., in the
form of gifts, share application money, loans etc.
2. To inflate expense in the trading and profit and loss account so as
to reduce the real profits and thereby pay less taxes.
It has been revealed that the following entries have been received by
29.2 The details of six entries were then set out in the above 'reasons'. These
included name of the beneficiary, the beneficiary's bank, value of the entry
taken, instrument number, date, name of the account in which entry was
taken and the account from where the entry was given the details of those
banks. The reasons then recorded:
"The transactions involving Rs. 27,00,000/-, mentioned in the manner
above, constitutes fresh information in respect of the assessee as a
beneficiary of bogus accommodation entries provided to it and
represents the undisclosed income/income from other sources of the
ITA 692/2016 Page 13 of 18
assessee company, which has not been offered to tax by the assessee
till its return filed.
On the basis of this new information, I have reason to believe that the
income of Rs. 27,00,000/- has escaped assessment as defined
by section 147 of the Income Tax Act. Therefore, this is a fit case for
the issuance of the notice under section 148."
29.3 The Court was not inclined to interfere in the above circumstances in
exercise of its writ jurisdiction to quash the proceedings. A careful perusal
of the above reasons reveals that the AO does not merely reproduce the
information but takes the effort of revealing what is contained in the
investigation report specific to the Assessee. Importantly he notes that the
information obtained was 'fresh' and had not been offered by the Assessee
till its return pursuant to the notice issued to it was filed. This is a crucial
factor that went into the formation of the belief. In the present case,
however, the AO has made no effort to set out the portion of the
investigation report which contains the information specific to the Assessee.
He does not also examine the return already filed to ascertain if the entry has
been disclosed therein.
30.1 In Commissioner of Income Tax, New Delhi v. Highgain Finvest (P)
Limited (2007) 164 Taxman 142 (Del) relied upon by Mr. Chaudhary, the
reasons to believe read as under:
"It has been informed by the Additional Director of Income Tax
(Investigation), Unit VII, New Delhi vide letter No. 138 dated 8 th
April 2003 that this company was involved in the giving and taking
bogus entries/ transactions during the financial year 1996-97, as per
the deposition made before them by Shri Sanjay Rastogi, CA during a
survey operation conducted at his office premises by the Investigation
ITA 692/2016 Page 14 of 18
Wing. The particulars of some of the transaction of this nature are as
Date Particulars of cheque Debit Amt. Credit Amt
18.11.96 305002 5,00,000
Through the Bank Account No. CA 4266 of M/s. Mehram Exports
Pvt. Ltd. in the PNB, New Rohtak Road, New Delhi.
Note: It is noted that there might be more such entries apart from the
The return of income for the assessment year 1997-98 was filed by the
Assessee on 4th March 1998 which was accepted under Section 143
(1) at the declared income of Rs. 4,200. In view of these facts, I have
reason to believe that the amount of such transactions particularly that
of Rs. 5,00,000 (as mentioned above) has escaped the assessment
within the meaning of the proviso to Section 147 and clause (b) to the
Explanation 2 of this section.
Submitted to the Additional CIT, Range -12, New Delhi for approval
to issue notice under Section 148 for the assessment year 1997-98, if
30.2 The AO was not merely reproducing the information received from the
investigation but took the effort of referring to the deposition made during
the survey by the Chartered Accountant that the Assessee company was
involved in the giving and taking of bogus entries. The AO thus indicated
what the tangible material was which enabled him to form the reasons to
believe that income has escaped assessment. It was in those circumstances
that in the case, the Court came to the conclusion that there was prima facie
material for the AO to come to the conclusion that the Assessee had not
made a full and true disclosure of all the material facts relevant for the
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31. In Commissioner of Income Tax v. G&G Pharma (supra) there was a
similar instance of reopening of assessment by the AO based on the
information received from the DIT (I). There again the details of the entry
provided were set out in the 'reasons to believe'. However, the Court found
that the AO had not made any effort to discuss the material on the basis of
which he formed prima facie view that income had escaped assessment. The
Court held that the basic requirement of Section 147 of the Act that the AO
should apply his mind in order to form reasons to believe that income had
escaped assessment had not been fulfilled. Likewise in CIT-4 v.
Independent Media P. Limited (supra) the Court in similar circumstances
invalidated the initiation of the proceedings to reopen the assessment under
Section 147 of the Act.
32. In Oriental Insurance Company Limited v. Commissioner of Income
Tax 378 ITR 421 (Del) it was held that "therefore, even if it is assumed
that, in fact, the Assessees income has escaped assessment, the AO would
have no jurisdiction to assess the same if his reasons to believe were not
based on any cogent material. In absence of the jurisdictional pre-condition
being met to reopen the assessment, the question of assessing or reassessing
income under Section 147 of the Act would not arise."
33. In Rustagi Engineering Udyog (P) Limited (supra), it was held that
"...the impugned notices must also be set aside as the AO had no reason to
believe that the income of the Assessee for the relevant assessment years
had escaped assessment. Concededly, the AO had no tangible material in
regard to any of the transactions pertaining to the relevant assessment years.
ITA 692/2016 Page 16 of 18
Although the AO may have entertained a suspicion that the Assessees
income has escaped assessment, such suspicion could not form the basis of
initiating proceedings under Section 147 of the Act. A reason to believe
not reason to suspect is the precondition for exercise of jurisdiction under
Section 147 of the Act. "
34. Recently in Agya Ram v. CIT (supra), it was emphasized that the
reasons to believe "should have a link with an objective fact in the form of
information or materials on record..." It was further emphasized that "mere
allegation in reasons cannot be treated equivalent to material in eyes of law.
Mere receipt of information from any source would not by itself tantamount
to reason to believe that income chargeable to tax has escaped assessments."
35. In the decision of this Court dated 16th March 2016 in W.P. (C) No. 9659
of 2015 (Rajiv Agarwal v. CIT) it was emphasized that "even in cases where
the AO comes across certain unverified information, it is necessary for him
to take further steps, make inquiries and garner further material and if such
material indicates that income of an Assessee has escaped assessment, form
a belief that income of the Assessee 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'.
ITA 692/2016 Page 17 of 18
The reasons fail to demonstrate the link between the tangible material and
the formation of the reason to believe that income has escaped assessment.
37. For the aforementioned reasons, the Court is satisfied that in the facts
and circumstances of the case, no error has been committed by the ITAT in
the impugned order in concluding that the initiation of the proceedings under
Section 147/148 of the Act to reopen the assessments for the AYs in
question does not satisfy the requirement of law.
38. The question framed is answered in the negative, i.e., in favour of the
Assessee and against the Revenue. The appeal is, accordingly, dismissed but
with no orders as to costs.
S. MURALIDHAR, J
CHANDER SHEKHAR, J
MAY 26, 2017/Rm
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