TaxTMI 
TaxTMI 
2010 (4) TMI 869
X X X X Extracts X X X X
X X X X Extracts X X X X
....t with the grounds raised by the assessee in the cross-objections. 3. At this stage, it is pertinent to note that the addition of Rs. 10,52,62,889 on account of accommodation entries along with Rs. 10,52,629 being alleged commission paid for availing accommodation entries made by the Assessing Officer has been deleted by the CIT(A), which action of the CIT(A) has been disputed by the revenue in the appeal filed by it. 4. Grounds raised in the cross-objections are as under:- "1. That the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in upholding the validity of initiation of the reassessment proceedings which had been disputed before him as raised in ground No. 2. He has further incorrectly held that he is not adjudicating the ground raised when he impliedly adjudicated the ground so raised when he proceeded to determine the merit of the additions made. 2. That the learned Commissioner of Income-tax (Appeals) ought to have specifically held that the proceedings initiated were without jurisdiction and there was no material to conclude that there was any escapement of income and that there was any failure on part of the assessee to disclose all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....forwarding entries in the beneficiaries was done by 'layering' the cheques i.e., cheques were routed through many paper/dummy companies of Shri Ruia before reaching its destination - the beneficiaries. This is done by way of simultaneous clearance cheques drawn by one company favouring other through a series of credit/debit entries to hoodwink the department. All the cheques are immediately cleared under high value cheque clearance scheme. None of these companies have any business activities and activities only on paper are carried out by them. One illustration will further clarify this dubious mechanism of raising bogus capital moving cheques through the investment companies. 7.1 (iii) To understand the principle of laundering, suppose Mr. Ruia has floated 4 companies named A, B, C & D. Now he receives Rs. 25 lakhs from some beneficiary. This amount will be deposited in some Kuccha Bank A/c and a cheque from the same account in the form of purchase consideration, share investment, loan etc. will be issued to A. Again A will draw a cheque of Rs. 25 lakhs favouring company B. B will draw a cheque of similar amount favouring C. C will issue a cheque for exactly the same amount in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Exims Pvt. Ltd. 25,00,000 5-13-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 15,00,000 5-13-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 25,00,000 5-15-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 5,00,000 5-15-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 10,00,000 5-16-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 5,00,000 5-28-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 40,00,000 5-28-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 10,00,000 5-29-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 50,00,000 6-3-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 50,00,000 6-3-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 25,00,000 6-6-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 50,00,000 6-7-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 25,00,000 6-7-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 15,00,000 Date MM/DD/YY From To Amount 6-7-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 60,00,000 6-12-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 35,00,000 6-20-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. 20,00,000 6-21-2002 Vivek M/s. Lakshya Exims Pvt. Ltd. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and securities. During the course of Investigation and search and seizure operations in the case of Shri P.K Ruia and his group companies by the Directorate of Income-tax (Investigation), Kolkata, it was gathered that a large number of companies were floated and bogus entries were given to a number of beneficiaries while charging commission. In turn, the beneficiaries paid cash to obtain the bogus entries of loans. It has been informed by the DCIT, Central Circle-VI, Kolkata vide his letter. F.No. CC-VI/2005-06/Kol./354, dated 13-9-2005 that one such beneficiary is the assessee company M/s. Lakshya Exims Private Limited in assessment year 2003-04. The details of transactions are given in this letter and are reproduced as under:- ****** (Entries as mentioned by DCIT, CC-VI, Kolkata) (already produced in para 5 of this order) In view of the above facts, I have reason to believe that the income of the assessee company which has been shown as bogus loans/share capital has escaped assessment to the above extent. Accordingly, proceedings are initiated under section 147 of Income-tax Act, 1961. Notice is issued under section 148 of Income-tax Act, 1961. Sd./- (Vin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any material on record on the basis of the reasons recorded to hold that the income of the assessee company has escaped assessment. The CIT(A) also framed another issue whether addition made of Rs. 10,52,62,889 representing the realization from sale of cotton knitted fabric to M/s. Vivek Leafin Pvt. Ltd. could be held to be the sum received in lieu of accommodation entries, and, thus, taxable under section 68 of the Act, and as to whether the assessee company has paid any commission of Rs. 10,52,629 for obtaining such accommodation entries. 12. The CIT(A) then discussed the facts in respect of transaction of purchase and sale of cotton knitted fabrics by the company, and after considering the assessee's submissions and Assessing Officer's order and the relevant facts, came to a conclusion that no addition of Rs. 10,52,62,889 and Rs. 10,52,629 as made by the Assessing Officer is not at all called for, and, therefore, the CIT(A) deleted the addition. The CIT(A) further mentioned that in the light of his finding on the basis of which the addition made by the Assessing Officer was deleted by him, he did not deem it necessary or expedient to consider and decide the grounds raised by ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) (vi) CIT v. Atul Jain/Smt. Vinita Jain [2008] 299 ITR 383 (Delhi). 15. The ld. DR, on the other hand, submitted that in the present case, no regular assessment under section 143(3) was made before issuing notice under section 148 of the Act. The return of income filed by the assessee was merely processed under section 143(1), and thus, there being no assessment under section 143(3), the Assessing Officer had every jurisdiction to initiate proceedings under section 147 of the Act on the basis of information coming to his knowledge that the income of the assessee had escaped assessment. He further submitted that on the basis of the information received from Investigation Wing, the Assessing Officer had sufficient reason to entertain a belief that income of the assessee had escaped assessment within the meaning of section 147 of the Act. He further submitted that at the time when notice under section 148 was issued, the Assessing Officer is required to entertain a prima facie belief based on some material that income had escaped assessment, and the sufficiency and correctness of the material is not a thing to be considered ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssued by him would be liable to be struck down as invalid. 18. Similarly, in the case of Lakhmani Mewal Das (supra) the Hon'ble Apex Court of the land has held that the reasons for the formation of the belief contemplated by the section 147 of the Act for reopening of the assessment must have rational connections or relevant bearing on the formation of belief. Rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of the income of the assessee in the particular year. It was further held therein that it is no doubt true that Court cannot go into the sufficiency or adequacy of the material and substitutes its own opinion for that of the Assessing Officer on the point as to whether action should be initiated for reopening the assessment. At the same time, it is to be borne in mind that it is not any and every material, howsoever, vague and indefinite or distant, remote and far-fetched, which would warrant the formation of the belief relating to the escapement of the income of the assessee from assessment. Action under section 147 of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment. 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 requisite conditions in that regard is essential. At that stage, the final outcome of the proceedings is not relevant. In other words, at the initiation stage what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only issue whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the material would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. (P.) Ltd. [1996] 217 ITR 59....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Union of India [1992] 194 ITR 32. Of course, this was in the context of section 132 of the Act but as held in United Electrical Co. (P.) Ltd.'s case (supra), the logic is equally applicable to a case under section 147 of the Act. 24. From the aforesaid decisions, we may note the following proposition to decide the question as to whether the reasons recorded by the Assessing Officer are sufficient to initiate proceedings under section 147 of the Act:- (i)Formation of the required opinion and the belief by the Assessing Officer is a condition precedent to exercise jurisdiction to initiate proceedings under section 147 of the Act. The fulfilment of this condition is not a mere formality, but it is mandatory. The failure to fulfil that condition would vitiate the entire proceedings. (ii)The reasons for the formation of the required belief must have rational connection with or relevant bearing on the formation of belief. The rational connection postulates that there must be direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of the belief that there has been escapement of income of the assessee from the assessment in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat a bogus entry or transaction has been generated by way of availing accommodation entries, and, therefore, on the facts of the present case, it is established that there was a live link or a direct nexus between the material which suggested escapement of income and the information on the basis of which a belief could be entertained that income has escaped assessment. He further contended that at the stage of issuing notice under section 148 of the Act, it is not necessary to establish conclusively that income had actually been escaped assessment, and at that stage, sufficiency or the correctness of the material is not a thing to be considered. 28. We have carefully perused the reasons recorded by the Assessing Officer for entertaining a belief that income had escaped assessment within the meaning of section 147 of the Act. The reasons so recorded by the Assessing Officer has already been reproduced in para 5 above of this order. On perusal of the reasons recorded by the Assessing Officer, it is clear that the Assessing Officer proceeded to initiate proceedings under section 147 of the Act, on the following assumptions:- (i)That during the course of investigation and the se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ief that the income of the assessee company, in the nature of bogus loans/share capital, has escaped assessment to that extent is not based on any relevant material found during the course of the search conducted against Shri P.K. Ruia and his group companies. This, thus, makes it clear that the proceedings under section 147 has been initiated by the Assessing Officer on non-existent ground or fact inasmuch as there is no material on record to entertain a belief that the assessee had bogus loans/share capital from companies controlled by Shri P.K. Ruia, and thus, there exist no direct nexus or live link between the material found during the course of the search relating to the present assessee and the belief entertained by the Assessing Officer that the assessee had raised bogus and credits during the year under consideration, which resulted into escapement of income. We find that the Assessing Officer has entertained a belief merely on the basis of unfounded and non-existent information supplied by DCIT, CC-6, Kolkata, that the assessee had raised bogus loans/share capital from group of companies controlled by Shri Ruia without making any effort to satisfy himself as to whether th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment, is arbitrary or unreasonable being based on irrelevant and non-existent material. We further hold that there is no rational or intelligible nexus between reasons and the belief so that, on such reasons, any one can properly instructed on facts and law could reasonably entertain a belief that the assessee had raised bogus loans and share capital and the assessee's income to that extent has escaped assessment. 31. In support of the view we have taken above, we may rely upon the decision of Hon'ble High Court of Delhi in the case of Rainee Singh (supra), where it was found that very basis for initiating proceedings under section 147 was on wrong premise as it was neither factually correct that M/s. Rathi Ispaat Ltd. was loss making company and on the other hand, it was also established that payment was received by M/s. Rathi Ispaat Ltd. for services rendered by it to the assessee, which was shown as income in its return and duly taxed by Income-tax Department. In that case, the Assessing Officer proceeded to initiate proceedings under section 147 of the Act on the assumption that the assessee has diverted her income amounting to Rs. 6.30 crores by way of showing the bogus....