TaxTMI 
TaxTMI 
2010 (8) TMI 451
X X X X Extracts X X X X
X X X X Extracts X X X X
....as issued on 25-3-2008. In response to that notice, the assessee-company requested to treat the return filed on 25-11-2003 as return filed in response to notice under section 148 of the Act. The assessee filed the preliminary objection against the issue of notice under section 147 of the Act. Such preliminary objections were disposed off by the Assessing Officer vide order dated21-11-2008. Before, we consider the ground of appeal raised by the assessee, it will be useful to reproduce the reasons recorded by the Assessing Officer for issuance of notice under section 148 of the Act : "During the course of scrutiny assessment proceedings in the assessee's own case for assessment year 2005-06, it was noticed that the assessee-company has received share capital and share premium from following companies during the period financial years 2002-03 and 2003-04 :- S. No. Name of the Shareholder Address No. of shares Share Capital Share Premium Total of share capital and share premium 1. Rockery Marketing (P.) Ltd. 2,G.C. Avenue, 2nd Floor, Kolkata 20,000 2,00,000 18,00,000 20,00,000 2. Toplight Tradelink Ltd. 2,G.C. Avenue, 2nd Floor, Kol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0,000 In view of the above facts of the case, it is found that the assessee-company has introduced a sum of Rs. 1,10,00,000 in the form of bogus share capital and share premium in assessment year 2003-04 and a sum of Rs. 50,00,000 in assessment year 2004-05. Therefore, I have reason to believe income at least to the extent of Rs. 1,10,00,000 has escaped to assessment for assessment year 2003-04 and accordingly proceedings under section 147 are initiated. Notice under section 149 is issued." 5. While disposing off the objections raised by the assessee against issuance of notice, the Assessing Officer has given back ground in respect of issue of notice under section 148 of the Act. Search and seizure operation was conducted against M/s. B.C. Purohit & Co. on 12-4-2005. During search operation, the Investigation Wing has found that M/s. B.C. Purohit & Co. has floated bogus companies. Such bogus companies issued cheques for loans, share capital, share premium, share application money, gifts, etc., after receiving cash from the same parties to whom such cheques were issued. For providing such entries, certain commission was charged on the gross amount from the beneficiary. The Ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R 500. 8. The third objection of the assessee is that it is not at all observed that either be or any of shareholder company has specifically stated either on oath or otherwise that they have provided accommodation entries to the assessee-company by way of receiving cash from the company. Hence, without such information or material, the Assessing Officer could not have any reason of belief of escapement of income. The Assessing Officer while disposing off the objection mentioned that information gathered during the course of search in the case of M/s. B.C. Purohit & Co. led the Assessing Officer to have reasons to believe that receipts shown to have been received in the form of share capital and share premium from the bogus concerns floated by M/s. B.C. Purohit & Co. was an undisclosed income of the assessee which has escaped assessment. 9. The fourth objection of the assessee was that reason does not indicate as to what material/information was complied by the Assessing Officer to form his belief of escapement of income. The Assessing Officer stated that it is not required by the Assessing Officer to find the exact quantum of income which has escaped assessment. The only con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....td. [2006] 287 ITR 135 (Delhi). 5. CIT v. Divine Leasing & Finance Ltd. [2007] 158 Taxman 440 (Delhi). 6. Jaya Securities Ltd. v. CIT [2008] 116 Taxman 7 (All.). 12. The Assessing Officer has disposed off all the abovereferred objections by mentioning that the consideration of probable addition at the time of disposal of the objections is premature. The assessee can file objection against reopening of the assessment and issue of quantum of addition is not relevant at the time of filing of objection. 13. The next objection raised by the assessee was that the assessment of the assessee has been made under section 143(1) of the Act and all the facts have been disclosed to the Assessing Officer. The Assessing Officer observed that processing of a case under section 143(1) cannot be treated as an assessment. The Assessing Officer do not express any opinion while processing the return under section 143(1) and hence it cannot be said that notice under section 148 has been issued on the ground of change of opinion. It is not a case of reassessment. Thus the Assessing Officer rejected objection of the assessee against the issuance of notice under section 148 after passing t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... having controlling/substantial interest in the companies which were shareholders of the assessee. Moreover, during the course of search, no material was found to suggest that 11 shareholders belonged to M/s. B.C. Purohit & Co. or materials to show some cash was flown from the assessee-company to M/s. B.C. Purohit & Co. or some commission was paid by the assessee-company to M/s. B.C. Purohit & Co. There is no material or information in the reasons recorded to show that as to how M/s. B.C. Purohit & Co. was found to be an entry operator engaged in providing accommodation entries by way of receiving cash from beneficiaries. The Assessing Officer in the reasons recorded has stated that income to the extent of Rs. 1.01 crores has escaped assessment. The amount received on account of share capital cannot be an income and it is clear from the reasons recorded that the Assessing Officer has not applied his mind for holding that capital receipt can be added as income. The ld. AR has relied upon the decision of Hon'ble Apex Court in the case of Ajit Jain (supra) in which it was held that mere intimation, simply by the CBI that money was found in possession cannot be an information for the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament re-introduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549, dated31st October, 1989 [(1990) 82 CTR (St.) 1], which reads as follows : 7.2 Amendment made by the Amending Act, 1989, to re-introduce the expression 'reason to believe' in section 147.- A number of representations were received against the omission of the words 'reason to believe' from section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression 'reason to believe' had been explained in a number of Court r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing a prima facie opinion regarding the income escaping assessment, it is sufficient to issue notice under section 148. The Courts cannot examine the adequacy or sufficiency of reasons on facts for deciding the issue as to whether on such facts notice could be issued or not unless the reasons are found to be totally perverse or absurd or against any provisions of law. Section 147 applies to assessment or reassessment. If return has been filed and requirement of section 147 are complied with then notice for reopening can be made. In view of the decision of Hon'ble M.P. High Court, ld. DR submitted that reopening of assessment is valid. 19. We have heard both the parties. The return of income was filed on 31-10-2003 and the same was processed under section 143(1) on 6-12-2003. Section 143(1) has undergone many changes and therefore, we will consider provisions of section 143(1) as were available during the period when the return was processed. As per provisions available at that relevant time, the Assessing Officer was required to send the intimation to the assessee specifying sum payable on the basis of the return of income. Such intimation was to be deemed to be a notice of dema....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ustification. 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 requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concer....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have paid cash in lieu of receiving share capital and share premium through cheques and there is sufficient indication that share capital and share premium introduced represents cash which was given to companies belonging to M/s. B.C. Purohit & Co. Names of the companies were intimated to the Assessing Officer by the Investigation Wing and the information was given that the companies belonging to M/s. B.C. Purohit & Co. were engaged in providing accommodation entries. The ld. AR has filed the copy of the return receipt for the assessment year 2003-04 along with copies of the documents attached with the return. Such papers are available at pages 64 to 75 of the paper book. In the balance sheet, the assessee has shown the share capital to the extent of Rs. 12 lakhs as compared to 1.06 lakhs from the earlier year. A sum of Rs. 99 lakhs was credited in the share premium account on account of issue of 1.10 lakhs shares. As per documents attached with the return, it is not made clear as to whom, the shares have been allotted. Hence in the return filed, it was not known that the shareholders belong to M/s. B.C. Purohit & Co. and Group were the companies. The Assessing Officer ascertained....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erefore, this decision of Hon'ble Apex Court is of no help to the assessee. 19.5 The ld. AR has relied upon the decision of Hon'ble Apex Court in the case of Kelvinator of India Ltd. (supra). In that case, the Hon'ble Apex Court held that the Assessing Officer cannot reopen the assessment on account of change of opinion. The Hon'ble Apex Court held that the Assessing Officer has no arbitrary power to reopen the assessment on the basis of mere change of opinion. This decision is applicable in case there is a case of reassessment. However, it has already been observed that no assessment was made on the basis of original return but only processing of return was done. 19.6 The ld. AR has relied upon the decision of Jurisdictional High Court in the case of Smt. Jyoti Devi (supra). In that case the return was processed under section 143(1)(a). Section 143(1) as applicable in the instant case is not the same as has been considered by the Hon'ble Jurisdictional High Court. Moreover, in view of the decision of Hon'ble Apex Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra), intimation cannot be treated as an assessment. Hence, the decision of Hon'ble Jurisdictional Hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....given by the Investigation Wing to the Assessing Officer. It will be useful to reproduce the held portion of the decision as reported in ITR : "Held, reversing the decision of the High Court, that the letter of the Deputy Director referred to the statement containing financial information regarding the company in question which was annexed to the letter. The statement contained information derived from the Bombay Stock Exchange Directory indicating that during the period 1965-70 the company had prospered, that the book value per equity share had risen from Rs. 31855 for the year ending December 31, 1965, to Rs. 401 for the year ending December 31, 1970, the earning per share had risen from Rs. 8.37 per share to Rs. 4 per share and that the dividend percentage had also risen from 2 per cent to 10 per cent for the same period. On the basis of the information contained in the letter of the Deputy Director 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 that the market quotations from the Calcutta Stock Association shown by the respondent at the time of original ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessment and under-assessment. For this, Hon'ble Madras High Court referred to the following decisions : 1. TO-cum-RTO v. Durg Transport Co. (P.) Ltd. [1972] 85 ITR 156 (SC). 2. CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297(SC). The Hon'ble Madras High Court has also observed that in long line of decisions, the Supreme Court has held that High Court, under article 226 of the Constitution, has power to set aside a notice under section 147 of the Income-tax Act, 1961, if the conditions precedent for the exercise of the jurisdiction do not exist. The Hon'ble Madras High Court has referred to the provisions for reopening as existed in Income-tax Act, 1922 and Income-tax Act, 1961. The Hon'ble Madras High Court has also noticed the changes in the provisions for reopening of assessment with effect from 1-4-1989. The Hon'ble Madras High Court has also referred to various decisions of Hon'ble Supreme Court of India for the purpose to elaborate as to what reasons to believe means. The Hon'ble Madras High Court has noticed the Explanation 2 introduced in section 147 of the Act. The Hon'ble Madras High Court at page 66 has observed as under : "Thus it is clear that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssment years 2003-04 and 2004-05. Following chart will give the details of quantum of share applications and share premium received from different companies : S. No. Name of the shareholder No. of shares Share capital Share premium Total of share capital and share premium Received in financial year 2002-03 Received in financial year 2003-04 1. Rockey Marketing (P.) Ltd. 15000 150000 1350000 1500000 1000000 500000 2. Toplight Tradelink (P.) Ltd. 12000 120000 1080000 1200000 1200000 0 3. Marubhumi Consultants (P.) Ltd. 15000 150000 1350000 1500000 1000000 500000 4. Vijaypath Commodities (P.) Ltd. 19000 190000 1710000 1900000 1900000 0 5. Godawari Commerce (P.) Ltd. 18000 180000 1620000 1800000 1800000 0 6. MFL Housing Finance Ltd. (Now Universal Multimedia Ltd.) 18000 180000 1620000 1800000 1800000 0 7. Prime Capital Market 21000 210000 1890000 2100000 2100000 0 8. Universal Multimedia Ltd. (Formerly MFL Housing Finance Ltd.) 5000 50000 450000 500000 5000000 0 9. Si....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0 5,00,000 979259 14-12-2002 26-12-2002 5,000 5,00,000 979215 26-12-2002 11-3-2003 4,000 4,00,000 967295 11-3-2003 Sir, from the above details and documents, it is crystal clear that the transactions have been done through cheque of ABN AMRO Bank, Branch Brabourane Road, Kolkata and through bank account of the shareholder company and the assessee-company therefore, transactions are totally valid and genuine which is made out of the companies own source. Creditworthiness :- The shareholder company is having paid-up share capital of Rs. 93,00,510 and reserve and surplus of Rs. 14,76,77,750 i.e., total worth of the company comes to Rs. 15,69,78,260 as per balance sheet filed before your honour for the year ending 31-3-2003. From the perusal of balance sheet, it is crystal clear that the shareholder company has a well sufficient fund and own sources to invest for purchase of shares in the assessee-company for a small amount of Rs. 19 lakhs only. Sir, from the abovesaid details, information and documents filed before your honour as a evidence of abovesaid details, it is crystal clear that the shareholder company is having good creditwor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ort of ADIT (Inv.), Kolkata indicates that the shares shown to have been subscribed by the entry operator concerns at Kolkata and Jaipur have been sold by these companies. However, the shareholding register of the assessee-company still shows that the shares are being held by the companies who initially subscribed the capital. This shows that the entries in respect of share capital were accommodation entries. 4. All the companies are operating from the premises which belonged to M/s. B.C. Purohit Group. Hence such companies were incorporated at the same address so that the accommodation entries can be managed by the M/s. B.C. Purohit Group. 5. The companies are paper companies having no business except providing accommodation entries. 6. The ratio of the judgment on which the ld. AR has placed reliance are not applicable to the present case. Accordingly the Assessing Officer held that the amount of Rs. 1.10 crores credited in the books of the assessee as share capital and share premium is non-genuine and the same was added to the income of the assessee. 25. The ld. CIT(A) mentioned that the share capital of the companies belonging to M/s. B.C. Purohit Group....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wards the information provided by the companies to the Assessing Officer. All the companies have admitted that they have subscribed to the share capital of the assessee-company. Such companies gave the date on which share application was given and the cheque number vide which the amount was given. All such companies are having their substantial net worth. The ld. AR further submitted that all the 11 companies did not belong to the M/s. B.C. Purohit Group and it is not ascertainable as to why the share application money given by other companies have not been admitted by the Assessing Officer. 26.2 The ld. AR further submitted that the issue under consideration is covered in favour of the assessee in view of the decision of ITAT Jaipur Bench in the case of Hotel Gaudavan (P.) Ltd. (supra). In this case, the addition on account of share capital was based on the statement of director of the company which subscribed to the share capital and the director stated that he was providing accommodation entries but the Tribunal deleted the addition. The ld. AR drew our attention to the fact that assessee-company has declared dividend in subsequent years and it cannot be said that investment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 of the paper book filed by the Department. Shri Sushil Kumar Purohit gave the details of 13 companies in which he was the director. Out of these 13 companies only five companies were those which have subscribed to the share capital of the assessee-company. Shri Sushil Kumar Purohit stated that the books of account in respect of the above-referred companies are not maintained on regular basis. Shri Sushil Kumar Purohit was required to explain the source of cash deposits in the companies in which he is director so that companies may invest in purchases and sales of shares. Shri Sushil Kumar Purohit stated that the whole work is looked after by his younger brother Shri Jagdish Prasad Purohit. Shri Sushil Kumar Purohit was also required to explain the entries in certain documents found during the course of search. However, none of the documents related to the companies which are shareholders of the assessee-company. During the course of search, the revenue found some documents containing bank statement and account opening forms of 17 persons. Shri Sushil Kumar Purohit was able to identify four persons and in respect of other persons, he stated that he does not know such persons. 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....5 On identical issue, the Tribunal Jaipur Bench in the case of Hotel Gaudavan (P.) Ltd. (supra) has held as under :- '6. As regards the issue on merit in the departmental appeal, we concur with the views of the ld. CIT(A) that the Assessing Officer has not considered the explanation of the assessee. The amount under consideration of Rs. 1.89 crores have been received by the assessee as share application money from M/s. Jalkanta Technical & Financial Service Pvt. Ltd. (JTFSPL) after a proper Resolution passed by the Board of Directors of the aforesaid company through banking channel. M/s. JTFSPL is having permanent account and filing its return of income regularly. The Assessing Officer has nowhere mentioned that money belongs to the assessee-company and therefore, Provisions of section 68 cannot be invoked. The ld. CIT(A) has rightly relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Stellar Inv. Ltd. (164 CTR 287) which has been confirmed by the Hon'ble Supreme Court of India. The ld. CIT(A) has also relied upon the decision of Hon'ble Jurisdictional High Court in the case of Barkha Synthetics Ltd. v. ACIT 197 CTR 432 and also the decision of ITAT Jodhp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hilt by the assessee - If the Assessing Officer harbours doubts of the legitimacy of any subscription he is empowered, nay duty bound, to carry out thorough investigations - But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company - If relevant details of address and identity of the subscribers are furnished to the Department along with copies of the shareholders registers, share application forms, share transfer register etc. it would constitute acceptable proof or explanation by the assessee - Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices - Tribunal has noted that the assessee-company is a public limited company which had received subscriptions to the public issue through banking channels and the shares were allotted in consonance with the provisions of Securities Contract (Regulation) Act, 1956, as also the rules and regulations of Delhi Stock Exchange - Complete details were furnished - Tribunal has further found that the Assessing Officer h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Liability 1,49,78,125 1,97,09,841 Sale of share during F.Y. 2002-03 6,85,43,300 Purchase of share during F.Y. 2002-03 4,36,89,700 From the above details, it is clear that there is no increase on the liability side of the balance sheet. The assessee has received funds from the sale of shares. It is not the case of the revenue that the shares sold by this company were not genuine and funds were made available from such sale of shares was bogus. Thus the balance sheet does not show the receipt of funds as share capital during the year and even the current liability stood decreased. Thus the material available on record do not suggest that the funds given by such company related to the assessment year under consideration. 28.13 In the case of Universal Multimedia, the details as are available from the balance sheet are as under :- 31-3-2003 31-3-2002 Share Capital 31,82,90,226 31,82,90,226 Current Liability 3,63,61,310 35,15,480 In the current liability, this company has received a sum of around Rs. 3.30 crores against shares. Shares of this company were quoted in Calcutta Stock Exchange. During the finan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave been quoted in the Calcutta Stock Exchange. The details are available at page 430 of the paper book filed by the ld. AR. In the case of M/s. Warner Multimedia (P.) Ltd., the company is having secured loans from Rural Electrification Corporation (REC) as on31-3-2003. The liability side on account of loans has reduced to Rs. 6.50 crores as against 2.60 crores in the immediately preceding year. Thus this company was a company which was listed on Stock Exchange and was having unsecured loans to the extent of Rs. 3.47 crores from a Public Sector Undertaking and there can be no doubt regarding the subscription of share capital from such company. Considering the abovereferred facts, we therefore, feel that there was no case of making addition on account of share capital. Thus the addition of Rs. 1.10 crores is deleted. 29. The third grievance of the assessee is in respect of charging of interest. 30. The charging of interest is mandatory and the Assessing Officer will give consequential relief. However, in respect of interest under section 234D, we rely on the decision of Kerala High Court in the case of Kerala Chemicals & Proteins Ltd. [2010] 323 ITR 584 in which it has been he....