KHATU SHYAM PROCESSORS PVT. LTD. V. DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2)

SCA/22933/2017

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Khatu Shyam Processors Pvt. Ltd. challenged a notice issued by the Dy. Commissioner of Income Tax, which sought to reopen their assessment for the year 2010-2011. The notice was based on allegations that the company had received accommodation entries from various Kolkata-based paper companies, which were deemed to be non-genuine. The petitioner argued that the reopening was based on the same grounds as the original assessment, which constituted a change of opinion, and that it was beyond the permissible period for reopening assessments. The court examined the reasons provided by the Assessing Officer, including information from the Investigation Wing and findings from discreet inquiries, and concluded that there was a valid basis for reopening the assessment.

• Counselvise Citation: [2018] 140 COUNSELVISE.COM (IT) 694507 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 19-03-2018
• Assessment Year: misc
• Other Referred Cases: Principal Commissioner of Income-tax, Rajkot-3 v. Gokul Ceramics, Central Provinces Manganese Ore Co. Ltd. vs. Income Tax Officer, Nagpur, Income Tax Officer vs Purushottam Das Bangur, Income Tax Officer vs Selected Dalurband Coal Co. Pvt. Ltd., AGR Investment Ltd. vs. Additional Commissioner of Income Tax and Anr, Sterlite Industries (India) Ltd. vs. Assistant Commissioner of Income Tax
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: NIKUNT RAVAL
• Assessee Lawyers: B S SOPARKAR
• Keywords: Accommodation entries; Change of opinion; Reopening of assessment; Bogus investments; Discreet inquiries
• Section: 147; 148; 143(3)

Judgement Text

"C/SCA/22933/2017 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION No. 22933 of 2017 ============================================================== KHATU SHYAM PROCESSORS PVT. LTD. Versus DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2) ============================================================== Appearance : Mr B S SOPARKAR, Advocate for the PETITIONER Mr NIKUNT RAVAL for Mrs KALPANAK RAVAL, Advocates for the RESPONDENT ============================================================== CORAM: HONOURABLE Mr. JUSTICE AKIL KURESHI and HONOURABLE Mr. JUSTICE B.N. KARIA 19th March 2018 ORAL ORDER (PER : HONOURABLE Mr. JUSTICE AKIL KURESHI) Petitioner has challenged a notice dated 31st March 2017 issued by the respondent-Assessing Officer seeking to reopen the petitioner’s assessment for assessment year 2010-2011. Brief facts of the case are as under : Petitioner is a private limited company and is engaged in the business of dying of cloth on job-work basis. In the AY 2010-2011, the petitioner had filed return of income on 28th March 2011 declaring total income of Rs. 6.92 lacs [rounded off]. Such return was taken in scrutiny. The Assessing Officer passed an order of assessment under Section 143 [3] of the Income-tax Act, 1961 [“the Act” for short] on 19th March 2013. To reopen such Page 1 of 15 C/SCA/22933/2017 ORDER assessment, impugned notice came to be issued. In order to do so, the Assessing Officer had recorded the following reasons :- “Reasons for issuing notice u/s. 148 of the Income Tax Act, 1961. 1. The assessee has filed return declaring income at Rs. 6,92,580/= on 28.03.2011 and scrutiny assessment was completed under Section 143 [3] at the total income of Rs. 8,47,350/=. 2. Information of accommodation entries received from investigation wing, Kolkata : The DDIT [Inv.] Unit 3 (1) – Kolkata vide his letter dated 27.03.2017 has provided a list of 396 paper/accommodation provider companies. In the said list some of the paper company has provided accommodation entries to the assessee during the year, which is discussed in next para. On perusal of assessment orders/list supplied by the ADIT [Invt.], Kolkata, it is found that the assessee company has received following accommodation entries in form of Share Capital & Share Premium during the year from the Kolkata based company : Sr. No. Name & Postal Address of the Company Total Investment in Share Capital/Premium 1 Abhiruchi Vision Pvt. Limited, 4, Ganesh Chandra Avenue, 1st Floor, Room No. 1, Kolkata 11,40,000=00 2 Dreamz Vanijya [P] Limited, 4, Ganesh Chandra Avenue, 1st Floor, Room No. 1, Kolkata 9,90,000=00 3 Gouri Merchandise [P] Ltd., 6, NG Basak Road, Block-1, Fase Flat No. L-3, Kolkata 9,99,000=00 4 Shambu Agency [P] Limited, 6, NG Basak Road, Block L, Fase 2, Float No. LE, Kolkata 4,95,000=00 5 Ganesh Vincom Private Limited, 6, N.G Basak Road, Block-L, Phase L1, Flat No. 1, Kolkata 15,00,000=00 TOTAL Rs.. 51,15,000=00 Page 2 of 15 C/SCA/22933/2017 ORDER These companies are Kolkata based paper companies which are not having any business activity and the sole purpose of creating these companies is to provide accommodation entries to beneficiary parties. Hence, source of above investments are unexplained, as these companies have no creditworthiness to make such huge investments with the assessee-company. 3. After verifying the above facts from the assessment records, the Inspector of this office was directed to make discreet inquiries in respect of the assessee company to inquire whether the assessee company is indulged in receiving accommodation entires from the paper companies or not. The Inspector made local inquires in the nearby area where the said company is working. He reported that it used to take accommodation entires of the share capital/share premium etc., in various years from the various Kolkata based paper companies to convert its black money into white. Hence, report of Inspector and information received from the Investigation Wing, Kolkata were co-related to each other. Consequently, above investment are not genuine. From the above discussion, it is proved that the assessee did not disclose fully and truly material facts to the Department which is necessary assessment. In the light of above discussion, it is clear that the assessee has concealed income of Rs. 51,15,000/= during the year. Therefore, I have reason to believe that the assessee has concealed income to the extent of Rs. 51,15,000/= which is an escaped assessment within the meaning of section 147 of the Income Tax, 1961. Hence, I am satisfied that it is a fit case for issuing notice under Section 148.” Page 3 of 15 C/SCA/22933/2017 ORDER The petitioner raised objections to the notice of reopening under a letter dated 18th December 2017. Such objections were however rejected by the Assessing Officer by an Order dated 19th December 2017 whereby the present petition has been filed. Counsel for the petitioner raised the following contentions in support of the petition : [i] The reasons are based on alleged bogus investments made by the so-called shell companies of Kolkata. All these investments were examined by the Assessing Officer during the original assessment. Any reopening on the same ground would be hit by the principle of change of opinion. [ii] Impugned notice has been issued beyond the period of four years from the end of relevant assessment year, in absence of any failure on the part of the assessee to disclose truly and fully, all material facts necessary for reopening would not be permissible. [iii] Assessing Officer has proceeded merely on the report of the Investigating Wing, Kolkata without independent application of mind. Thus, the Assessing Officer has acted on the borrowed satisfaction. [iv] Drawing our attention to the last portion of the reasons recorded, counsel for the petitioner argued that the Assessing Officer has taken into account impermissible and extraneous Page 4 of 15 C/SCA/22933/2017 ORDER material. The Assessing Officer claims to have carried out discreet inquiry, however, the precise mode of inquiry is not revealed. In any case, reopening of the assessment cannot be sustained on the basis of some information gathered by the Assessing Officer which may not be reliable or dependable. On the other hand, learned counsel for the Revenue opposing the petition contended that the Assessing Officer has recorded proper reasons. On the basis of material supplied to him, he had formed a belief that income chargeable to tax has escaped assessment. This is not a case where he acted mechanically. In any case, the further material on which the Assessing Officer has placed reliance are clearly severable and would not vitiate the notice of reopening. A perusal of the reasons recorded show that the same come into two parts. First portion refers to information provided to the Assessing Officer by the Investigation Wing of Kolkata and the processing of such information by the Assessing Officer. This portion shows that the Investigating Wing had, under a letter dated 27th March 2017, provided list of as many as 396 companies which were mere paper companies indulging in providing accommodation entries. The Assessing Officer found that some of the companies out of the said list have provided accommodation Page 5 of 15 C/SCA/22933/2017 ORDER entires to the assessee during the year under consideration. He recorded that on perusal of the assessment record and the list of the companies supplied by the Investigation Wing, it was found that the assessee company had received accommodation entires in the form of share capital and share premium from five different companies amounting Rs. 51,15,000/=. He recorded that these Kolkata based companies were paper companies and were not having any business activities. The sole purpose of creating these companies were to provide accommodation entires to the beneficiary parties. It was on the basis of such material, he concluded that the source of investment in the assessee company were unexplained, as investing companies have no creditworthiness to make such investment. Three things immediately emerge from the reasons recorded by the Assessing Officer viz., [i] that the issue whether these investments were genuine or not, and whether investing companies had wherewithal to make investment or not is the central question presently, which was not an issue during the original assessment proceeding. [ii] the question of true and full disclosure and the scrutinized issue in fact in the present case closely overlap and [iii] the present is not a case where the Assessing Officer has acted mechanically without any mental input on his part or acted on Page 6 of 15 C/SCA/22933/2017 ORDER borrowed satisfaction. What was provided to him was a list of 396 companies by the Investigating Wing pointing out that these were mere shell companies, their creatison was for the purpose of providing accommodation entires. The Assessing Officer on perusal of the assessment record and list supplied by the Investigating Wing co-related the different material on record and prima facie came to the conclusion that the investment of Rs. 51.15 lakhs made by five of these companies in the form of share-capital or share premium of the assessee company was not genuine. The last aspect has been examined by this Court on numerous occasions. We may refer to one such judgment of the Court in the case of Principal Commissioner of Income-tax, Rajkot-3 v. Gokul Ceramics, reported in [2016] 241 Taxman 1 [Gujarat] wherein the Court had made the following observations :- “9. It can thus be seen that the entire material collected by the DGCEI during the search, which included incriminating documents and other such relevant materials, was alongwith report and show-cause notice placed at the disposal of the Assessing Officer. These materials prima facie suggested suppression of sale consideration of the tiles manufactured by the assessee to evade excise duty. On the basis of such material, the Assessing Officer also formed a belief that income chargeable to tax had also escaped assessment. When thus the Assessing officer had such Page 7 of 15 C/SCA/22933/2017 ORDER material available with him which he perused, considered, applied his mind and recorded the finding of belief that income chargeable to tax had escaped assessment, the re- opening could not and should not have been declared as invalid, on the ground that he proceeded on the show-cause notice issued by the Excise Department which had yet not culminated into final order. At this stage the Assessing Officer was not required to hold conclusively that additions invariably be made. He truly had to form a bona fide belief that income had escaped assessment. In this context, we may refer to various decisions cited by the counsel for the Revenue. 10. In case of Central Provinces Manganese Ore Co. Ltd. vs. Income Tax Officer, Nagpur (supra) the Supreme Court noted that in case of the assessee which had an office in London, this Customs authority had come to know that the assessee had declared very low price in respect of the consignment of Manganese exported by them out of India. After due inquiries and investigations, the Customs authorities found that the assessee was systematically under- voicing the value of Manganese as compared with the prevailing market price. The Income Tax Officer on coming to know about the proceedings before the Customs Collector in this respect issued notice for reopening of the assessment. In the reasons that the Assessing Officer relied on the facts as found by the Customs Authorities that the assessee had under-voiced goods during export. Under such circumstances, upholding the validity of the notice for reopening, the Supreme Court held and observed as under: So far as the first condition is concerned, the Income Tax Officer, in his recorded reasons, has Page 8 of 15 C/SCA/22933/2017 ORDER relied upon the fact as found by the Customs Authorities that the appellant had under invoiced the goods it exported. It is not doubt correct that the said finding may not be binding upon the income tax authorities but it can be a valid reason to believe that the chargeable income has been under assessed. The final outcome of the proceedings is not relevant. What is relevant is the existence of reasons to make the Income Tax Officer believe that there has been under assessment of the assessee's income for a particular year. We are satisfied that the first condition to invoke the jurisdiction of the Income Tax Officer under Section 147(a) of the Act was satisfied. 11. In case of Income Tax Officer vs Purushottam Das Bangur (supra) after completion of assessment in case of the assessee, the Assessing Officer received letter from Directorate of Investigation giving detailed particulars collected from Bombay Stock Exchange which revealed earning of share and price of share increased during period in question and quotation appearing at Calcutta Stock Exchange was as a result of manipulated transaction. On the basis of such information, the Assessing Officer issued notice for reopening of the assessment. The question, therefore, arose whether the information contained in the letter of Directorate of Investigation could be said to be definite information and the Assessing Officer could act upon such information for taking action under Section 147(b) of the Act. In such background, the Supreme Court observed as under : 12. Ms. Gauri Rastogi, the learned counsel appearing for the respondents, has urged that the letter of Shri Bagai was received by the Income tax Officer on March 26, 1974 and on the very next day, that is, on March 27, 1974, he issued the impugned notice under Section 147(b) of the Act and Page 9 of 15 C/SCA/22933/2017 ORDER that he did not have conducted any inquiry or investigation into the information sent by Shri Bagai. Merely because the impugned notice was sent on the next day after receipt of the letter of Shri Bagai does not mean that the Income Tax Officer did not apply his mind to the information contained in the said letter of Shri Bagai. On the basis of the said facts and information contained in the said letter, the Income Tax officer, without any further investigation, could have formed the opinion that there was reason to believe that the income of the assessee chargeable to tax had escaped assessment. The High Court, in our opinion, was in error in proceeding on the basis that it could not be said that the Income Tax Officer had in his possession information on the basis of which he could have reasons to believe that income of the assessee chargeable to tax had escaped assessment for the relevant assessment years. For the reasons aforementioned, we are unable to uphold the impugned judgment of the High Court. The appeal is, therefore, allowed, the impugned judgment of the High Court is set aside and the Writ Petitions filed by the respondents are dismissed. No order as to costs. 12. In case of Income Tax Officer vs Selected Dalurband Coal Co. Pvt. Ltd.(supra), the assessment was reopened on the basis of the information contained in letter from Chief Mining Officer that the colliery of the assessee had been inspected and there had been under reporting of coal raised. Upholding the validity of re-opening of assessment, the Supreme Court held and observed as under: After hearing the learned counsel for the parties at length, we are of the opinion that we cannot say that the letter aforesaid does not constitute Page 10 of 15 C/SCA/22933/2017 ORDER relevant material or that on that basis, the Income Tax Officer could not have reasonably formed the requisite belief. The letter shows that a joint inspection was conducted in the colliery of the respondent on January 9,1967, by the officers of the Mining Department in the presence of the representatives of the assessee and according to the opinion of the officers of the Mining Department, there was under reporting of the raising figure to the extent indicated in the said letter. The report is made by a Government Department and that too after conducting a joint inspection. It gives a reasonably specific estimate of the excessive coal mining said to have been done by the respondent over and above the figure disclosed by it in its returns. Whether the facts stated in the letter are true or not is not the concern at this stage. It may be well be that the assessee may be able to establish that the facts stated in the said letter are not true but that conclusion can be arrived at only after making the necessary enquiry. At the stage of the issuance of the notice, the only question is whether there was relevant material, as stated above, on which a reasonable person could have formed the requisite belief. Since we are unable to say that the said letter could not have constituted the basis for forming such a belief, it cannot be said that the issuance of notice was invalid. Inasmuch as, as a result of our order, the reassessment proceedings have not to go on we don not and we ought not to express any opinion on the merits. 13. In case of AGR Investment Ltd. vs. Additional Commissioner of Income Tax and Anr (supra), a Division Bench of Delhi High Court considered the validity of reopening of assessment where the notice was based on information received from Directorate of investigation that the assessee was beneficiary of bogus accommodation entries. The Court while upholding the validity of reopening observed that sufficiency of reason cannot be considered in a writ petition. It was observed as under : Page 11 of 15 C/SCA/22933/2017 ORDER 23. The present factual canvas has to be scrutinized on the touchstone of the aforesaid enunciation of law. It is worth noting that the learned counsel for the petitioner has submitted with immense vehemence that the petitioner had entered into correspondence to have the documents but the assessing officer treated them as objections and made a communication. However, on a scrutiny of the order, it is perceivable that the authority has passed the order dealing with the objections in a very careful and studied manner. He has taken note of the fact that transactions involving Rs.27 lakhs mentioned in the table in Annexure P-2 constitute fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income. The assessing officer has referred to the subsequent information and adverted to the concept of true and full disclosure of facts. It is also noticeable that there was specific information received from the office of the DIT (INV-V) as regards the transactions entered into by the assessee company with number of concerns which had made accommodation entries and they were not genuine transactions. As we perceive, it is neither a change of opinion nor does it convey a particular interpretation of a specific provision which was done in a particular manner in the original assessment and sought to be done in a different manner in the proceeding under Section 147 of the Act. The reason to believe has been appropriately understood by the assessing officer and there is material on the basis of which the notice was issued. As has been held in Phool Chand Bajrang Lal (supra), Bombay Pharma Products (supra) and Anant Kumar Saharia (supra), the Court, in exercise of jurisdiction under Article 226 of Page 12 of 15 C/SCA/22933/2017 ORDER the Constitution of India pertaining to sufficiency of reasons for formation of the belief, cannot interfere. The same is not to be judged at that stage. In SFIL Stock Broking Ltd. (supra), the bench has interfered as it was not discernible whether the assessing officer had applied his mind to the information and independently arrived at a belief on the basis of material which he had before him that the income had escaped assessment. In our considered opinion, the decision rendered therein is not applicable to the factual matrix in the case at hand. In the case of Sarthak Securities Co. Pvt. Ltd. (supra), the Division Bench had noted that certain companies were used as conduits but the assessee had, at the stage of original assessment, furnished the names of the companies with which it had entered into transactions and the assessing officer was made aware of the situation and further the reason recorded does not indicate application of mind. That apart, the existence of the companies was not disputed and the companies had bank accounts and payments were made to the assessee company through the banking channel. Regard being had to the aforesaid fact situation, this Court had interfered. Thus, the said decision is also distinguishable on the factual score. 14. Learned Single Judge of Madras High Court in case of Sterlite Industries (India) Ltd. vs. Assistant Commissioner of Income Tax, reported in [2008] 302 ITR 275 (Mad) upheld the notice for reopening which was based on information from enforcement directorate showing possible inflation of purchases made by the assessee.” Page 13 of 15 C/SCA/22933/2017 ORDER This discussion still leave open, the assessee’s last contention regarding the attempt made by Assessing Officer to verify these facts through discreet inquiries. In the last portion of the reasons recorded by the Assessing Officer, he has stated that after verifying the facts, as recorded above, the Inspector was directed to make discreet inquires in respect of the assessee company to inquire whether the company was indulged in receiving accommodation entries from the paper companies or not. He further recorded that Inspector having made local inquires in the nearby area where the company is working, recorded that the company used to take accommodation entires from various Kolkata based paper companies. The Assessing Officer, therefore, recorded that, “..hence the report of the Inspector and information received from the Investigation Wing, Kolkata are co-related to each other.” To us, this appears to be usual attempt on the part of the Assessing Officer to make “discreet inquires” in order to ascertain whether the company was indulging in such illegal activities. The manner or method of such discreet inquiry is not revealed and therefore, we are not clear as to how exactly inquiry was made. However, the Assessing Officer seems to be suggesting that the Inspector deputed by him on the basis of unrecorded statements appears to have made such a report. Whether on the basis of Page 14 of 15 C/SCA/22933/2017 ORDER unrecorded or even on the basis of statements of unrelated persons which may have been recorded, we have doubt about the efficacy thereof. Proper information at the command of the Assessing Officer can come only through reliable sources. Statements of those who ought to know may be one such source. At any rate, the Assessing Officer cannot bank on unrecorded statements or statements from the sources which can at best be described as relying on rumours or gossips. Had this been the foundational reason we would have been prompted to quash the notice. However, this clearly is separate and severable part of the reasons and at the best can be seen as an over enthusiastic approach on the part of the Assessing officer to buttress an already arrived at conclusion that income chargeable to tax has escaped assessment on the basis of information on record. In the result, petition is dismissed. Notice discharged. [Akil Kureshi, J.] [B.N Karia, J.] Prakash Page 15 of 15 "