CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE...

WP(C) No.6087/2010 of 15

* THE HIGH COURT OF DELHI AT NEW DELHI

Judgment Reserved on: 9th

September, 2010

% Judgment Pronounced on: 18th

October, 2010

+ WP(C) No.6087/2010

SARTHAK SECURITIES CO. PVT. LTD. ..... Petitioner

Through: Mr. Udaibir Singh Kochar, Adv.

versus

INCOME TAX OFFICER-WARD 7(3) ..... Respondent

Through: Ms. Rashmi Chopra, Adv.

CORAM:

HON'BLE THE CHIEF JUSTICE

HON'BLE MR. JUSTICE MANMOHAN

1. Whether reporters of the local papers be allowed to see the judgment? Yes

2. To be referred to the Reporter or not? Yes

3. Whether the judgment should be reported in the Digest? Yes

DIPAK MISRA, CJ

By this writ preferred under Article 226 of the Constitution of India,

the assessee-petitioner has prayed for issue of a writ of certiorari for

quashment of the notice dated 25th March, 2010, Annexure P-II, issued

under Section 148 of the Income Tax Act, 1961 (for brevity „the Act‟)

pertaining to the assessment year 2003-04 by the Income Tax Officer, the 1st

respondent herein.

http://www.itatonline.org

WP(C) No.6087/2010 of 15

2. The facts which are imperative to be unfurled are that the assessee-

petitioner filed its return for the assessment year 2003-04 on 31st March,

2004 declaring an income of Rs. 15,360/-. The said return was processed

and intimation under Section 143(1) was issued on 6th April, 2004 accepting

the return. As put forth, the petitioner decided to issue shares in accordance

with its Memorandum and Articles of Association during the previous year

relevant to the assessment year 2003-04 and for the said purpose approached

a number of prospective investors. Four private limited companies, namely,

Nishant Finvest Pvt. Ltd., Shri Dinanath Luhhariwal Spinning Mills Pvt.

Ltd., Division Trading Pvt. Ltd and K.R. Fincap Pvt. Ltd., decided to invest

in the shares of the petitioner company. As pleaded, after observing all the

legal formalities, the assessee-petitioner allotted the shares to these four

companies on 31st March, 2003. The amount invested by the said companies

are Rs.2,50,000/-, Rs.2,50,000/-, Rs.3,00,000/- and Rs.2,50,000/-

respectively. The above-named companies were active as per the records of

the Registrar of Companies (ROC) and are assessed to income-tax and have

been allotted permanent account numbers by the Income Tax Department.

3. As pleaded, on 25th March, 2010, a notice under Section 148 of the

Act was issued by the respondent No.1 to the petitioner alleging that he had

reason to believe that the income chargeable to tax for the assessment year

2003-04 had escaped assessment within the meaning of Section 147 of the

Act and, accordingly, he required the petitioner to file the return for the said

assessment year. In response to the said notice, the assessee-petitioner


WP(C) No.6087/2010 of 15

requested vide letter dated 28th

April, 2010 to treat the return of income filed

on 31st March, 2004 to be the return which would deem to have been filed in

compliance with the notice. The assessee-petitioner also requested the

respondent to provide a copy of the reasons recorded under Section 148(2)

and the approval for issuance of notice. The respondent furnished the

reasons recorded by him vide letter dated 21st July, 2010. While furnishing

the reasons, the respondent also initiated assessment proceedings by issuing

formal notices. The assessee through his authorized representative raised

objections to the initiation of the proceedings under Section 147 of the Act

on the foundation that the same had not been initiated in accordance with

law. Be it noted, in the objections, many a ground was raised and reliance

was placed on the decision rendered by the Apex Court in CIT v. Lovely

Exports (P) Ltd., 216 CTR 195 (SC) and on the decision of this Court in

CIT v. SFIL Stock Broking Ltd. (ITA No.1056/2009).

4. The respondent No.1, by order dated 25th August, 2010, rejected the

objections raised by the petitioner and issued notices for fixing the hearing

to 27th

August, 2010.

5. Be it noted, the matter was finally heard with the consent of the

learned counsel for the parties. We have heard Mr. Udaibir Singh Kochar,

learned counsel for the assessee-petitioner, and Ms. Rashmi Chopra, learned

counsel for the revenue.


WP(C) No.6087/2010 of 15

6. It is contended by Mr. Kochar that the reasons recorded for initiation

of proceedings under Section 147(2) do not disclose the basis. The

proceedings have been initiated on the ground of information received from

the investigation wing but the order of the assessing officer does not reflect

any independent application of mind to the information so received. It is

urged that the respondent No.1 has failed to appreciate the ratio laid down in

the decision rendered in Lovely Exports (P) Ltd.BI (supra) when all the

requisite information was available with the assessing officer from the very

beginning.

7. Ms. Rashmi Chopra, learned counsel for the revenue, in support of the

order, submitted that the order passed by the assessing officer reflects

application of mind and the sufficiency of reasons cannot be gone into at this

stage.

8. The singular question that emerges for consideration is whether in the

case at hand, the initiation of proceedings under Section 147 is justified in

law or not.

9. The assessing officer, while issuing the notice, has stated thus:-

“Whereas I have reason to believe that your income

chargeable to tax for the assessment year 2003-2004 has

escaped assessment within the meaning of Section 147 of the

Income Tax Act, 1961.

I, therefore, propose to assess/reassess the income for the

said assessment year and I hereby require you to deliver to me


WP(C) No.6087/2010 of 15

within 20 days from the date of service of this notice, a return

in the prescribed form of the income of your income in respect

of which you are assessable for the said assessment year.”

10. After receipt of the said notice, the petitioner submitted that the return

of income, as filed earlier, should be treated as the return in compliance with

the notice under reference. In the said letter, he asked for reasons to enable

him to file the objections. After receipt of the said letter, the respondent

No.1, the assessing officer, sent a communication vide Annexure-XI

wherein it has been stated thus:-

“M/s Sarthak Securities P Ltd

AY 2003-04

19/3/2010 Information was received from the office of the

Addl DIT (Investigation) Unit – V that M/s Sarthak Securities

P Ltd had received bogus accommodation entries during the

FY 2002-03 relevant to the AY 2003-04 as per details placed

contra.

Beneficiary Name

Beneficiary Bank

Beneficiary Branch

Value of Entry

Instrument No. by which entry taken

Date on which entry taken

Name of A/c holder of entry giving a/c

Bank from which entry given

Branch of entry giving bank

Sarthak Securities P. Ltd.

OBC Saket 2500000/-

17/12/02 Nishant Finvest

SBBJ NRR

Do Do Do 2500000/-

18/9/ 02 Dinanath Luhhari Wal Spinning Mill

SBP DG

DO DO DO 2500000/-

16/12/02 K.R. Fincap P Ltd

SBBJ NRR

DO DO DO 300000/- 12/3/ 03 Division Trading P Ltd.

BOR Rohtak Rd.

According to the information received from the DIT (Inv) the

accommodation entries are received as share application

money or as unsecured loan. The assessee’s Balance sheet as

on 31/3/2003 showed that there is introduction of share capital

of Rs.284800/- and share premium of Rs.865000/-.

In this case return of income for the AY 2003-04 was

filed on declaring income of Rs.15360/- and as per records

asstt has not been completed u/s 143(3) of the I.T. Act.


WP(C) No.6087/2010 of 15

As the assessee had received bogus accommodation entry

of Rs.1050000/- during the AY 2003-04, I have reason to

believe that income chargeable to tax has escaped assessment.”

11. After receipt of the said communication, the assessee-petitioner filed

objections to the initiation of proceedings under Section 147 of the Act. We

think it apposite to reproduce the main part of the objections, which read as

follows:-

“1. The reasons do not disclose the basis on which the Addl.

DIT has termed the receipt of money by the assessee from four

incorporated bodies viz. Nishant Finvest (P) Ltd., Shri Dinanath

Luhariwala Spining Mills (P) Ltd., K.R. Fincap (P) Ltd. and

Division Trading (P) Ltd. towards share application money as

bogus accommodation entries. If any investigations were

carried out by Addl. DIT or any witnesses were examined by

him who implicated the assessee, the report of such

investigations or the statements of the witnesses do not form

part of the reasons

2. “……………………….”

3. Further, the alleged information provided by the Addl.

DIT has been accepted as gospel truth without any verification

by the A.O. The law postulates the A.O. (and not the Addl.

DIT) to have reason to believe. Blind acceptance of the

information furnished by the Addl. DIT cannot form reasons

leading to the belief by the A.O. of any escapement of income.

4. The A.O. has to independently apply his mind to the

information received from the Addl. DIT and arrive at the belief

that income has escaped assessment……………

In the instant case, the reasons recorded do not show any

application of mind nor the same show any belief independently

arrived at, which is the basic pre requisite for issuing notice

under Section 148.

5. At any rate, the alleged bogus shareholders are all

incorporated and active companies as per the records of

Registrar of Companies. Moreover, as per the alleged

information provided by the Addl. DIT himself, all of them had

bank accounts and payments were made by them to the assessee


WP(C) No.6087/2010 of 15

company through banking channels. As such the identity of the

shareholders stands duly accepted even by the Addl. DIT on

whose information the proceedings have been initiated……..

6. In the instant case, the names of the shareholders have

been provided by the Addl. DIT himself and are also

incorporated in the reasons recorded u/s 148. Hence, in case

the department feels that they were accommodation entry

providers, it is free to proceed against them.”

12. The said objections have been rejected on 25th August, 2010, mainly

stating, inter alia, as follows:-

“In this regard, I hereby bring to your notice that, further to the

information received from the Investigation Wing and on

subsequent detailed examination, inter alia, of Bank statements

on record, I have strong, reasons to form this honest and

reasonable belief that you have, during the financial year 2002-

03, transacted with:-

a) M/s Nishant Finvest on 17-12-2002 for an amount of

Rs.2,50,2000/-.

b) M/s Dinanath Luhhariwal Spinning Mill on 18-09-2002

for an amount of Rs.2,50,000/-

c) M/s K.R. Fincap Pvt Ltd on 16-12-2002 for an amount of

Rs.2,50,000/- and

d) M/s Division Trading Pvt Ltd on 12-3-2003 for an

amount of Rs.3,00,000/-

And have used the aforesaid entities as a conduit to absorb your

own unaccounted monies and as such have accommodated with

these entities.”

After so stating, the assessing officer distinguished the decisions

relied on by the assessee and rejected the objections.

13. It is submitted by Mr. Singh, learned counsel for the petitioner, that

there has been no application of mind and further no new material has been

brought to his notice. It is contended by him that the assessing officer was


WP(C) No.6087/2010 of 15

very much aware of the names of the existing four companies and that being

the position, the decision in Lovely Exports P. Ltd. (supra) gets squarely

attracted and not following the ratio of the said decision amounts to

improper exercise of power which makes the order vulnerable and totally

untenable.

14. In this context, we think it apt to refer to Section 147 of the Act,

which reads as under.

“147. Income escaping assessment.

If the Assessing Officer has reason to believe that any income

chargeable to tax has escaped assessment for any assessment

year, he may, subject to the provisions of sections 148 to 153,

assess or reassess such income and also any other income

chargeable to tax which has escaped assessment and which

comes to his notice subsequently in the course of the

proceedings under this section, or recompute the loss or the

depreciation allowance or any other allowance, as the case may

be, for the assessment year concerned (hereafter in this section

and in sections 148 to 153 referred to as the relevant assessment

year):

Provided that where an assessment under sub-section (3) of

section 143 or this section has been made for the relevant

assessment year, no action shall be taken under this section

after the expiry of four years from the end of the relevant

assessment year, unless any income chargeable to tax has

escaped assessment for such assessment year by reason of the

failure on the part of the assessee to make a return under section

139 or in response to a notice issued under sub-section (1) of

section 142 or section 148 or to disclose fully and truly all

material facts necessary for his assessment for that assessment

year:

Provided further that the Assessing Officer may assess or

reassess such income, other than the income involving matters

which are the subject-matters of any appeal, reference or

revision, which is chargeable to tax and has escaped

assessment.


http://law.incometaxindia.gov.in/DIT/HtmlFileProcess.aspx?FooterPath=D:\WebSites\DITTaxmann\Act2010\DirectTaxLaws\ITACT\HTMLFiles\2010&DFile=section148.htm&tar=top










WP(C) No.6087/2010 of 15

Explanation 1.—Production before the Assessing Officer of

account books or other evidence from which material evidence

could, with due diligence, have been discovered by the

Assessing Officer will not necessarily amount to disclosure

within the meaning of the foregoing proviso.

Explanation 2.—For the purposes of this section, the following

shall also be deemed to be cases where income chargeable to

tax has escaped assessment, namely:—

(a) where no return of income has been furnished by

the assessee although his total income or the total

income of any other person in respect of which he

is assessable under this Act during the previous

year exceeded the maximum amount which is not

chargeable to income-tax;

(b) where a return of income has been furnished by the

assessee but no assessment has been made and it is

noticed by the Assessing Officer that the assessee

has understated the income or has claimed

excessive loss, deduction, allowance or relief in

the return;

(c) where an assessment has been made, but—

(i) income chargeable to tax has been underassessed ; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive

relief under this Act; or

(iv) excessive loss or depreciation allowance or any other

allowance under this Act has been computed.

Explanation 3.—For the purpose of assessment or reassessment

under this section, the Assessing Officer may assess or reassess

the income in respect of any issue, which has escaped

assessment, and such issue comes to his notice subsequently in

the course of the proceedings under this section,

notwithstanding that the reasons for such issue have not been

included in the reasons recorded under sub-section (2) of

section 148.”



WP(C) No.6087/2010 of 15

15. On scanning of the anatomy of the aforesaid provision, it is clear as

crystal that the formation of belief is a condition precedent as regards the

escapement of the tax pertaining to the assessment year by the assessing

officer. The assessing officer is required to form an opinion before he

proceeds to issue a notice. The validity of reasons, which are supposed to

sustain the formation of an opinion, is challengeable. The reasons to believe

are required to be recorded by the assessing officer.

16. In this regard, it is apt to reproduce a passage from N.D. Bhatt,

Inspecting Assistant Commissioner, Income Tax & Another. v. I.B.M.

World Trade Corporation, [1995] 216 ITR 811(Bombay): -

“It is also well-settled that the reasons for reopening are

required to be recorded by the assessing authority before

issuing any notice under section 148 by virtue of the provisions

of section 148(2) at the relevant time. Only the reason so

recorded can be looked at for sustaining or setting aside a notice

issued under section 148. In the case of Equitable Investment

Co. (P.) Ltd. vs. ITO [1988] 174 ITR 714, a Division Bench of

the Calcutta High Court has held that where a notice issued

under section 148 of the Income-tax Act, 1961, after obtaining

the sanction of the Commissioner of Income-tax is challenged,

the only document to be looked into for determining the

validity of the notice is the report on the basis of which the

sanction of the Commissioner of Income-tax has been obtained.

The Income-tax Department cannot rely on any other material

apart from the report.”

17. In Hindustan Lever Ltd. v. R.B. Wadkar, [2004] 268 ITR 332 (Bom),

a Division Bench has opined thus:-

“…. the reasons are required to be read as they were recorded

by the Assessing Officer. No substitution or deletion is


WP(C) No.6087/2010 of 15

permissible. No additions can be made to those reasons. No

inference can be allowed to be drawn based on reasons not

recorded. It is for the Assessing Officer to disclose and open his

mind through reasons recorded by him. He has to speak through

his reasons. It is for the Assessing Officer to reach to the

conclusion as to whether there was failure on the part of the

assessee to disclose fully and truly all material facts necessary

for his assessment for the concerned assessment year. It is for

the Assessing Officer to form his opinion. It is for him to put

his opinion on record in black and white. The reasons recorded

should be clear and unambiguous and should not suffer from

any vagueness. The reasons recorded must disclose his mind.

Reasons are the manifestation of mind of the Assessing Officer.

The reasons recorded should be self-explanatory and should not

keep the assessee guessing for the reasons. Reasons provide the

link between conclusion and evidence. The reasons recorded

must be based on evidence. The Assessing Officer, in the event

of challenge to the reasons, must be able to justify the same

based on material available on record. He must disclose in the

reasons as to which fact or material was not disclosed by the

assessee fully and truly necessary for assessment of that

assessment year, so as to establish the vital link between the

reasons and evidence. That vital link is the safeguard against

arbitrary reopening of the concluded assessment. The reasons

recorded by the Assessing Officer cannot be supplemented by

filing an affidavit or making an oral submission, otherwise, the

reasons which were lacking in the material particulars would

get supplemented, by the time the matter reaches to the court,

on the strength of affidavit or oral submissions advanced.”

[underlining is ours]

18. In Assistant Commissioner of Income Tax v. Rajesh Jhaveri Stock

Brokers P. Ltd, [2007] 291 ITR 500 (SC), it has been ruled thus:-

“Section 147 authorises and permits the Assessing Officer to

assess or reassess income chargeable to tax if he has reason to

believe that income for any assessment year has escaped

assessment. The word “reason” in the phrase “reason to

believe” would mean cause or justification. If the Assessing

Officer has cause or justification to know or suppose that

income had escaped assessment, it can be said to have reason to

believe that an income had escaped assessment. The expression

cannot be read to mean that the Assessing Officer should have

finally ascertained the fact by legal evidence or conclusion. The


WP(C) No.6087/2010 of 15

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) fulfillment 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 is “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 concern at that

stage. This is so because the formation of belief by the

Assessing Officer is within the realm of subjective

satisfaction.”

[Emphasis supplied]

19. In this context, we may refer with profit to a Division Bench decision

of this Court in ITA No.1056/2009 (The Commissioner of Income Tax III

v. SFIL Stock Broking Ltd.) decided on 27th

April, 2010 wherein the Bench

was dealing with the validity of the proceedings under Section 147 of the

Act. The Bench reproduced the initial issuance of notice and thereafter

referred to the reasons for issue of notice under Section 148 which was

provided to the assessee. Thereafter, the Bench referred to the decisions in

CIT v. Atul Jain, 299 ITR 383 (Del), Rajesh Jhaveri Stock Brokers Pvt.

Ltd (supra), Jay Bharat Maruti Ltd. v. CIT, 223 CTR 269 (Del) and CIT v.

Batra Bhatta Company, 174 Taxman 444 (Del) and eventually held thus: -

“9. In the present case, we find that the first sentence of

the so-called reasons recorded by the Assessing Officer is mere

information received from the Deputy Director of Income Tax

(Investigation). The second sentence is a direction given by the

very same Deputy Director of Income Tax (Investigation) to

issue a notice under Section 148 and the third sentence again

comprises of a direction given by the Additional Commissioner


WP(C) No.6087/2010 of 15

of Income Tax to initiate proceedings under Section 148 in

respect of cases pertaining to the relevant ward. These three

sentence are followed by the following sentence, which is the

concluding portion of the so-called reasons:-

“Thus, I have sufficient information in my

possession to issue notice u/s 148 in the case of

M/s SFIL Stock Broking Ltd. on the basis of

reasons recorded as above.”

10. From the above, it is clear that the Assessing Officer

referred to the information and the two directions as „reasons'

on the basis of which he was proceeding to issue notice under

Section 148. We are afraid that these cannot be the reasons for

proceeding under Section 147/148 of the said Act. The first

part is only an information and the second and the third parts of

the beginning paragraph of the so-called reasons are mere

directions. From the so-called reasons, it is not at all

discernible as to whether the Assessing Officer had applied his

mind to the information and independently arrived at a belief

that, on the basis of the material which he had before him,

income had escaped assessment. Consequently, we find that

the Tribunal has arrived at the correct conclusion on facts. The

law is well settled. There is no substantial question of law

which arises for our consideration.”

[Emphasis is ours]

20. On a perusal of the aforesaid decisions, it is graphically clear that

once the ingredients of Section 147 are fulfilled, the assessing officer is

competent in law to initiate the proceedings under Section 147. To put it

differently, the conditions precedent as engrafted in the said provision are to

be satisfied.

21. At this juncture, it is profitable to refer to the authority in GNK

Driveshafts (India) Ltd. v. Income Tax Officer and Others, (2003) 179 C54

(SC) 11 wherein their Lordships of the Apex Court have held thus:-


WP(C) No.6087/2010 of 15

“5. We see no justifiable reason to interfere with the order

under challenge. However, we clarify that when a notice under

Section 148 of the Income Tax Act is issued, the proper course

of action for the notice is to file return and if he so desires, to

seek reasons for issuing notices. The assessing officer is bound

to furnish reasons within a reasonable time. On receipt of

reasons, the notice is entitled to file objections to issuance of

notice and the assessing officer is bound to dispose of the same

by passing a speaking order. In the instant case, as the reasons

have been disclosed in these proceedings, the assessing officer

has to dispose of the objections, if filed, by passing a speaking

order, before proceeding with the assessment in respect of the

abovesaid five assessment years.”

22. In Lovely Exports (P) Ltd. (supra), the Apex Court held thus:-

“2. Can the amount of share money be regarded as undisclosed

income under Section 68 of Income Tax Act, 1961? We find no

merit in this Special Leave Petition for the simple reason that if

the share application money is received by the assessee

company from alleged bogus shareholders, whose names are

given to the assessing officer, then the department is free to

proceed to reopen their individual assessments in accordance

with law. Hence, we find no infirmity with the impugned

judgment.”

23. The obtaining factual matrix has to be tested on the anvil of the

aforesaid pronouncement of law. In the case at hand, as is evincible, the

assessing officer was aware of the existence of four companies with whom

the assessee had entered into transaction. Both the orders clearly exposit

that the assessing officer was made aware of the situation by the

investigation wing and there is no mention that these companies are

fictitious companies. Neither the reasons in the initial notice nor the

communication providing reasons remotely indicate independent application

of mind. True it is, at that stage, it is not necessary to have the established


WP(C) No.6087/2010 of 15

fact of escapement of income but what is necessary is that there is relevant

material on which a reasonable person could have formed the requisite

belief. To elaborate, the conclusive proof is not germane at this stage but the

formation of belief must be on the base or foundation or platform of

prudence which a reasonable person is required to apply. As is manifest

from the perusal of the supply of reasons and the order of rejection of

objections, the names of the companies were available with the authority.

Their existence is not disputed. What is mentioned is that these companies

were used as conduits. In that view of the matter, the principle laid down in

Lovely Exports (P) Ltd. (supra) gets squarely attracted. The same has not

been referred to while passing the order of rejection. The assessee in his

objections had clearly stated that the companies had bank accounts and

payments were made to the assessee company through banking channel.

The identity of the companies was not disputed. Under these circumstances,

it would not be appropriate to require the assessee to go through the entire

gamut of proceedings. It is totally unwarranted.

24. Resultantly, the initiation of proceedings under Section 147 and

issuance of notice under Section 148 of the Act are hereby quashed. In the

facts and circumstances of the case, there shall be no order as to costs.

CHIEF JUSTICE

OCTOBER 18, 2010/vk MANMOHAN, J.


ITA 1056/2009 Page No.1 of 8

THE HIGH COURT OF DELHI AT NEW DELHI

% Judgment delivered on: 27.04.2010

+ ITA 1056/2009

THE COMMISSIONER OF INCOME TAX III ..... Appellant

- versus –

SFIL STOCK BROKING LTD ..... Respondents

Advocates who appeared in this case:-

For the Appellant : Mr Mr Sanjeev Sabharwal

For the Respondent : Mr Ajay Vohra with Ms Kavita Jha

and Mr Sriram Krishna

CORAM:-

HON’BLE MR JUSTICE BADAR DURREZ AHMED

HON’BLE MR JUSTICE V.K. JAIN

1. Whether Reporters of local papers may be allowed to see the judgment ?

2. To be referred to the Reporter or not ?

3. Whether the judgment should be reported in Digest ?

BADAR DURREZ AHMED, J (ORAL)

1. This appeal by the revenue is directed against the order dated

17.12.2008 passed in ITA No. 4991/Del/2004 by the Income Tax Appellate

Tribunal in respect of the assessment year 1998-1999.

2. The only issue before us is with regard to the validity of the

proceedings under Section 147 of the Income Tax Act, 1961 (hereinafter

referred to as „the said Act‟). The facts are that the assessee in his original

return of income filed on 30.11.1998 had shown a long term capital gain of

Rs 40,953/-. The said return was processed under Section 143(1) on


ITA 1056/2009 Page No.2 of 8

22.03.2002. Subsequently, by a letter dated 17.03.2003, the Deputy

Director of Income Tax (Investigation) informed the Assessing Officer of

the assessee that during the course of investigation Shri Satish Goel,

proprietor of M/s R. K. Aggarwal and Company has stated on oath that the

transactions through bank account No. 003097 of Corporation Bank were

only paper transactions in which the party was intending to take bills paid in

cash and issue cheques/ drafts showing the said amounts as sale of shares.

It was further informed that the assessee was neither a share broker nor a

member of any stock exchange and that he was doing the work of giving

entries. Further information was given that the entry of Rs 20,70,000/- in

account No. 003097 dated 28.02.98 and 01.03.1998 was nothing but entry

taken by paying cash. Thereafter, on the basis of the aforesaid information,

a notice under Section 148 of the said Act was issued by the Assessing

Officer to the assessee, which was allegedly the beneficiary of the bogus

claim of long term capital gain shown on sale/ purchase of shares.

3. Subsequently, the reasons for issuance of the notice under

Section 148 were provided to the assessee and the said reasons, as recorded,

were as under:-

“Information received from Deputy Director of Income Tax (Inv) 107, Sushant Lok, Gurgaon vide his letter No. DDIT (INV)/GGN/02-03/271 dated 17.03.2003 received in my office on 25.03.2003, that one of my assessee M/s SFIL Stock Broking Limited had made bogus claim of long term capital gains shown as earned on account of sale/ purchase of shares taken through bank account No. CA-3097, Corporation Bank, Karol Bagh, New Delhi in the


ITA 1056/2009 Page No.3 of 8

name of R. K. Aggarwal & Company by obtaining entries for Rs 6,00,000/-, Rs 7,00,000/- and Rs7,70,000/- on 28.02.98, 28.02.98 and 01.03.98 respectively. He has directed the A.O. to get notices issued u/S 148. Subsequently, I have been directed by the Addl. CIT-R8, New Delhi vide his letter No. addl. CIT R-8/2002-03/572 dated 26.08.2003 to initiate proceedings u/s 148 in respect of cases pertaining to this ward. Thus, I have sufficient information in my possession to issue notice u/s 148 in the case of M/s SFIL Stock Broking Ltd. on the basis of reasons recorded as above.”

4. Thereafter, during the re-assessment proceedings, the Assessing

Officer made an addition of Rs 20,70,000/- by holding that the assessee

could not explain the source of the entries. Being aggrieved by the

assessment order, the assessee preferred an appeal before the Commissioner

of Income Tax (Appeals), who confirmed the order passed by the Assessing

Officer. Thereafter, the appellant preferred a second appeal before the

Income Tax Appellate Tribunal in which an additional ground with regard

to the assumption of jurisdiction on the part of the Assessing Officer under

Section 147/148 of the said Act was taken. It is on this additional ground

that the Income Tax Appellate Tribunal has agreed with the assessee‟s

submission and quashed the entire re-assessment proceeding.

5. The Tribunal, following the decision of this Court in the case of

CIT v. Atul Jain: 299 ITR 383 (Del), held that the facts of the present case

were virtually identical to those of Atul Jain (supra) and that, because the

High Court in the case of Atul Jain (supra) had quashed the proceedings


ITA 1056/2009 Page No.4 of 8

under Section 147/148, the present proceedings were also liable to be

quashed.

6. The learned counsel for the appellant/ revenue contended that the

Tribunal had erred in following the decision in the case of Atul Jain (supra)

inasmuch as the reasons recorded in Atul Jain (supra) were different from

the reasons recorded in the present case. He submitted that the so-called

reasons recorded in Atul Jain (supra) were clearly held by this Court to be

vague and scanty and not to be any reasons at all. However, in the present

case, there was clear information which was available with the Assessing

Officer on this basis of which he could form a belief and it is also submitted

by the learned counsel for the appellant that the Assessing Officer did form

a belief and, therefore, invoking the decision of the Supreme Court in the

case of ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd : (2007) 291 ITR

500 (SC), he submitted that the Tribunal had erred. He submitted that a

substantial question did arise for the consideration of this Court. In

particular, the learned counsel for the appellant / revenue relied upon the

following portion of the Supreme Court decision in Rajesh Jhaveri

(supra):-

“16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by


ITA 1056/2009 Page No.5 of 8

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 Delhi High 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 is “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 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. Pvt. Ltd.: [1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO: [1999] 236 ITR 34 (SC).”

7. On the other hand, the learned counsel for the respondent/

assessee placed reliance on the decision of this Court in the case of Atul

Jain (supra) as also on several other decisions of this Court including that

in the case of Jay Bharat Maruti Ltd. v. CIT: 223 CTR 269 (Del) and CIT

v. Batra Bhatta Company: 174 Taxman 444 (Del). The learned counsel for

the assessee/ respondent also submitted that the decision of the Supreme

Court in the case of Rajesh Jhaveri (supra) was also clear in stating that

there must be a belief which must be arrived at by the Assessing Officer and

that there must be some material before the Assessing Officer so as to arrive

at such a belief in order that the expression “reason to believe” is triggered.

He submitted that in the present case, if one were to examine the reasons

recorded prior to issuance of the notice under Section 148, there is only an

information which has purportedly been received from the Deputy Director


ITA 1056/2009 Page No.6 of 8

of Income Tax (Investigation) followed by a direction given by the same

Deputy Director to proceed under Section 148 and another direction given

by the Assessing Officer‟s immediate superior officer, namely, the

Additional Commissioner of Income Tax to also issue a notice under

Section 148 of the said Act. Therefore, according to the learned counsel for

the respondent/ assessee, there was no „belief‟ whatsoever formed by the

Assessing Officer that there was any escapement of income. He has merely

acted on the directions of the Deputy Director of Income Tax (Investigation)

and the Additional Commissioner of Income Tax, which have been also

referred to in the purported reasons recorded. He has not independently

made up his mind on the basis of the information received from the Deputy

Director of Income Tax (Investigation).

8. After having heard the counsel for the parties, we are inclined to

agree with the submissions made by the respondent / assessee. We find that

the Supreme Court in Rajesh Jhaveri (supra) made it absolutely clear that

before an Assessing Officer issues a notice under Section 148, thereby re-

opening the assessment under Section 147 of the said Act, he must have

formed a belief that income had escaped assessment and that there must be

some basis for forming such a belief. The Supreme Court made it clear that

the basis of such belief could be discerned from the material on record

which was available with the Assessing Officer. However, the Supreme

Court in Rajesh Jhaveri (supra) did not say that it was not necessary for the


ITA 1056/2009 Page No.7 of 8

Assessing Officer to form a „belief‟ and that the mere fact that there was

some material on record was sufficient.

9. In the present case, we find that the first sentence of the so-called

reasons recorded by the Assessing Officer is mere information received

from the Deputy Director of Income Tax (Investigation). The second

sentence is a direction given by the very same Deputy Director of Income

Tax (Investigation) to issue a notice under Section 148 and the third

sentence again comprises of a direction given by the Additional

Commissioner of Income Tax to initiate proceedings under Section 148 in

respect of cases pertaining to the relevant ward. These three sentence are

followed by the following sentence, which is the concluding portion of the

so-called reasons:-

“Thus, I have sufficient information in my possession to issue notice u/s 148 in the case of M/s SFIL Stock Broking Ltd. on the basis of reasons recorded as above.”

10. From the above, it is clear that the Assessing Officer referred to

the information and the two directions as „reasons‟ on the basis of which he

was proceeding to issue notice under Section 148. We are afraid that these

cannot be the reasons for proceeding under Section 147/148 of the said Act.

The first part is only an information and the second and the third parts of the

beginning paragraph of the so-called reasons are mere directions. From the

so-called reasons, it is not at all discernible as to whether the Assessing

Officer had applied his mind to the information and independently arrived at

a belief that, on the basis of the material which he had before him, income


ITA 1056/2009 Page No.8 of 8

had escaped assessment. Consequently, we find that the Tribunal has

arrived at the correct conclusion on facts. The law is well settled. There is

no substantial question of law which arises for our consideration.

The appeal is dismissed.

BADAR DURREZ AHMED, J

V.K. JAIN, J

APRIL 27, 2010

SR


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