By TIOL News Service

NEW DELHI, JAN 21, 2019: THE ISSUE AT HAND BEFORE THE BENCH IS - Whether, in the case of re-assessment, the 'reason to believe' recorded by the AO pales against an appellate order making substantive addition. NO IS THE VERDICT.

Facts of the case

THE assessee, a public limited company, made public issue of Rs 95 lakhs during the relevant AY, which was fully subscribed. The issue was made to fund the manufacture & sale of egg trays. Though the assessee acquired land for growing crops, the attempt was abandoned due to lack of resources and the land could not be put to further use. In returns for the relevant AY, the assessee declared income of Rs 6889/- and a loss of Rs 41766/- for the next AY. Thereafter, Search & Seizure operations were carried out u/s 132 at the premises of an entity, on account of which it emerged that the assessee invested about Rs 2.50 crores with a firm engaged as a liquor contractor. It was also noted that such amount paid was not refunded or repaid till the date of the Search proceedings. Inquiry revealed that this cash was first deposited in accounts of stock brokers, before being transferred to the assessee's bank account. The source of deposits in the brokers' bank accounts was unexplained. Thus the AO recorded reasons to believe and proceeded to re-open the assessment for the relevant AYs. For one AY, the AO then made additions of about Rs 2.10 crores on account of unexplained cash deposits, as well as additions of Rs 40 lakhs for the following AY. In arriving at such findings, the AO relied on statements taken from the directors in the assessee-company, as well as those taken from some of the stock brokers, which the AO claimed to have confirmed the bogus nature of the transactions.

On appeal, the CIT(A) partly sustained the findings of the AO, having reduced the quantum of the additions made for one of the two relevant AYs. On further appeal, the Tribunal held that the re-assessment proceedings were not in accordance with law, given the factual circumstances. Hence it deleted the additions made for both the AYs.

On appeal, the High Court held that,

++ the order passed by the Tribunal does not dispute the evidence and material, albeit holds that this material was not tangible for the fact that three brokers did exist and it was known that the source of deposit in the bank account was a sale of shares/investments. No information was received by the AO from the Investigation Wing that the assessee had received accommodation entry. This rationale is incorrect, for whether or not any accommodation entry was received has to be inferred and concluded from the facts by the AO, and not by a third person. It is the subjective opinion formed by the AO which has to be tested on the principle of an honest and reasonable person. In this case, the stock-brokers had elucidated on the sham and bogus nature of the share transaction i.e., investment and sale of worthless shares which was done through unknown persons who were the assessee's representatives and other facts accepted and admitted in the statements which were recorded by the Investigation Wing;

++ similarly, paragraph 25(ii) of the Tribunal's order proceeds on wrong premise that when the block assessment order in the case of Ms Mohinder Kaur was quashed on the technical ground that addition of Rs 2.5 crores could not have been made in the block assessment proceedings, re-opening under Section 147 read with Section 148 of the Act would not be justified. The entire money of Taranjit Singh was routed through the assessee or the Revenue could not take a 'somersault' for the purpose of re-opening assessment or make addition on substantive basis later on. This reasoning is wrong and fallacious being contrary to law, for appellate orders in the case of Ms Mohinder Kaur had not been passed when the 'reason to believe' in the case of assessee were recorded. The 'reason to believe' recorded cannot be set aside on the basis of the appellate order in the case assessee making substantive addition instead of protective additions made in the assessment order. Question of 'somersault' does not arise when protective addition is made into substantive addition;

++ the Tribunal has not taken notice of the statements of Mr Bharat Bhushan Goyal, and the three brokers, reproduced in the Assessment Orders, on the ground that there was violation of principles of natural justice. The reason given was that the Assessment Orders do not record that the assessee had been allowed to cross examine the brokers at the assessment stage. An adverse presumption has been drawn to affirmatively believe and hold that the assessee was not given opportunity to cross examine or was denied the right to cross examine because the Assessment Order did not record that such opportunity was granted. The presumption is wrong and perverse;

++ the assessee had not raised a specific ground that they were not furnished statements on oath or were denied opportunity to cross-examine the brokers. The Assessment Order specifically refers to the failure of the stock brokers to produce relevant documents/papers. The AO had not only relied upon the statements recorded by Deputy Director (Inv.) but had also himself recorded the statement of Mr Shagun Garg on 11th March, 2005. The Commissioner of Income Tax (Appeals) had similarly recorded the statement of Mr Hari Krishan Punni on 27th February, 2008 during the pendency of the appeal. Relevant facts noticed in the assessment order and statement of oath have been passed over and overlooked. Hence the question of law No. (2) relating to Assessment Year 1999-2000 in favour of the Revenue and against the assessee, albeit, with an order of remand to the Tribunal to decide the issues raised on merits after duly taking into account all facts and circumstances recorded by the AO and the first Appellate Authority.

(See 2019-TIOL-169-HC-DEL-IT)