Court upholds tax authority’s power to reopen assessment based on new information, even after scrutiny.

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Case Name: 

Sanjay Baulal Surana Vs Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 20501 of 2019

Date: 11th August 2021

Key Takeaways:

1. The tax authority can reopen an assessment if it has “reason to believe” that income has escaped assessment, even if a scrutiny assessment was previously conducted.
2. The “reason to believe” standard is based on the tax authority’s prima facie belief, not conclusive proof.
3. The tax authority can rely on information from investigation wings to form a reasonable belief that accommodation entries were used to conceal income.
4. The sufficiency or correctness of the material used to reopen the assessment is not to be considered at this stage.

Issue: 

Whether the tax authority was justified in reopening the taxpayer’s assessment for a previous year, based on information that the taxpayer had received accommodation entries.

Facts:

• The taxpayer, an individual, had filed his income tax return for the assessment year 2013-14, declaring total income of ₹31,52,550.
• The case was selected for scrutiny assessment, and the taxpayer provided the required details. No additions were made to the taxpayer’s income during the original assessment.
• However, several years later, the tax authority issued a notice to reopen the assessment, claiming that the taxpayer had received accommodation entries from companies controlled by the Banka Group.
• The tax authority relied on information from the Investigation Wing, which found that the taxpayer had received ₹50,00,112 from Gyaneshwar Vyappar Pvt. Ltd. and ₹35,00,056 from Babylon Trading and Investment Pvt. Ltd., which were allegedly shell companies providing accommodation entries.
• The taxpayer challenged the reopening notice, arguing that the amounts were actually advances received and later returned for cancelled property transactions, and that there was no tangible material to justify the reopening.

Arguments:

Taxpayer’s Arguments:

• The amounts received were advances for property transactions that were later cancelled, and the taxpayer had returned the amounts with interest.
• The tax authority’s observation that the amounts were not reflected in the balance sheet or profit and loss account was incorrect, as the advances were returned during the same year.
• The tax authority’s reliance on statements from tainted parties (the accommodation entry providers) was not valid.
• The reopening was based on a mere change of opinion, without any tangible material to justify the belief that income had escaped assessment.

Tax Authority’s Arguments:

• The information received from the Investigation Wing showed that the taxpayer had received accommodation entries from companies controlled by the Banka Group, which were found to be shell companies providing bogus transactions.
• The statements of the accommodation entry providers, along with the documentary evidence, provided the tax authority with a reasonable belief that the taxpayer’s income had escaped assessment.
• Even if a scrutiny assessment was previously conducted, the tax authority can reopen the assessment if it finds substantial new material indicating that income has escaped assessment.

Key Legal Precedents:

1. ITO v. Lakhmani Mewal Das [(1976) 103 ITR 437]: The “reason to believe” standard requires a rational connection between the material and the formation of the belief that income has escaped assessment.
2. Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC): The court only needs to see if there was prima facie material for the tax authority to reopen the case, not the sufficiency or correctness of the material.
3. Phool Chand Bajrang Lal v. ITO [203 ITR 456 (SC)]: Acquiring fresh, reliable information that exposes the falsity of the taxpayer’s original statements can justify reopening the assessment.

Judgment:

The court dismissed the taxpayer’s petition and upheld the tax authority’s power to reopen the assessment. The court found that the tax authority had valid reasons to believe that the taxpayer’s income had escaped assessment, based on the information received from the Investigation Wing regarding the taxpayer’s involvement in accommodation entries. The court held that the tax authority had followed the proper procedure and had the necessary material to form a reasonable belief, even if a scrutiny assessment was previously conducted.

FAQs:

Q1: Can the tax authority reopen an assessment if a scrutiny assessment was already conducted?

A: Yes, the tax authority can reopen an assessment if it finds substantial new material indicating that income has escaped assessment, even if a scrutiny assessment was previously conducted.

Q2: What is the standard for the tax authority to reopen an assessment?

A: The tax authority must have “reason to believe” that income has escaped assessment. This is a prima facie standard, based on the material available, and does not require conclusive proof.

Q3: Can the tax authority rely on information from investigation wings to reopen an assessment?

A: Yes, the tax authority can rely on information from investigation wings, such as findings of accommodation entries or bogus transactions, to form a reasonable belief that income has escaped assessment.

Q4: Can the taxpayer challenge the reopening of the assessment?

A: The taxpayer can challenge the reopening, but the court will only examine whether the tax authority had a rational connection between the material and the formation of the belief that income has escaped assessment. The sufficiency or correctness of the material is not to be considered at this stage.

1. This petition, under Article 226 of the Constitution of India, is filed by the petitioner – assessee seeking to quash and set aside the Notice dated 27.03.2019 issued by the respondent authority under section 148 (of Income Tax Act, 1961) (herein after referred to as “the Act”) for the Assessment Year 2013-14, as it has reason to believe that the income chargeable to tax for the assessment year under consideration has escaped

assessment within the meaning of section 147 (of Income Tax Act, 1961).

2. The facts of the case of the petitioner are that the

petitioner, who is an individual, had, during the Financial Year

2012-13, relevant to Assessment Year 2013-14 (i.e. the year

under consideration), derived income from the house property,

business income and income from other sources. During the year

under consideration, the petitioner entered into Agreements to

Sell in respect of the Offices owned by him being Office Nos. HG-

12 and HG-13, situated in International Trade Center, Majura

Gate Crossing, Ring Road, Surat, with Babylon Trading and

Investment Pvt. Ltd., dated 23.08.2012 for Rs.70 lakh, and

received part consideration of Rs.35 lakh through RTGS and with

Gyaneshwar Vyapar Pvt. Ltd. dated 25.09.2012 for Rs.70 lakh and

received part consideration of Rs.50 lakh through RTGS. Since,

the said offices were occupied by the tenant and the petitioner

could not get the same vacated, the aforesaid agreements to sell

came to be cancelled vide agreements dated 10.11.2012 and

01.12.2012 respectively. Accordingly, amounts of Rs.36,40,384/-

and Rs.51,61,096/- (principal + interest) were returned to the

Babylon Trading and Investment Pvt. Ltd. and Gyaneshwar

Vyapar Pvt. Ltd. respectively, by cheque No. 401374, debited to

the petitioner’s account on 21.12.2012 and No. 401381, debited

to the petitioner’s account on 29.12.2012, during the year under

consideration. Thereafter, the petitioner filed his Return of

Income (RoI) for the year under consideration on 31.10.2013

declaring the total income at Rs.31,52,550/-. The case of the

petitioner for the year under consideration was selected for

scrutiny assessment and various details were called by the then

Assessing Officer, which were furnished by the petitioner. That,

while framing assessment under section 143(3) (of Income Tax Act, 1961) vide

order dated 25.01.2016, no addition came to be made. However,

after a period of almost six years, the respondent authority

issued notice dated 27.03.2019 under section 148 (of Income Tax Act, 1961)

seeking to reopen the case of the petitioner for the year under

consideration. In response to the said notice, the petitioner filed

its RoI on 12.04.2019 and also requested to supply the reasons

for reopening, which were supplied vide letter dated 07.05.2019.

A perusal of the same revealed that the case of the petitioner

was reopened on the count that the amounts received from the

aforesaid companies during the year under consideration were

nothing but an outcome of the accommodation entries. The case

of the respondent was that, as per the information received from

the DDIT (Inv.), Unit 1(3), Kolkata, a search and seizure action

was carried out in the case of one Banka Group (a third party) on

21.05.2018 and it was found that the Banka Group is involved in

the activity of providing accommodation entries through the

various companies controlled and managed by it. The petitioner

had received a sum of Rs.50,00,112/- from M/s. Gyaneshwar

Vyapar Pvt. Ltd., which was alleged to be a company controlled

and managed by the Banka Group and hence, the respondent

was of the view that the said amount was the outcome of an

accommodation entry. Further, as per the second information

received from the DDIT (Inv.), Unit 4(2), Kolkata in respect of M/s.

Babylon Trading and Investment Pvt. Ltd., the name of the said

company appeared in the database of various shell companies

controlled and managed by Gopal Banka and Manoharlal Nanglia

(alleged entry operator). Since, the petitioner had received a

sum of Rs.35,00,056/- from the said company, the respondent

was of the view that the said amount was the outcome of an

accommodation entry. Accordingly, the respondent had reason

to believe that the income of Rs.85,00,168/-

(Rs.50,00,112+35,00,056) had escaped assessment. Hence, the

case of the petitioner for the year under consideration was

reopened. Against the reasons accorded, the petitioner, vide

letter dated 19.09.2019, raised objections against reopening on

factual as well as the legal grounds, however, the respondent

authority disposed of the said objections raised by the petitioner

vide order dated 11.10.2019 inter alia holding that the reopening

is justified and valid in the eyes of law. Being aggrieved, the

petitioner is before this Court by way of this petition.

3. We have heard, learned senior advocate Mr. Tushar Hemani

for learned advocate Ms. Vaibhavi Parikh for the petitioner and

learned advocate Mr. Nikunt Raval for learned advocate

Mrs. Kalpana Raval for the respondent.

3.1 The learned senior advocate for the petitioner has

vehemently submitted that the basis for reopening the

assessment by the Assessing Officer is receipt of money by the

petitioner from the aforesaid companies, however, in fact, the

said money, received towards part consideration in respect of

two agreements to sell of the offices owned by the petitioner,

was returned, with interest, to the said companies by cheques as

the agreements to sell came to be cancelled as the tenant did not

vacate the same and the said fact, was also brought to the notice

of the respondent authority while raising objections against

reopening. However, the respondent, while passing the order

disposing of the objections, had stated that had the said amount

been the advance towards agreements to sell, the same would

have been shown in the balance-sheet or sale proceeds in the

profit and loss accounts, but it was not the case and on the

contrary, the petitioner had shown the same as unsecured loan.

The learned senior advocate for the petitioner submitted that the

said observation of the respondent is misconceived for the reason

that the advance was returned to the concerned, during the year

under consideration itself and hence, there was no question of

reflecting the same in the balance-sheet. Further, the

agreements to sell were cancelled and hence, there was no

question of reflecting the sale proceeds in the profit and loss

account. He submitted that merely, the petitioner had shown

unsecured loans of Rs.15,25,68,165/-, would not mean that the

petitioner had received the same from the above two parties.

3.2 The learned senior advocate for the petitioner further

submitted that had it been a case of accommodation entry, the

amounts in question would have remained with the petitioner,

but it is not the case here. The said amounts had been duly

returned to the concerned with interest. He further submitted

that thus, the department is not justified in proposing to reopen

the case of the petitioner on such false pretext and that the

reasons for reopening lacked validity.

3.3 The learned senior advocate for the petitioner submitted

that the statement of a tainted party cannot be considered as

tangible material so as to have reason to believe that the income

chargeable to tax has escaped assessment. He submitted that

the reopening is based on mere change of opinion of the

Assessing Officer inasmuch as notice under section 148 (of Income Tax Act, 1961)

can be issued only if an Assessing Officer has reason to believe

that any income chargeable to tax has escaped assessment and

for such formation of belief, there should be some tangible

material and act, which is lacking in the case on hand. He

submitted that the case of the petitioner was selected for

scrutiny assessment and the issue on hand was examined

threadbare at the original assessment and accordingly, merely

because the Assessing Officer happens to change his opinion,

action under section 147 (of Income Tax Act, 1961) cannot be taken. It is

contended and argued by the learned senior advocate for the

petitioner that the assessment for the year under consideration

was found to be proper and the same was admitted by the

Assessing Officer and therefore, if creditworthiness was found in

the transactions, the impugned reopening, merely relying upon

the information received from the DDIT (Inv.), Unit 1(3), Kolkata

and DDIT (Inv.), Unit 4(2), Kolkata, sans any independent

satisfaction of the Assessing Officer, only on borrowed

satisfaction, is illegal and bad in law and it cannot be said that

the petitioner has failed to disclose fully and truly all material

facts relevant for the assessment.

3.4 The learned senior advocate for the petitioner further

submitted that the petitioner has no connection, either with

Mukesh Banka or Gopal Banka or Manoharlal Nanglia and the

petitioner has never carried out any transaction with them.

Further, there is no statement on record to show that the

accommodation entry has been provided to the petitioner and

only on the basis of generalize information, the case of the

petitioner cannot be reopened. Further, both the companies in

question, are genuine companies and are still active in the RoC

and they are nowhere covered in the list of shell companies.

3.5 Making above submissions, it is urged by the learned senior

advocate for the petitioner to allow the present petition and to

quash and set aside the impugned notice.

4. Per contra, learned advocate Mr. Nikunt Raval for the

respondent authority, while opposing the present petition, drew

our attention to the reasons recorded for reopening of

assessment dated 07.05.2019, and submitted that the amounts

credited in the bank accounts of the petitioner – assessee were in

the nature of accommodation entries only and the transactions

clearly represent the income escaped assessment in the year

under consideration. The learned advocate for the respondent

submitted that two information, one from the DDIT (Inv.), Unit

1(3), Kolkata and another, from the DDIT (Inv.), Unit 4(2), Kolkata

had been received. So far as the first information is concerned, it

is revealed that the amount of Rs.50,00,112/- received by the

assessee, petitioner herein, from M/s. Gyaneshwar Vyappar Pvt.

Ltd. is a company belonging to Banka Group of companies, in the

form of accommodation entry. Further, it was found from the

detailed investigation report, based on documentary evidence

and statement under section 132(4) (of Income Tax Act, 1961) of the entry

provider Shri Mukesh Banka, recorded during the course of

search/ survey/ enquiry action on 19.07.2018, that various

companies controlled and managed by Shri Mukesh Banka, was

involved in large scale to provide accommodation entries in the

nature of unsecured loans/ other forms to various beneficiaries.

The assessee i.e. the petitioner herein was found to be one of the

beneficiaries.

4.1 The learned advocate for the respondent further submitted

that so far as the second information is concerned, on

investigation, it was found that the name of Babylon Trading and

Investment Pvt. Ltd. appeared in the department’s database of

shell entity, which was controlled by entry operators Gopal Banka

and Manoharlal Nanglia. Amit Kumar Chaudhary, who was one of

the dummy Directors of that company, had admitted in his

statement recorded under section 131 (of Income Tax Act, 1961) on 14.11.2014

that he had acted as only dummy Director for the company

controlled by Shri Manoharlal Nanglia and used for facilitating

accommodation entries to the beneficiary companies. It was

eventually found that the assessee i.e. the petitioner herein had

received Rs.35,00,056/- in the form of accommodation entry in

the nature of unsecured loan or other forms, which clearly shows

that the income chargeable to tax has escaped assessment.

4.2 It is further submitted by the learned advocate for the

respondent that the petitioner had shown unsecured loan of

Rs.15,25,68,165/- under the head “Unsecured Loan from Others”,

which shows that the petitioner had received unsecured loan

from the above two parties and hence, the contention of the

petitioner that the petitioner had received advance against the

agreements to sell, is nothing but an afterthought. It is

submitted that the financial analysis of such paper/shell

companies of Banka Group from which the petitioner had

received unsecured loan, had been carried out by the

Investigation Wing, Kolkata which revealed that, i) no profit

accumulation in the company/ies across various financial year; ii)

no actual business is done being “0” turnover; iii) most of the

companies have shown income under the head of “other

income”, which shows that the companies have no actual

business activity; iv) Shri Mukesh Banka, in his statements under

sections 131 and 132(4) of the Act, respectively recorded on

30.05.2018 and 19.07.2018, has admitted that these companies

are paper/shell companies, controlled and managed by him; v)

the Directors of these companies are dummy Directors as per the

statements of Shri Mukesh Banka, recorded under section 132(4) (of Income Tax Act, 1961)

of the Act; and vi) these companies were found to be non-

existent as per the inquiry made by the Inspector of the Income-

Tax of Investigation Wing, Kolkata.

4.3 It is further submitted that on examination of the bank

account, it was observed that the bank account was credited with

transfers or RTGS, which were directly credited to the account of

the beneficiary concerns or layered through the bank accounts of

shell/paper companies and finally transferred to the bank

accounts of the beneficiary concerns. The intermediary

companies are mentioned in the database of shell/paper

companies held with the department. It is submitted that

thorough inquiry was carried out by the Investigation Wing,

Kolkata and after verifying all the aspects regarding the

incriminating documents unearthed during the course of search

action, it declared the transactions were accommodation entries

provided by the bogus companies, managed and controlled by

Shri Mukesh Banka and Shri Manoharlal Nanglia and thus, there is

tangible material on record. In support, the learned advocate for

the respondent has relied upon a decision in Pushpak Bullion

(P) Ltd. v. DCIT, [2017] 85 Taxmann.com 84 (Guj.).

4.4 It is further submitted that there is no procedural lapse and/

or deviation from procedure prescribed in reopening and the

reasons recorded do not lack validity as all the procedures, laid

down under the Act, have been duly followed and necessary

approvals from the competent authority are received.

4.5 So far as the contention of the learned senior advocate for

the petitioner to the effect that merely on the basis of change of

opinion, assessment for the year under consideration is sought to

be reopened, the learned advocate for the respondent submitted

that the case of the petitioner is sought to be reopened on the

basis of some tangible material available and on the established

fact the transactions were bogus in nature, and all the relevant

information available with the department at the time of

recording the reasons for reopening have been duly discussed in

the reasons.

4.6 So far as the contention of the petitioner that the case is

reopened beyond a period of four years from the end of the

relevant assessment year is concerned, the learned advocate for

the respondent submitted that all the requirements under section

147 of the Act to initiate the proceedings are fulfilled. Further,

the case of the petitioner was reopened on account of

information received from the Investigation Wing, Kolkata, as

referred to herein above and from the information disseminated

by the Investigation Wing, Kolkata, it is evident that the assessee

has failed to furnish fully and truly, all material facts before the

Assessing Officer.

4.7 Making above submissions, it is urged that the Court may

not interfere in the impugned notice and requested to dismiss the

petition.

5. Having regard to the submissions advanced by the learned

advocates for the respective parties and having perused the

material placed on record, it appears to us that the learned senior

advocate for the petitioner has challenged the impugned notice

mainly on the ground that when jurisdictional facts are not

established, the department cannot assume the jurisdiction and

reopen the assessment. The basis for such submission is that,

according to the learned senior advocate for the petitioner, the

amounts were received by the petitioner towards part

consideration in pursuance to the agreements to sell in respect of

the two offices owned by the petitioner and since, the offices,

which were occupied by the tenant, could not be vacated, the

said amounts, together with interest, were returned to the

concerned during the year under consideration, which is evident

from the record. Further, he has submitted that the case of the

petitioner was selected for scrutiny assessment and at the

relevant time, the petitioner had disclosed fully and truly, all

material facts, relevant for the assessment and hence, merely, on

the basis of change of opinion, the impugned notice is issued.

5.1 At this juncture, it would be apt to refer to the observations

made by us with regard to the scope and ambit of section 147 (of Income Tax Act, 1961) of

the Act in paragraphs 7, 8, 9 and 10 of CAV Judgement dated

05.07.2021 rendered in Special Civil Application No. 19821 of

2019, which are as under:

“7. At the outset, it may be noted that as per the settled

legal position, two conditions have to be satisfied before

the Assessing Officer invokes his jurisdiction to reopen the

assessment under section 147 of the Income Tax Act, 1961 after the

expiry of four years from the end of the relevant

assessment year – firstly, that the Assessing Officer must

have reason to believe that the income chargeable to tax

has escaped assessment for the concerned assessment

year, and secondly, such escapement of assessment was

by reason of failure on the part of the assessee to make the

return under section 139 (of Income Tax Act, 1961), or in response to a notice issued

under Sub-section (1) of Section 142 (of Income Tax Act, 1961) or Section 148 (of Income Tax Act, 1961) or to

disclose fully and truly all the material facts necessary for

his assessment for that assessment year. So far as the

case of the present petitioner is concerned, the assessment

for the A.Y. 2012-13 is sought to be reopened by the

Assessing Officer under section 147 (of Income Tax Act, 1961)/148 of the said Act, on

his having arrived at a satisfaction that the income for the

said assessment year had escaped assessment by reason

of the failure on the part of the assessee to disclose fully

and truly all material facts necessary for his assessment.

8. It is pertinent to note that as held by the Supreme

Court in catena of decisions, the formation of belief by the

Assessing Officer at the stage of initiation of action under

section 147 (of Income Tax Act, 1961) is within the realm of subjective

satisfaction. The Supreme Court in the case of Assistant

Commissioner of Income Tax versus Rajesh Jhaveri

Stock Brokers P. Ltd. reported in (2007) 291 ITR

500(SC), had an occasion to deal with the scope and effect

of section 147 (of Income Tax Act, 1961) as substituted w.e.f. April 1st, 1989, in which

the Court has observed as under : -

“Section 147 (of Income Tax Act, 1961) 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 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) (of Income Tax Act, 1961) (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

(see ITO v. Selected Dalurband Coal P. Ltd.

[1996] 217 ITR 597 (SC)]; Raymond Woollen

Mills Ltd. v. ITO [1999] 236 ITR 34 (SC).

The scope and effect of section 147 (of Income Tax Act, 1961) as substituted

with effect from April 1, 1989, as also sections 148 to

152 are substantially different from the provisions as

they stood prior to such substitution. Under the old

provisions of section 147 (of Income Tax Act, 1961), separate clauses (a) and

(b) laid down the circumstances under which income

escaping assessment for the past assessment years

could be assessed or reassessed. To confer

jurisdiction under section 147(a) (of Income Tax Act, 1961) two conditions were

required to be satisfied : firstly the Assessing Officer

must have reason to believe that income, profits or

gains chargeable to income tax have escaped

assessment, and secondly he must also have reason

to believe that such escapement has occurred by

reason of either omission or failure on the part of the

assessee to disclose fully or truly all material facts

necessary for his assessment of that year. Both these

conditions were conditions precedent to be satisfied

before the Assessing Officer could have jurisdiction to

issue notice under section 148 (of Income Tax Act, 1961) read with section

147(a). But under the substituted section 147 (of Income Tax Act, 1961)

existence of only the first condition suffices. In other

words if the Assessing Officer for whatever reason

has reason to believe that income has escaped

assessment it confers jurisdiction to reopen the

assessment. It is, however, to be noted that both the

conditions must be fulfilled if the case falls within the

ambit of the proviso to section 147 (of Income Tax Act, 1961).”

9. In the case of Raymond Woollen Mills Ltd.

Versus Income-Tax Officer and others reported in

1999 236 ITR 34(SC), the Supreme Court observed

that the Court has only to see whether there was

prima facie some material on the basis of which the

Department could reopen the case. The sufficiency or

correctness of the material is not a thing to be

considered at this stage.

10. It is very pertinent to note that in the case of

Phool Chand Bajrang Lal versus Income-Tax

Officer reported in 203 ITR 456 (SC), it was

observed that the acquiring fresh information,

specific in nature and reliable in character, relating to

the concluded assessment, which went to expose the

falsity of the statement made by the assessee at the

time of original assessment was different from

drawing fresh inference from the same facts and

material which was available with the Income-Tax

Officer at the time of the original assessment

proceedings. Where the transaction itself on the basis

of the subsequent information was found to be a

bogus transaction, the mere disclosure of that

transaction at the time of original proceedings could

not be said to be disclosure of the true and full facts,

and the Officer would have the jurisdiction to reopen

the concluded assessment in such a case. The

precise observation made by the Supreme Court in

the said case may be reproduced as under : -

“In the present case as already noticed, the Income-

Tax Officer, Azamgarh, subsequent to the completion

of the original assessment proceedings, on making an

enquiry from the jurisdictional Income-Tax Officer at

Calcutta, learnt that the Calcutta company from

whom the assessee claimed to have borrowed the

loan of Rs. 50,000/- in cash had not really lent any

money but only its name to cover up a bogus

transaction and, after recording his satisfaction as

required by the provisions of section 147 (of Income Tax Act, 1961),

proposed to reopen the assessment proceedings.

The present is thus not a case where the Income-Tax

Officer sought to draw any fresh inference which

could have been raised at the time of the original

assessment on the basis of the material placed

before him by the assessee relating to the loan from

the Calcutta company and which he failed to draw at

that time. Acquiring fresh information, specific in

nature and reliable in character, relating to the

concluded assessment, which goes to expose the

falsity of the statement made by the assessee at the

time of the original assessment is different from

drawing fresh inference from the same facts and

material which were available with the Income-Tax

Officer at the time of the original assessment

proceedings. The two situations are distinct and

different. Thus, where the transaction itself, on the

basis of subsequent information, is found to be a

bogus transaction, the mere disclosure of that

transaction at the time of original assessment

proceedings cannot be said to be a disclosure of the

“true” and “full” facts in the case and the Income-Tax

Officer would have the jurisdiction to reopen the

concluded assessment in such a case.”

5.2 Further, the term “reason to believe”, however, is not

defined in the Act but it can be gathered and available from the

information, leading the Assessing Officer to reopen the

assessment. The term itself is suggestive of its prima facie

characteristics and not established or conclusive facts or

information. Meaning thereby, it is the Assessing Officer’s prima

facie belief, of course, derived from the some material /

information, etc. leading him to reopen the assessment.

5.3 The ambit and import of the term “reason to believe” has

been examined in numerous cases, notably in ITO v. Lakhmani

Mewal Das [(1976) 103 ITR 437: 1976 (3) SCC 757]. The

Apex Court held that, “the reason must be held in good faith. It

cannot be merely a pretence. It is open to the Court to examine

whether the reasons for the formation of the belief have a

rational connection with or a relevant bearing on the formation of

the belief and are not extraneous or irrelevant for the purpose of

the section. To this limited extent, the action of the Income Tax

Officer in starting proceedings in respect of income escaping

assessment is open to challenge in a Court of law. Rational

connection postulates that there must be a direct nexus or live

link between the material coming to the notice of the Income Tax

Officer and the formation of his belief that there has been

escapement of the income of the assessee from assessment in

the particular year because of his failure to disclose fully and

truly all material facts. It is no doubt true that the Court cannot

go into the sufficiency or adequacy of the material and substitute

its own opinion for that of the Income Tax Officer on the point as

to whether action should be initiated for reopening assessment.

At the same time we have to bear in mind that it is not any and

every material, howsoever vague and indefinite or distant,

remote and far-fetched, which would warrant the formation of the

belief relating to escapement of the income of the assessee from

assessment”.

5.4 It would also be worthwhile to refer to the observations

made by us in the CAV Judgment dated 06.08.2021 Special Civil

Application No. 22613 of 2019, which read as under:

“7. As stated hereinabove, the often posed question as to

whether the Assessing Officer could have assumed the

jurisdiction under Section 147 (of Income Tax Act, 1961)/148 of the said Act on the

basis of the information / material received from the

investigating wings unearthing the bogus transactions or

accommodation entries involving the assessee, has been

again posed before this Court. Before adverting the

submissions made by the learned advocates for the parties,

it may be noted that the words “accommodation entries”

have not been defined anywhere in the Act, however, in

catena of decisions, the Courts have dealt with the issue of

“accommodation entries”. It cannot be gainsaid that the

tax-evaders in order to bring back their unaccounted

income to their books of accounts without paying any tax

thereon, use numerous methods and techniques. For

routing the unaccounted income, the taxevaders under the

guise of loan entries or share capital entries or other

camouflage entries create an appearance of legitimate

transactions in their books of accounts. Such well

recognized rackets are controlled and conducted by the

persons known as “accommodation entry providers”, and

the “accommodation entries” are provided by them to the

persons who are the taxevaders. The entries on paper

apparently may appear to be of routine nature, but the trail

of money transited through the layers would be

subsequently unearthed during the search and seizure

operations conducted either at the assessee’s premises or

his associate’s premises or at the premises of some third

party, who may be an accommodation entry provider.

Under the circumstances, when the material is brought to

the notice of the Assessing Officer, which would prima facie

discredit or impeach the genuineness of the particulars

furnished by the assessee at the time of original

assessment, and when it prima facie establishes the link

between the assessee and the third party who is an

accommodation entry provider, the Assessing Officer is

empowered rather duty bound to make further inquiry /

investigation to unearth such camouflage or wrong or

illegal dealings of the assessee. As observed by the

Supreme Court in the case of Sumati Dayal vs

Commissioner Of Income-Tax reported in AIR 1995 SC

2109, apparent must be considered as real until it is shown

that there are reasons to believe that apparent is not real,

and that the Taxing Officers are entitled to look into the

surrounding circumstances to find out the reality, and the

matter has to be considered by applying the test of human

probabilities.”

6. In the aforesaid prelude, if the facts of the case are

adverted to, as referred to herein above, it is the case of the

petitioner that the petitioner had returned the amounts in

pursuance to the agreements to sell, as aforesaid during the year

under consideration and that, there is no tangible material, even

otherwise in the hands of the respondent to substantiate that the

income chargeable to tax has escaped assessment qua the

assessee. The department, in the reasons recorded for

reopening as well as in the affidavit-in-reply filed by it, however,

has replied to the said queries which go to the root of the matter.

It is averred that two information, one from the DDIT (Inv.), Unit

1(3), Kolkata and another, from the DDIT (Inv.), Unit 4(2), Kolkata

had been received. So far as the first information is concerned, it

was revealed that the amount of Rs.50,00,112/- received by the

assessee, petitioner herein, from M/s. Gyaneshwar Vyappar Pvt.

Ltd. was a company belonging to Banka Group of companies, in

the form of accommodation entry. Further, it was found from the

detailed investigation report, based on documentary evidence

and statement under section 132(4) (of Income Tax Act, 1961) of the entry

provider Shri Mukesh Banka, recorded during the course of

search/ survey/ enquiry action on 19.07.2018, that various

companies controlled and managed by Shri Mukesh Banka, were

involved in large scale to provide accommodation entries in the

nature of unsecured loans/ other forms to various beneficiaries.

The assessee i.e. the petitioner herein was found to be one of the

beneficiaries.

6.1 So far as the second information is concerned, on

investigation, it was found that the name of Babylon Trading and

Investment Pvt. Ltd. appeared in the department’s database of

shell entity, which was controlled by entry operator Gopal Banka

and Manoharlal Nanglia. Amit Kumar Chaudhary, who was one of

the dummy Directors of that company, had admitted in his

statement recorded under section 131 (of Income Tax Act, 1961) on 14.11.2014

that he had acted as only dummy Director for the company

controlled by Shri Manoharlal Nanglia and used for facilitating

accommodation entries to the beneficiary companies. It was

eventually found that the assessee i.e. the petitioner herein had

received Rs.35,00,056/- in the form of accommodation entry in

the nature of unsecured loan or other forms, which clearly

showed that the income chargeable to tax had escaped

assessment.

6.2 Further it is averred that the petitioner had shown

unsecured loan of Rs.15,25,68,165/- under the head of

“Unsecured Loan from Others”, which showed that the petitioner

had received unsecured loan from the above two parties and

hence, the contention of the petitioner that the petitioner had

received advance against the agreements to sell was found to be

an afterthought. Further, the financial analysis of such

paper/shell companies of Banka Group from which the petitioner

had received unsecured loan, was carried out by the Investigation

Wing, Kolkata which revealed that, i) no profit accumulation in

the company/ies across various financial year; ii) no actual

business is done being “0” turnover; iii) most of the companies

have shown income under the head of “other income”, which

shows that the companies have no actual business activity; iv)

Shri Mukesh Banka, in his statements under sections 131 (of Income Tax Act, 1961) and

132(4) of the Act, respectively recorded on 30.05.2018 and

19.07.2018, has admitted that these companies are paper/shell

companies, controlled and managed by him; v) the Directors of

these companies are dummy Directors as per the statements of

Shri Mukesh Banka, recorded under section 132(4) (of Income Tax Act, 1961); and

vi) these companies were found to be non-existent as per the

inquiry made by the Inspector of the Income-Tax of Investigation

Wing, Kolkata.

6.3 Moreover, on examination of the bank account, it was

observed that the bank account was credited with transfers or

RTGS, which were directly credited to the account of the

beneficiary concerns or layered through the bank accounts of

shell/paper companies and finally transferred to the bank

accounts of the beneficiary concerns. The intermediary

companies are mentioned in the database of shell/paper

companies held with the department. Thorough inquiry was

carried out by the Investigation Wing, Kolkata and after being

verifying all the aspects regarding the incriminating documents

unearthed during the course of search action, it was declared

that the transactions were accommodation entries provided by

the bogus companies managed and controlled by Shri Mukesh

Banka and Shri Manoharlal Nanglia and tangible material appears

to have been there on record. Thus, the contention of the

learned senior advocate for the petitioner that merely on the

basis of change of opinion, reopening is sought, stands nugatory.

6.4 The learned senior advocate for the petitioner has

submitted that in the scrutiny assessment proceeding carried out

under section 143(3) (of Income Tax Act, 1961), the petitioner had submitted all

the details relevant for the assessment and thus, discharged the

onus under section 68 (of Income Tax Act, 1961), however, it appears that the

Assessing Officer has found that the petitioner has not fully and

truly disclosed all material facts necessary for assessment for the

reason that the petitioner was found to be the beneficiary of the

accommodation entry. Therefore, there is clear failure on the

part of the assessee to fully and truly disclose all the facts

necessary for assessment proceeding under section 143(3) (of Income Tax Act, 1961) of the

Act.

6.5 Thus, considering the aforesaid facts and circumstances of

the case, we are of the considered view that it cannot be said

that there is no reason to believe that the income chargeable to

tax has escaped assessment because such exercise of reopening

has been made only after due inquiries and recording of

statements of concerned persons, as referred to herein above,

and on having found prima facie material, impugned notice is

issued to the petitioner.

6.6 In Peass Industrial Engineers (P.) Ltd. v. Deputy

Commissioner of Income Tax, [2016] 76 Taxmann.com 106

(Gujarat), this Court has observed as under:

“9. On the basis of aforesaid proposition laid by series of

decisions, we are of the opinion that when the Authority is

armed with the tangible material in the form of specific

information received by the Investigation Wing,

Ahmedabad is thoroughly justified in issuing a notice for

reassessment. It is revealed from the said additional

material available on hand a reasonable belief is formed by

the Assessing Authority that income of the petitioner has

escaped assessment and therefore, once the reasonable

belief is formulated by the Authority on the basis of cogent

tangible material, the Authority is not expected to conclude

at this stage the issue finally or to ascertain the fact by

evidence or conclusion, we are of the opinion that

function of the assessing authority at this stage is to

administer the statute and what is required at this

stage is a reason to believe and not establish fact of

escapement of income and therefore, looking to the

scope of Section 147 (of Income Tax Act, 1961) as also Sections 148 to 152 of

the Act, even if scrutiny assessment has been

undertaken, if substantial new material is found in

the form of information on the basis of which the

assessing authority can form a belief that the

income of the petitioner has escaped assessment, it

is always open for the assessing authority to reopen

assessment. From the reasons which are recorded, it

clearly emerges that the petitioner is the beneficiary of

those entries by Kayan brothers, who are well known entry

operators across the country and this fact has been

unearthed on account of the information received by DGIT

Investigation Branch and therefore, it cannot be said in any

way that even if four years have been passed, it is not open

for the Authority to reopen the assessment. In the present

case, there was independent application of mind on behalf

of the assessing authority in arriving at the conclusion that

income had escaped assessment and therefore, the

contentions raised by the petitioner are devoid of merits.

Dealing with the contentions of the petitioner that the

information received from DGIT, Investigation Branch,

Ahmedabad, can never be said to be additional

information. We are of the opinion that the information

which has been received is on 26.3.2015 from the DGIT,

Investigation Branch, Ahmedabad, whereby it has been

revealed that present petitioner is also the beneficiaries of

those Kayan brothers, who are in the activity of entry

operation throughout the country and therefore, it cannot

be said that this is not justifiable material to form a reason

to belief by the Authority and therefore, this being a case,

the Authority is justified in issuing notice under Section 148 (of Income Tax Act, 1961)

of the Act to reopen the assessment and therefore, the

challenge contained in the petition being devoid of merits,

same deserves to be dismissed. As we found that for the

exercise of power of reopening of assessment after a

period of 4 years, a proper procedure is observed by the

Authority, specific approval has been obtained from the

competent Authority and upon perusal of original file, we

have satisfied ourselves that the approval has been

accorded in a proper manner by the competent Authority

and since the notice is issued based upon substantial

compliance of statutory provision, the Authority has acted

well within the bounds of his powers and the Authority has

issued notice. We found that the order which has been

passed of rejecting the objections raised by the petitioner is

also a well reasoned order passed after due exercise of

jurisdiction and therefore, same is not, therefore, required

to be interfered with.”

6.7 Thus, the function of the assessing authority at this stage is

to administer the statute and what is required is a reason to

believe and not to establish fact of escapement of income and

therefore, looking to the scope of Section 147 (of Income Tax Act, 1961) as also sections

148 to 152 of the Act, even if scrutiny assessment has been

undertaken, if substantial new material is found in the form of

information on the basis of which the assessing authority can

form a belief that the income of the petitioner has escaped

assessment, it is always open for the assessing authority to

reopen the assessment.

6.8 Further, in the decision in Aaspas Multimedia Ltd. v.

Deputy Commissioner of Income Tax, Circle 1(1), [2017]

83 Taxmann.com 82 (Gujarat), it is observed as under:

“...In the present case the reassessment proceedings have

been initiated by the Assessing Officer on the basis of

material provided by the Principal Director (Investigation).

It is also required to be noted that the genuineness of the

various companies who made share applications are

doubted. The assessee is alleged to have been engaged in

bogus share applications from various bogus concerns

operated by PKJ. The assessee is the beneficiary of the

said transactions of share application by those bogus

concerns. In the wake of information received by the

Assessing Officer, when the Assessing Officer formed a

belief that the investment made from the funding of such

companies which are bogus, the Assessing Officer has

rightly assumed jurisdiction of initiating the reassessment

proceedings. The Assessing Officer, on the basis of

information subsequently having come to his knowledge,

recognized untruthfulness of the facts furnished earlier. In

the present case, since both the necessary conditions to

reopen the assessment have been duly fulfilled, sufficiency

of the reasons is not to be gone into by this Court.

Information furnished at the time of original assessment,

when by subsequent information received from the

Principal Director (Investigation), itself found to be

controverted, the objection to the notice of reassessment

under section 147 (of Income Tax Act, 1961) must fail.”

6.9 In the case on hand also, the Assessing Officer has reason

to believe that the petitioner is a beneficiary of accommodation

entry and basis for formation of such belief is several inquiries

and the investigation by the Investigation Wing, Kolkata and

report thereof. The reasons for the formation of the belief by the

Assessing Officer in the instant case, appear to have a rational

connection with or relevant bearing on the formation of belief

that there has been escapement of the income of the assessee

from assessment in the particular year because of his failure to

disclose fully and truly all material facts. Accordingly, no

interference is called for at the hands of this Court in this petition

under Article 226 of the Constitution of India.

6.10 We may reiterate the observation made by the Apex Court

in Raymond Woollen Mills Ltd. (supra) that, “at the time of

recording the reason for satisfaction of AO, there should be prima

facie some material on the basis of which, the department could

reopen the case. The sufficiency or correctness of the material is

not a thing to be considered at this stage. It will be open to the

assessee to prove that the assumption of fact made in the notice

was erroneous at the time of assessment proceedings”.

6.11 Further, in the case of Ess Kay Engineering Co. (P) Ltd.

v. Commissioner of Income Tax, 247 ITR 818 (SC), also it

has been observed that the Assessing Officer is not precluded

from reopening the assessment of an earlier year on the basis of

fresh material discovered subsequently during the course of

assessment of next assessment year.

7. In the backdrop as aforesaid, present petition fails and is

dismissed accordingly. Notice is discharged. Ad-interim relief is

vacated forthwith. No order as to costs.

[ Bela M. Trivedi, J. ]

[ A. C. Joshi, J. ]