Court upholds tax authority’s power to reopen assessment based on new information about accommodation entries.

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Case Name: 

Bharatkumar Kalubhai Ghadiya vs Assistant Commissioner of Income Tax (High Court of Gujarat)

R/Special Civil Application No. 7743 of 2021

Date: 19th August 2021

Key Takeaways:

1. The tax authority can reopen an assessment if it has “reason to believe” the taxpayer’s income has escaped assessment, even if a full assessment was previously conducted.
2. The “reason to believe” standard is based on the tax authority having some relevant material or information, not conclusive proof.
3. Accommodation entries used to claim bogus capital gains can provide the tax authority with sufficient reason to reopen an assessment.
4. The court will not examine the sufficiency or correctness of the material used by the tax authority to form its belief, only whether there is a rational connection between the material and the belief.

Issue: 

Whether the tax authority had valid grounds to reopen the taxpayer’s assessment for 2013-14 under Section 147 (of Income Tax Act, 1961).

Facts:

• The taxpayer, an individual, filed his return of income for 2013-14 showing a net taxable income of ₹23,30,760.
• The assessment was originally completed under Section 143(3) (of Income Tax Act, 1961) in 2015.
• In 2020, the tax authority issued a notice under Section 148 (of Income Tax Act, 1961) to reopen the assessment, believing the taxpayer’s income had escaped assessment.
• The basis for reopening was information received from the Investigation Wing about a search conducted on certain individuals (Sanjay Shah and Jignesh Shah) who were found to be providing accommodation entries, including to the taxpayer.
• The tax authority’s investigation found evidence that the taxpayer had purchased and sold shares of a company (Safal Herbs Ltd, formerly Parikh Herbals Ltd) in a manner indicative of using accommodation entries to claim bogus long-term capital gains.

Arguments:

Taxpayer’s Arguments:

• The tax authority lacked valid reasons to believe the taxpayer’s income had escaped assessment, as there was no direct evidence linking the taxpayer to the accommodation entries.
• The tax authority was merely acting on a change of opinion, which is not a valid ground for reopening.
• The taxpayer had disclosed all material facts during the original assessment.

Tax Authority’s Arguments:

• The information received from the Investigation Wing, including statements from the accommodation entry providers, provided sufficient reason to believe the taxpayer’s income had escaped assessment.
• The tax authority conducted a thorough investigation and found tangible evidence of the taxpayer’s involvement in the accommodation entry scheme.
• Reopening the assessment was justified, as the taxpayer had failed to fully and truly disclose all material facts during the original assessment.

Key Legal Precedents:

1. Assistant Commissioner of Income Tax vs Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500 (SC) - Established the “reason to believe” standard for reopening assessments.
2. Phool Chand Bajrang Lal vs Income-Tax Officer (1993) 203 ITR 456 (SC) - Held that acquiring new information exposing the falsity of the taxpayer’s original statements can justify reopening an assessment.
3. Lakhmani Mewal Das vs ITO (1976) 103 ITR 437 (SC) - Stated that the court can examine whether the reasons for the tax authority’s belief have a rational connection to the belief.

Judgment:

The High Court upheld the tax authority’s decision to reopen the assessment. The court found that the tax authority had sufficient reason to believe the taxpayer’s income had escaped assessment, based on the information received from the Investigation Wing and the subsequent investigation. The court held that the tax authority had followed the proper procedures and that the reasons recorded for reopening had a rational connection to the belief that the taxpayer’s income had escaped assessment. The court dismissed the taxpayer’s petition.

FAQs:

Q1: Can the tax authority reopen an assessment even if a full assessment was previously conducted?

A: Yes, the tax authority can reopen an assessment if it has “reason to believe” the taxpayer’s income has escaped assessment, even if a full assessment was previously completed. The “reason to believe” standard is based on the tax authority having relevant material or information, not conclusive proof.

Q2: What kind of information can give the tax authority “reason to believe” income has escaped assessment?

A: Information about the taxpayer’s involvement in accommodation entry schemes, such as evidence of bogus capital gains transactions, can provide the tax authority with sufficient reason to believe the taxpayer’s income has escaped assessment.

Q3: Can the court examine the sufficiency or correctness of the information used by the tax authority to reopen the assessment?

A: No, the court will not examine the sufficiency or correctness of the material used by the tax authority. The court will only look at whether there is a rational connection between the material and the tax authority’s belief that the taxpayer’s income has escaped assessment.

Q4: What does this case mean for taxpayers who have been subjected to reopened assessments based on accommodation entry allegations?

A: This case suggests that the courts will generally uphold the tax authority’s power to reopen assessments in such situations, as long as the tax authority has followed the proper procedures and can demonstrate a rational basis for its belief that the taxpayer’s income has escaped assessment. Taxpayers may need to focus on challenging the specific evidence and reasoning used by the tax authority rather than the reopening process itself.

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 18.03.2020 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 in brief of the case of the petitioner are that the petitioner, who is an individual, had, filed Return of Income (RoI) on 17.03.2021 at net taxable income of Rs.23,30,760/-. The assessment under section 143(3) (of Income Tax Act, 1961) r/w. section 153A (of Income Tax Act, 1961) was finalized on 31.12.2015. However, thereafter, the impugned notice under section 148 (of Income Tax Act, 1961) had been issued to the

petitioner. The RoI for the Assessing Officer 2013-14 was filed on 21.03.2014 earlier, and there was submission dated 23.12.2015, filed before the Assessing Officer. The petitioner also furnished the information as was asked for. Thereafter, the assessment under section 143(3) (of Income Tax Act, 1961), r/w. section 153A (of Income Tax Act, 1961) was framed vide Assessment Order dated 31.12.2015. After filing RoI on 17.03.2021, based on proceedings under section 148 (of Income Tax Act, 1961),

the Assessing Officer supplied the reasons for reopening vide communication dated 24.03.2021. The notice under section 142(1) (of Income Tax Act, 1961) was issued on 08.04.2021. Against the reasons accorded, the petitioner, vide letter dated 22.04.2021, raised objections against reopening on factual as well as the legal grounds and certain submissions along with accompaniments thereto, were also filed vide communication dated 03.05.2021, however, the respondent authority disposed of the said objections raised by the petitioner vide order dated 10.05.2021 inter alia holding that the reopening is justified and valid in the eye of law. Thereafter, a show-cause notice dated 25.05.2021 was issued against the petitioner fixing the date of hearing on

31.05.2021, which were replied by the petitioner by communication dated 26.05.2021 raising some contentions with regard to the identical matter etc. and grant of interim relief by this Court. Accordingly, the petitioner is before this Court by way of this petition.

3. We have heard, learned advocate Mr. Ketan Shah for the

petitioner and learned senior advocate Mr. M. R. Bhatt for learned

advocate Mrs. Mauna M. Bhatt for the respondent.

3.1 The learned advocate for the petitioner has vehemently and

fervently argued that in the present case, the assessee has

neither contacted, nor has remote contact with Shri Jignesh Shah

as mentioned in the so-called list and therefore, the notice under

section 148 (of Income Tax Act, 1961) is bad in law. It is submitted that there is

no application of mind by the Assessing Officer and hence, the

impugned notice deserves to be set aside.

3.2 It is further contended by the learned advocate for the

petitioner that even the list filed by Shri Jignesh Shah does not

contain the name of the petitioner herein. The learned advocate

for the petitioner further drew our attention to the letter dated

18.12.2014, and submitted that it was noticed by CBDT that the

assessee were coerced to admit undisclosed income during

searches/surveys conducted by the department and therefore,

such practice was deprecated by the CBDT. He submitted every

citizen has right to transact in share and make purchase and sale

the same in the market, and thereby, there is nothing wrong in

availing the benefit/profit from the same. Further, it is submitted

that whatever Shri Jignesh Shah has done, cannot be taken as

accommodation entry by the assessee and therefore, the

impugned notice under section 148 (of Income Tax Act, 1961) is bad in law.

3.3 The learned advocate for the petitioner further submitted

that in the case on hand, the reopening is based on mere change

of opinion as it is reopened on the basis of the so-called

information dated 24.03.2019, which is after passing of the

assessment order dated 31.12.2015, however, in the order

disposing of the objections raised by the petitioner, the

respondent had admitted that there was no name of the

petitioner herein mentioned by the person namely Sanjay Shah

and others whose premises had been searched on 11.09.2018.

3.4 The learned advocate for the petitioner submitted that in

the order dated 10.05.2021, disposing of the objections raised by

the petitioner, there was a reference of statement under section

131 of the Act dated 16.11.2018 made by Shri Jignesh Shah,

wherein, he had admitted that he had provided the

accommodation entry to various companies including Safal Herb

Ltd. (earlier known as, Parikh Herbal Ltd.), however, such fact is

incorrect for the reason that the petitioner is not provided with

any such accommodation entry. Therefore, the reasons recorded

are based on vague information and on conjectures and

surmises. He submitted that this amounts to ‘reason to suspect’

and not ‘reason to believe’. It is submitted that the very

foundation to exercise jurisdiction under section 148 (of Income Tax Act, 1961) is

based on information in the case of Shri Jignesh Shah and the

statements made by him. However, since he has denied that he

had not given the name of the petitioner and that, the petitioner

was not a beneficiary, the question of proceeding further by way

of impugned notice, does not arise.

3.5 In support, the learned advocate for the petitioner has

relied upon following decisions:

i) United Electrical Company (P) Ltd. v.

Commissioner of Income-Tax, [2002] 125 Taxman

775 (Delhi) : 258 ITR 317 ;

ii) S.P. Agarwalla @ Sukhdeo v. Income-Tax

Officer, [1981] 5 Taxman 299 (Cal.);

iii) ITO v. Lakhmani Mewal Das [(1976) 103 ITR

437: 1976 (3) SCC 757];

3.6 The learned advocate for the petitioner submitted that even

otherwise, 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) of

the Act 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 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), Ahmedabad, 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.

3.7 The learned advocate for the petitioner further submitted

that 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. There is also no material on

record to show that the name of the petitioner was disclosed by

either Shri Sanjay Shah or Shri Jignesh Shah in his statement

under section 131 (of Income Tax Act, 1961) / 132(4). He further submitted that unless any

supportive material is there, even such a statement has no

evidentiary value. It is submitted that even if it is presumed that

there is an accommodation entry in respect of sell of scrip of M/s.

Parikh Herbals, there is no documentary evidence or information

received, has been confronted or brought on record.

3.8 The learned advocate for the petitioner further submitted

that there is no approval under section 151 (of Income Tax Act, 1961) on record

and therefore also, the proceedings are bad in law.

3.9 Making above submissions, it is urged by the learned

advocate for the petitioner to allow the present petition and to

quash and set aside the impugned notice.

4. Per contra, learned senior advocate Mr. M. R. Bhatt for the

respondent authority, while opposing the present petition, drew

our attention to the reasons recorded for reopening of

assessment dated 24.03.2021, and submitted that how the

petitioner is involved is very clear. He submitted that in the

reasons recorded, it was mentioned that some common

facts/patterns such as Cyclic Rise & Fall of price without any

change in market and/or fundamentals of the company and large

volume and trades occurred in very small time window were

observed by the DDIT (inv.), Unit 1(3), Ahmedabad in almost all

scrip analysis, which indicates that the scrips are used for bogus

LTCG (Long Term Capital Gain). Further, in the identical case of

M/s. Zaveri & Co., the petitioner had purchased the share of

Re.1/- and sold at Rs.1/20 and ultimately, availed the profit of

Rs.57 lakh, which is also doubtful. It is submitted that earlier it

was Parikh Herbals Ltd. and now it is Safal Herbs Ltd. He

submitted that since the petitioner had purchased the share from

so-called Safal Herbs Ltd., which is not in existence and therefore,

there is live link between the petitioner – assessee and so-called

Shri Jignesh Shah (Safal Herbs Ltd.). He submitted that in the

reasons recorded, it is clearly stated that, “on verification of

share trading details of the assessee, it is found that the

assessee has also purchased and sold the shares of M/s. Safal

Herbs Ltd. and has earned long term capital gain which has been

claimed exempt in the return of income filed for AY 2013-14. The

assessee had purchased 51900 shares of M/s. Parikh Herbals Ltd.

(now known as M/s. Safal Herbs Ltd.) at rate of Rs.1 per share on

01.04.2011 through broker M/s. Vijay Bhagwandas and Co. The

said purchase was through offline mode without STT and

payment of Rs.51900/- was made in cash. On 12.05.2012, the

assessee got these shares converted to demat form through M/s.

Prudent Broking Services Ltd. After gap of one year, the

assessee sold 14000 shares in May 2012 for aggregate amount

of Rs.48,31,835/-, making a profit of Rs.48,17,835/-.

Subsequently, there was share split of shares of M/s. Safal Herbs

Ltd. in ratio of 1:10 which resulted in increase of remaining

37900 shares to 379000 (37900*10) in assessee account.

Further, on 08.03.2013, the assessee sold 2800 shares for

Rs.8,88,386/-, making profit of Rs.8,85,586/-. Hence, from an

investment of Rs.14,280/-, the assessee made unmatched profit

of Rs.57,03,421/- The said profit has been claimed exempt under

section 10(38) (of Income Tax Act, 1961)”.

4.1 The learned senior advocate for the respondent further

submitted that, in the reasons recorded, it is further averred that,

“Considering the above facts and on the basis of tangible

material in the form of information received from the

investigation wing in consequence to search action in the case of

Jignesh Shah and Sanjay Shah group (JSSS hereinafter),

intimating claim of bogus exempt share profit from shares of M/s.

Safal Herbs Ltd. by the assessee, the case for AY 2013-14 was

reopened for reassessment.

4.2 The learned senior advocate for the respondent further

drew the attention to the reasons recorded to submit that, Shri

Jignesh Shah, in his statement recorded under section 131 (of Income Tax Act, 1961) of the

Act on 16.11.2018 has accepted that he facilitated

accommodation entries on long term capital gains through Sanjay

Shah and Tushar Shah in companies such as Safal Herbs Ltd.

(earlier Parikh Herbals Ltd.), Citizen Yarns Ltd., Noble Polymers

Ltd., Dhyana Finstock Ltd., etc. The relevant part of statement of

Jignesh Shah was also reproduced with the reasons recorded.

4.3 So far as the reliance placed by the learned advocate for

the petitioner on the decision in United Electrical Company

(P) Ltd./258 ITR 317 (supra), the learned senior advocate for

the respondent submitted that the same is not applicable in the

case on hand for the reason that the same is prior to the

amendment. Eventually, he submitted that it was found from the

detailed investigation report, based on documentary evidence

and statements under sections 131 (of Income Tax Act, 1961) / 132(4) of the Act of the

entry providers, recorded during the course of search/ survey/

enquiry action, the petitioner was found to be beneficiary of the

accommodation entry, which clearly shows that the income

chargeable to tax has escaped assessment. Accordingly, the

notice under section 148 (of Income Tax Act, 1961) has been rightly issued and

that, it cannot be said that merely, on the basis of change of

opinion, the same is issued. He 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.

4.4 It is further submitted by the learned senior advocate for

the respondent that thorough inquiry was carried out by the

Investigation Wing, Ahmedabad 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 and

thus, there is tangible material on record.

4.5 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.

4.6 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, Ahmedabad, as

referred to herein above and from the information disseminated

by the Investigation Wing, Ahmedabad, 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. We have heard the learned advocates for the respective

parties and perused the material placed on record. The issue

centered in the present petition is the issuance of the impugned

notice under section 148 (of Income Tax Act, 1961) seeking to reopen the

assessment of the petitioner for the year under consideration i.e.

Assessment Year 2013-14. The challenge to the said action on

the part of the department by the petitioner is on the count that

when jurisdictional facts are not established, the department

cannot assume the jurisdiction and reopen the assessment.

According to the petitioner, 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, which is not tenable in the eye of

law.

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 dealt

with, the respondent has sought to reopen the assessment of the

petitioner mainly on the basis of the information received from

the DDIT (Inv.), Unit 1(3), Ahmedabad, while carrying out search

on 11.09.2018 in the case of Shri Sanjay Shah and Shri Jignesh

Shah and that, as per the information, they had provided

accommodation entries to petitioner, which was admitted by

them in statements under section 131 (of Income Tax Act, 1961).

6.1 In this regard, if the material placed on record is seen, more

particularly, the reasons recorded for reopening, it is stated

therein that, “Furthermore, information from the O/o. The DDIT-

(Inv.), Unit-1(3), Ahmedabad was received on 24-03-2019 on

webmail. As per the information, search u/s. 132 (of Income Tax Act, 1961) was launched

on 11.09.2018 in case of Sanjay Shah and Jignesh Shah of

Ahmedabad (JSSS hereinafter). The search resulted into seizure

of unaccounted cash of 19.37 Crores (related to accommodation

entries and commission earned thereon) along with incriminating

digital as well as documentary evidences. Clandestine record of

unaccounted cash, synchronized trading, proving bogus LTCG in

various BSE listed scrips and transport of such cash through

angadiyas was found to be maintained in secret Tally Data file

with company name “123”. In this secret file, against

transactions of shares on BSE platform, movement (angadiya)

and delivery (recd) of cash is recorded. Furthermore, the receipt

of commission in cash is also recorded under the head “LTG

Commission”. The evidence manifest that this is the record of

accommodation entries of LTCG against receipt of cash. The

evidences demonstrate that accommodation entry provider duo

has resorted to synchronized trading in shares of various listed

companies because it is only through synchronized trading that

the sellers are ensured accommodation entry of bogus LTCG

against cash and the buyers are ensured delivery of cash against

such pre-determined purchase of shares. The buy and sell

parties are well planned in this transaction, as only in such

scenario, the cash is assured to the buyer and sale proceeds of

share are assured in the bank account linked with demat account

of seller. This is conclusive evidence of bogus LTCG and

synchronized trading. Furthermore, other kind of Digital Data

including incriminating MS Excel files, incriminating Word Files,

Whatsapp Chats/Images and documents including Khata Bahis

were also found and duly analysed. Stamps and bank account of

various persons were also found in possession of accommodation

entry provider duo. During recording of their statements and by

filing affidavits, various dummy directors admitted that they were

merely signing documents on directions of operators. They

admitted of being involved in providing accommodation entries

of LTCG, Loss, Unsecured Loans etc. Data analysis coupled with

circumstantial evidences led to discovery that 15 BSE listed

scrips have been used for generating bogus LTCG and contrived

losses. During investigation, sample trail of funds was also

established wherein the infrastructure of shroffs and angadiyas

was used by the duo for flouting unaccounted funds of

beneficiaries. The duo also admitted being involved in providing

accommodation entries including bogus LTCG and contrived

losses. Based on reference to various scrips in the seized and

impounded material, statements of various persons, BSE trade

data and order data analysis of 15 scrips was carried out. Some

common facts/patterns such as Cyclic Rise and Fall of Price

without any change in market and/or Fundamentals of the

company and large volume and trades occurred in very small-

time window were observed by the DDIT (Inv.), Unit-1(3),

Ahmedabad in almost all scrips analysis which indicates that the

scrips are used for bogus LTCG.....”. The reasons leading to

finding that scrip is used for bogus LTCG and contrived losses in

respect of scrips Safal Herbs Ltd. were given, which are as under:

i) Company does not exist at its address. Therefore, it

lacks identity as well as genuineness;

ii) Evidences of exchange of cash against

accommodation entries of bogus LTCG are found and

impounded in the search case of JSSS, in respect of certain

persons;

iii) Cyclic Rise and Fall of Price without any change in

Market and/or Fundamentals of the company indicates

fabricated trading;

iv) Incoherent Volume vs. Trades and their ratio. It

happened in case of price manipulation;

v) Very high Delivery based Volume which indicates

deliveries are deliberately taken for purpose of generating

fake LTCG;

vi) Trades at Same Price during the day on many trading

days. It indicates fabricated trades;

vii) time Different Analysis lead to finding that large

volume and trades occurred in very small-time window i.e.

Time difference between passive order and trade. It

indicates synchronized trading;

viii) Meagre Order vs. Trade ratio indicates synchronized

trading;

ix) Selected group of clients making high trade volume in

last 30 minutes indicates close price of the scrip was

manipulated to move in a particular direction;

x) Small group of clients mainly responsible for intra-day

price movement – both Higher side and/or Lower side;

xi) Many beneficiaries have traded in the scrip and

contributed turnover of more than 100 Crores;

xii) SEBI has passed adverse orders w.r.t. shareholding of

the scrip, which shows that its shareholding has been

rigged to provide bogus LTCG and contrived losses;

xiii) Jignesh Shah and Umang Shah (accountant of Sanjay

Shah) have admitted that the scrip has been used for

providing accommodation entries of bogus LTCG against

cash from beneficiaries.

6.2 It is further observed in the reasons recorded that the

beneficiary was identified from the trade data made on BSE

Platform. On verification of the said data, it was found that the

assessee Shri Bharatbhai K. Gadhiya, the petitioner herein, had

made the transaction of shares in respect of scrip Safal Herbs

Ltd. (Parikh Herbals Ltd.) during the F.Y. 2012-13 relevant to A.Y.

2013-14. The details of the transactions are as under:

Sum of Sell Quantity of Shares in FY 2012-13 42000

Sell TRADE VALUE in FY 2012-13 573440

6.3 In view of the above, the Assessing Officer opined that the

assessee, the petitioner herein, had taken accommodation entry

for claiming bogus capital gain. Further, on perusal of the RoI for

A.Y. 2013-14, it was seen that the assessee, the petitioner herein,

had taken accommodation entry of Rs.57,34,400/- in respect of

his unaccounted income. Hence, there was an escapement of

income of Rs.57,34,400/-. The Assessing Officer was of the view

that the petitioner – assessee had not disclosed, fully and truly,

all material facts necessary for his assessment and from the

aforesaid, he opined that the income chargeable to tax has

escaped assessment.

6.4 As stated earlier, thorough inquiry was carried out by the

Investigation Wing, Ahmedabad 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

and tangible material appears to have been there on record.

Thus, the contention of the learned advocate for the petitioner

that merely on the basis of change of opinion, reopening is

sought, stands nugatory.

6.5 It was submitted that during 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) of

the Act, 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).

6.6 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. It further appears that, no procedural

lapse and/or deviation from procedure prescribed in reopening

and the reasons recorded do not lack validity as necessary

approvals from the competent authority appears to have been

received.

6.7 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.”

6.8 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.

6.9 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.”

6.10 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, Ahmedabad 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.

6.11 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”.

6.12 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.

6.13 The learned advocate for the petitioner has relied upon

certain decisions as referred to herein above, one of which is,

decision in United Electrical Company (P) Ltd. (supra),

wherein, the Court has held that, ‘whether when a challenge is

made to action under section 147 (of Income Tax Act, 1961) what Court is required to

examine is whether some material exists on record for Assessing

Officer to form requisite belief and reasons for belief have a

rational nexus or a relevant bearing to formation of such belief

and are not extraneous or irrelevant for purpose of said section’.

According to the learned senior advocate for the respondent this

decision is not applicable in the case on hand for the reason that

the same is prior to the amendment. Nonetheless, in the instant

case, it was found from the detailed investigation report, based

on documentary evidence and statements under sections 131 (of Income Tax Act, 1961) /

132(4) of the Act of the entry providers, recorded during the

course of search/ survey/ enquiry action, that the petitioner was

found to be beneficiary of the accommodation entry, which

clearly showed that the income chargeable to tax has escaped

assessment. Accordingly, it cannot be said that merely, on the

basis of change of opinion, the reopening is sought. The case of

the petitioner appears to have been reopened on the basis of

some tangible material available and on the established fact the

transactions were bogus in nature. Accordingly, this decision

would be of no help to the petitioner.

6.14 So far as the decision in S.P. Agarwalla @ Sukhdeo

(supra) is concerned, it was held by the Court that, ‘in the

absence of such a nexus or link, the said confessional statement

could not constitute relevant material justifying the reopening of

the assessment. Moreover, the assessee had disclosed in his

return that he had obtained loan from P and produced

confirmatory letters in support thereof, and the ITO had

completed the assessment after satisfying himself about the

genuineness of the loan transaction. This assessment could not

be reopened on mere suspicion’. If the facts of the present case

are seen, on the basis of some tangible material available and on

the established facts, as discussed herein above, the reopening is

sought. Accordingly, this decision also would be of no avail to the

petitioner.

6.15 If the decision in Lakhmani Mewal Das (supra) is taken

into consideration, it is observed 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’. However, the Apex

Court has further held that, ‘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’. In the present case, from the

information received and inquiries made and documents

collected, it cannot be said that on the basis of vague and far-

fetched material, the reopening is sought as some tangible

material is found, which go to the root of the matter.

Accordingly, this decision would also be not applicable to the

facts of the present case.

6.16 So far as the letter of CBDT dated 18.12.2014, as referred

to by the learned advocate for the petitioner is concerned, it is

regarding coercion and undue influence upon the assessee for

admission. Suffice it to say that, it is not the case herein.

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)