Gujarat HC- Information received with direct nexus for formation of belief us 147 of Income Tax Act

Guj HC: Notice u/s 148/147 of the Income Tax Act, 1961: If some tangible material was found which has direct nexus/live link with the formation of belief that there has been escapement of income of assessee from assessment, it can be said to have reason to believe that an income had escaped assessment.

In Geetaben Dineshchandra Gupta vs. Income Tax Officer, Circle3(3)(2): R/Special Civil Application No. 18325 Of 2019; August 23, 2021 ; The Petitioner filed the present petition, under Articles 226 and 227 of the Constitution of India, challenging the notice dated 27-3-2019, issued under section 148 of the Income Ta x Act, 1961 (hereinafter referred to as ‘the Act’) proposing to reopen the assessment of the petitioner for the Assessment Year 2012-13.

The Assessee carried out huge transactions of purchases and sales without taking delivery of good and mere accommodation entries were provided without there being any physical transportation of goods.

It was contended by the assessee that despite the petitioner fully and truly disclosed all material facts relevant for his assessment during the course of scrutiny assessment along with statement of income with annexures, the petitioner surprisingly received notice dated 27-3-2019, issued under section 148 of the Act.

However, the respondent inter-alia contended that the petition was filed at a pre-mature stage inasmuch as, it is the notice under section 148 r/w. section 147 of the Act only. It is further contended that the petitioner, in the proprietorship concern of Subhalaxmi Trading Company, carried out huge transactions of purchases and sales. It had come on record that the petitioner accepted that she had made purchases and sales without taking delivery of good. Further, power of attorney holder of the petitioner, in his statement, has categorically admitted that his mother is a housewife and that, she had not carried out any business activities at any point of time in her life. It is further contended that mere accommodation entries were provided without there being any physical transportation of goods.

The inquiry conducted further revealed that for providing such accommodation entries, entry providers normally earn commission ranging from 0.5% to 1%. Therefore, despite the petitioner earning such commission for providing accommodation entries, had not shown such commission in the return and therefore, based on such tangible material assessment has been reopened. Further, despite showing huge turn-over of Rs. 24,10,82,501/- in the audited books of account, had disclosed a meager income of Rs. 1,42,694/-. Further, it came to the knowledge of the Assessing Officer that the assessee has provided accommodation entries to the Anil Group of companies to the tune of Rs. 24,10,82,501/- and the income derived from commission, ranges into 0.75% to 1%, is not disclosed by the petitioner during the year under consideration and thereby, the petitioner has not shown income of Rs. 18 lakh, which has escaped assessment.

Hence, the assessee’s contention that she had made full and true disclosure at the time of filing of return of income and during the assessment proceedings, is completely devoid of any merits.

Observations by Court:

• The PoA holder of the assessee stated that they made purchase and sales without taking delivery of goods. He further stated that all the transactions were only paper transactions which were prepared and managed by a separate entity. He further stated that in turn, his family used to receive financial benefits which have been shown as profit out of such billing activity. It was further observed that Subhalaxmi Trading Company had shown unsecured loan during F.Y. 2011-12 to 2013-14 relevant to A.Y. 2012-13 to 2014-15. On detailed enquiry it was proved beyond any reasonable doubt that whatever the transactions recorded in the case of subject i.e. Subhalaxmi Trading Company was carried out by Anil Group to facilitate to suppress the correct profit earned by it by inflating the purchase.
• 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 said Act 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, or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all the material facts necessary for his assessment for that assessment year.
• Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. 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.
• The ambit and import of the term “reason to believe” as held by Apex Court 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. 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. 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.
• 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”. For routing the unaccounted income, the tax evaders 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. 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.

Held: In view of the aforesaid circumstances and the established law of land it was held by the court that it appeared that there was direct nexus/live link between the material coming to the notice of the Assessing Officer and that, for formation of his belief that there has been escapement of the income of the assessee from assessment in the year under consideration because of assessee’s failure to disclose fully and truly all material facts as from the inquiry/investigation by the Investigation Wing of the respondent, some tangible material was found to substantiate the fact that the assessee was the provider of accommodation entries and that, the income from commission, ranging from 0.5% to 1% was not disclosed and thereby, the income chargeable to tax has escaped assessment for the year under consideration. As emerges from the record, the petitioner has filed RoI for the A.Y. 2012-13 disclosing income of Rs. 1,42,694/- despite showing a huge turnover of Rs. 24,10,82,501/- in the audited books of account. Thus the Bench held that formation of belief by the Assessing Officer that the income chargeable to tax has escaped assessment, based upon material derived during inquiry/investigation as justified.