M/s. Lakshya Exim Pvt. Ltd., New Delhi v. ITO, Ward 4 (3), New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D: NEW DELHI BEFORE SHRI C.L. SETHI JUDICIAL MEMBER & SHRI SHAMIM YAHYA ACCOUNTANT MEMBER ITA NO. 2328/DEL/2008 ASSESSMENT YEARS : 2003-04 INCOME TAX OFFICER WARD 4(3) NEW DELHI VS. M/S. LAKSHYA EXIM PVT. LTD. 146 ANSAL CHAMBER II BHIKAJI CAMA PACE NEW DELHI. PAN: AACL 9316 P C.O. NO. 165/DEL/2009 (IN ITA NO. 2328/DEL/2008) M/S. LAKSHYA EXIM PVT. LTD. 146 ANSAL CHAMBER II BHIKAJI CAMA PACE NEW DELHI. VS. INCOME TAX OFFICER WARD 4(3) NEW DELHI APPELLANT RESPONDENT DEPARTMENT BY : SHRI GAJANAND M EENA CIT DR ASSESSEE BY : SHRI C.S. AGGARWAL SR. ADVOCATE AND SHRI GAUTAM JAIN CA O R D E R PER: C.L. SETHI J.M. THE REVENUE HAS FILED THE APPEAL AGAINST THE ORDER DATED 31.03.2008 PASSED BY THE LD. CIT(A) IN THE MATTER OF AN ASSESS MENT MADE BY THE AO U/S. 144/147 OF THE INCOME TAX ACT 1961 (THE ACT) DA TED 06.12.2007 FOR THE A.Y. 2003-04. THE ASSESSEE HAS ALSO FILED CROSS OB JECTIONS RAISING THE GROUND THAT THE CIT(A) HAS ERRED IN LAW AND ON FACTS IN UP HOLDING THE VALIDITY OF INITIATION OF THE REASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT BY THE AO. ITA NO. 2328/DEL/2008 PAGE 2 OF 28 2. SINCE THE GROUNDS RAISED IN THE CROSS OBJECTIONS GOES TO THE ROOT OF THE AOS JURISDICTION TO COMPLETE THE ASSESSMENT U/S. 1 47 OF THE ACT WE DEEM IT FIT TO DEAL FIRST WITH THE GROUNDS RAISED BY THE AS SESSEE IN THE CROSS OBJECTIONS. 3. AT THIS STAGE IT IS PERTINENT TO NOTE THAT THE ADDITION OF RS. 10 52 62 889/- ON ACCOUNT OF ACCOMMODATION ENTRIES ALONGWITH RS. 10 52 629/- BEING ALLEGED COMMISSION PAID FOR AVAIL ING ACCOMMODATION ENTRIES MADE BY THE AO HAS BEEN DELETED BY THE CIT( A) WHICH ACTION OF THE CIT(A) HAS BEEN DISPUTED BY THE REVENUE IN THE APPE AL FILED BY IT. 4. GROUNDS RAISED IN THE CROSS OBJECTIONS ARE AS UN DER:- 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS IN UPHOLDIN G THE VALIDITY OF INITIATION OF THE REASSESSMENT PROCEEDI NGS WHICH HAD BEEN DISPUTED BEFORE HIM AS RAISED IN GROUND NO . 2. HE HAS FURTHER INCORRECTLY HELD THAT HE IS NOT ADJU DICATING THE GROUND RAISED WHEN HE IMPLIEDLY ADJUDICATED THE GROUND SO RAISED WHEN HE PROCEEDED TO DETERMINE THE MERIT OF THE ADDITIONS MADE. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE SPECIFICALLY HELD THAT THE PROCEEDINGS INITIATED WERE WITHOUT JURISDICTION AND THERE WAS NO MATERIAL TO CONCLUDE THAT THERE WAS ANY ESCAPEMENT OF INCOME AND THAT THERE WAS ANY FAILURE ON PART OF THE ASSESSEE TO DISCLOSE ALL THE MATERIAL F ACTS NEEDED FOR THE PURPOSE OF THE ASSESSMENT. 5. RELEVANT FACTS GIVING CAUSE TO THE ISSUE RAISED IN THE CROSS OBJECTIONS ARE IN BRIEF STATED IMMEDIATELY HEREAFTER AS UNDE R:- IN THIS CASE THE RETURN OF INCOME WAS VOLUNTARILY FILED BY THE ASSESSEE ON 28.11.2003 DECLARING TOTAL INCOME AT RS. 18 19 7 40/-. THIS RETURN WAS ITA NO. 2328/DEL/2008 PAGE 3 OF 28 PROCESSED U/S. 143(1) OF THE ACT ON 20.02.2004. SU BSEQUENTLY DCIT CC VI KOLKATA VIDE HIS LETTER DATED 13.09.2005 PASSED THE FOLLOWING INFORMATION TO DCIT. CC IV(6) NEW DELHI:- A SEARCH & SEIZURE OPERATION U/S. 132 OF THE I.T. ACT 1961 WAS CONDUCTED BY DIT (INVESTIGATION) KOLKATA IN RESPECT OF SHRI PAWAN KUMAR RUIA AND HIS GROUP COMPANIES ON 19.02.2004. THE MAIN ALLEGATION AGAINST MR. PAWAN KUMAR RUIA AND HIS COMPANIES AMONGST OTHERS WERE:- (I) IT WAS ALLEGED THAT MR. P.K. RUIA HAS FLOATED A NUMBER OF COMPANIES WITH A HOST OF DUMMY DIRECTORS. ALL THESE COMPANIES WERE FORMED THROUGH A FICTITIOUS CR OSS HOLDING OF SHARES AND ARE BEING USED TO PROVIDE JAM A KHARCHI ENTRIES TO DIFFERENT BENEFICIARIES AFTER RE CEIVING CASH FROM THEM. IN THE PROCESS COMMISSION IS BEIN G CHARGED FOR THE SERVICE RENDERED TO THEM. (II) IT WAS FURTHER ALLEGED THAT MR. RUIA HAS OBLIG ED A NUMBER OF BENEFICIARIES IN THIS PROCESS BY PROVIDIN G THEM EITHER FICTITIOUS LOANS ARE SHARE APPLICATION MONEY AND HAS EARNED HUGE AMOUNT AS COMMISSION WITHOUT PAYING THE RIGHTFUL TAXES. SUCH COMPANIES ARE ALSO SOLD AS A COMMODITY. 7.1 MODUS OPERANDI VIS--VIS LAUNDERING OF MONEY THROUGH DUMMY COMPANIES BY CREATING CORPORATE VEIL 7.1.I IN ANY BUSINESS THE MOST IMPORTANT REQUIREMENT IS TO HAVE INFRASTRUCTURE TO LAUNCH THE BUSINESS ACTIVITY. IN THE UNSCRUPULOUS BUSINESS OF ENTRY OPERATOR/LAUNDERING THIS LAUNCHING PAD IS FORMATION OF COMPANIES WITH HUGE FICTITIOUS CAPITAL BASE. MR. RUIA TOOK UP ACTIVITY IN THE EIGHTIES AND BY NOW HE HAS FLOATED HUNDREDS OF COMPANIES. THE PURPOSE OF FLOATING THE SE COMPANIES WAS TO MEET THE DEMAND OF THOSE BENEFICIA RIES WHO WANTED TO BUY SOME READYMADE COMPANY. THESE COMPANIES WERE SOLD TO DIFFERENT BENEFICIARIES AS COMMODITY FOR A LUMP SUM AMOUNT. ITA NO. 2328/DEL/2008 PAGE 4 OF 28 7.1.II THE REAL GAME WAS PLAYED WITH THE COMPANIES WHO WERE FORMED AND USED FOR THE PURPOSE OF GIVING ENTRIES. THESE COMPANIES WERE FORMED IN BATCHES. THE BANK ACCOUNTS OF ALL THESE COMPANIES WERE INTENTION ALLY OPENED IN ONE BRANCH. THE PROCESS OF FORWARDING EN TRIES IN THE BENEFICIARIES WAS DONE BY LAYERING THE CHE QUES I.E. CHEQUES WERE ROUTED THROUGH MANY PAPER/DUMMY COMPANIES OF SHRI RUIA BEFORE REACHING ITS DESTINA TION THE BENEFICIARIES. THIS IS DONE BY WAY OF SIMULTAN EOUS CLEARANCE CHEQUES DRAWN BY ONE COMPANY FAVOURING OT HER THROUGH A SERIES OF CREDIT/DEBIT ENTRIES TO HOODWIN K THE DEPARTMENT. ALL THE CHEQUES ARE IMMEDIATELY CLEARE D UNDER HIGH VALUE CHEQUE CLEARANCE SCHEME. NONE OF THESE COMPANIES HAVE ANY BUSINESS ACTIVITIES AND ACTIVITI ES ONLY ON PAPER ARE CARRIED OUT BY THEM. ONE ILLUSTRATION WILL FURTHER CLARIFY THIS DUBIOUS MECHANISM OF RAISING B OGUS CAPITAL MOVING CHEQUES THROUGH THE INVESTMENT COMPA NIES. 7.1.III TO UNDERSTAND THE PRINCIPLE OF LAUNDERING SUPPOSE MR. RUIA HAS FLOATED 4 COMPANIES NAMED A B C & D. NOW HE RECEIVES RS. 25 LAKHS FROM SOME BENEFI CIARY. THIS AMOUNT WILL BE DEPOSITED IN SOME KUCCHA BANK A /C AND A CHEQUE FROM THE SAME ACCOUNT IN THE FORM OF PURCHASE CONSIDERATION S HARE INVESTMENT LOAN ETC . WILL BE ISSUED TO A. AGAIN A WILL DRAW A CHEQUE OF RS. 25 LAKHS FAVOURING COMPANY B. B WILL DRAW A CHEQUE OF SIMIL AR AMOUNT FAVOURING C. C WILL ISSUE A CHEQUE FOR EXAC TLY THE SAME AMOUNT IN FAVOUR OF D AND FINALLY D WILL DRAW A CHEQUE TO THE BENEFICIARY FOR RS. 25 LAKHS. ALL TH E CHEQUES WILL BE DRAWN ON THE SAME DAY OF WITHIN A VERY SHOR T SPAN AND WILL BE CLEARED AS HIGH VALUE CHEQUES. THE GRA PHICS APPEARING BELOW PRESENTS A PICTORIAL REFLECTION OF THIS ILLUSTRATION:- D ----- CH. 25 L ---- BENEFICIARY ------ CASH 25 L KATCH BANK A/C. CH. 25 L CH. 25 L CHEQUE 25 L ------- C --------- B ------- A DOCUMENTS BANK A/CS BOOKS OF A/CS AND OTHER DETAILS SEIZED FROM THE RESIDENCE OF MR. P.K. RUIA SECRET OFFICE OF MR. RUIA AT STEPHEN COURT AND OTHER PLACE S FIVE SUFFICIENT EVIDENCE OF SUCH LAUNDERING. MR. A.K. GOENKA HAS ADMITTED U/S. 132(4) THAT PREMISES AT STEPHEN C OURT ITA NO. 2328/DEL/2008 PAGE 5 OF 28 BELONG TO MR. RUIA. SOME OTHER DUMMY DIRECTORS HAV E ALSO ACCEPTED THAT MR. RUIA IS HAVING CONTROL OVER THESE COMPANIES. PR-169 PAGE NO. 1 TO 116:- THESE PAGES CONTAIN DETAILS OF LOAN ADVANCE SHARE APPLICATION INVESTMENT ETC. MADE BY THE VARIOUS GROUP COMPANIES TO OUTSIDE COMPANIES. SINCE 01.04.1997 TO 31.03.2003. THESE DETAILS GIVE INFOR MATION ABOUT THE DATE OF INVESTMENT/ADVANCE NAME OF THE G ROUP COMPANY NAME OF THE PARTY TO WHOM ADVANCE HAS BEEN MADE AMOUNT (DR. CR.) (RATE OF INTEREST AND THE R ATE ON WHICH SHARES ARE ACQUIRED) DR. AND CR. STANDS FRO AMOUNT GIVEN AND AMOUNT RECEIVED RESPECTIVELY. AT VARIOUS PLACES IN THE COLUMN A/CS SA AND LOAN REFUND ARE WRITTEN AND THESE SEEMS TO STAND FOR SHARE APPLICATION AND LOAN RECEIVED BACK ON THE RESPECTIVE DATES. THE ANALYSIS OF THE ENTRIES PRIMA FACIE PROVES LAUNDERING OF HE MONEY TO PROVIDE ACCOMMODATION TO DIFFERENT OUTSIDE PARTIES AFTER CONCLUSION AS TO WH Y SUCH A HUGE AMOUNT OF CASH HAVE BEEN FOUND TO BE DEPOSITED IN DIFFERENT A/CS OF THE GROUP COMPANIES AS WELL AS PROPRIETORY CONCERNS OF MR. ASHOK SHARMA. BENEFICIARY-WISE LIST OF COMPANIES HAS ALSO BEEN PREPARED. YOUR ASSESSEE BEING ONE OF THE BENEFICIA RY COMPANY THE DETAILS OF TRANSACTION WITH PAPER/DUMM Y COMPANIES OF P.K. RUIA ARE BEING FORWARDED TO YOUR FOR FURTHER NECESSARY ACTION AT YOUR END. DATE MM/DD/YY FROM TO AMOUNT 5/3/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 50 00 000 5/4/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 0 00 5/6/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 0 00 5/13/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 15 00 000 5/13/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 000 5/15/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 5 00 0 00 5/15/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 5/16/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 5 00 0 00 5/28/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 40 00 000 5/28/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 5/29/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 50 00 000 ITA NO. 2328/DEL/2008 PAGE 6 OF 28 6/3//2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 50 00 000 6/3/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 0 00 6/6/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 50 00 0 00 6/7/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 0 00 6/7/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 15 00 0 00 6/7/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 60 00 0 00 6/12/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 35 00 000 6/20/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 6/21/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 6/24/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 000 6/25/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 000 7/1/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 0 00 7/2/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 0 00 7/12/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 000 7/15/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 7/19/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 7/19/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 8/3/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 40 00 0 00 8/5/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 5 00 00 0 8/3/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 0 00 8/14/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 25 00 000 8/14/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 15 00 000 8/19/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 8/23/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 9/5/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 0 00 10/14/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 10/16/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/16/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/18/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/22/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/22/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/28/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/29/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 10/29/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 10 00 000 11/18/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 11/18/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 20 00 000 12/3/2002 VIVEK M/S. LAKSHYA EXIMS PVT. LTD. 3 62 8 89 TOTAL = 10 53 62 8 89 SD/- ITA NO. 2328/DEL/2008 PAGE 7 OF 28 (P.P. SARKAR) DCIT CC IV KOLKATA 6. ON THE BASIS OF THE ABOVE INFORMATION THE THEN AO I.E. ACIT CIRCLE 4(1) NEW DELHI AFTER RECORDING FOLLOWING REASONS ON 30.06.2006 REOPENED THE ASSESSMENT U/S. 147/148 OF THE ACT:- THE ASSESSEE COMPANY FILED RETURN OF INCOME FOR ASSESSMENT YEAR 2003-04 ON 28.09.2003 ON TOTAL INCO ME OF RS. 18 19 479/-. THE ASSESSEE COMPANY HAS SHOWN IN COME FROM TRADING AND INVESTMENT IN SHARES AND SECURITIE S. DURING THE COURSE OF INVESTIGATION AND SEARCH AND SEIZURE OPERATIONS IN THE CASE OF SHRI P.K RUIA AND HIS GROUP COMPANIES BY THE DIRECTORATE OF INCOME TAX (INVESTIGATION) KOLKATA IT WAS GATHERED THAT A LA RGE NUMBER OF COMPANIES WERE FLOATED AND BOGUS ENTRIES WERE GIVEN TO A NUMBER OF BENEFICIARIES WHILE CHARGING COMMISSION. IN TURN THE BENEFICIARIES PAID CASH T O OBTAIN THE BOGUS ENTRIES OF LOANS. IT HAS BEEN INFORMED BY THE DCIT CENTRAL CIRCLE VI KOLKATA VIDE HIS LETTER F.NO. CC-VI/20 05- 06/KOL/354 DATED 13.099.2005 THAT ONE SUCH BENEFICI ARY IS THE ASSESSEE COMPANY M/S. LAKSHYA EXIMS PRIVATE LIM ITED IN ASSESSMENT YEAR 2003-04. THE DETAILS OF TRANSAC TIONS ARE GIVEN IN THIS LETTER AND ARE REPRODUCED AS UNDER:- .. . (ENTRIES AS MENTIONED BY DCIT CC-VI KOLKATTA) (ALREADY PRODUCED IN PARA 5 OF THIS ORDER ) IN VIEW OF THE ABOVE FACTS I HAVE REASON TO BELIEVE THAT THE INCOME OF THE ASSESSEE COMPANY WHI CH HAS BEEN SHOWN AS BOGUS LOANS/SHARE CAPITAL HAS ESCAPED ASSESSMENT TO THE ABOVE EXTENT. ACCORDINGLY PROCEEDINGS ARE INITIATED UNDER SECTION 147 OF INCOME TAX ACT 1961. NOTICE IS ISS UED UNDER SECTION 148 OF INCOME TAX ACT 1961. SD/- (VINOD JOHRI) ASST. COMMISSIONER OF I. TAX CIRCLE 4(1) NEW DELHI. ITA NO. 2328/DEL/2008 PAGE 8 OF 28 7. THEREAFTER THE AO ISSUED NOTICE U/S. 148 DATED 30.06.2006 IN RESPONSE TO WHICH THE ASSESSEE VIDE LETTER DATED 17.07.2006 SOUGHT ADJOURNMENT AND ULTIMATELY ON 08.08.2006 THE ASSESSEES AR APPEARE D BEFORE THE AO AND SOUGHT COPY OF REASONS RECORDED BY THE AO FOR REOPE NING THE CASE U/S. 147 OF THE ACT. THE REASONS WERE THEN SUPPLIED TO THE ASS ESSEE ON THE SAME DAY I.E. 08.08.2006. THEREAFTER THE ASSESSEE VIDE LETTER D ATED 19.07.2006 FILED ITS OBJECTIONS AGAINST THE REOPENING THE ASSESSMENT. T HE ASSESSEE THEN VIDE ITS REPLY DATED 19.08.2006 AND 19.09.2006 SUBMITTED BEF ORE THE AO THAT THE RETURN ALREADY FILED BY IT MAY BE TREATED AS A RETU RN FILED IN RESPONSE TO NOTICE ISSUED U/S. 148 OF THE ACT. IN THE MEANTIME JURISD ICTION OVER THIS CASE WAS TRANSFERRED FROM ACIT CIRCLE 4(1) NEW DELHI TO THE PRESENT AO I.E. ITO WARD 4(3) NEW DELHI. 8. THE AO THEN ISSUED A LETTER DATED 06.10.2006 WIT H REGARD TO THE OBJECTIONS RAISED BY THE ASSESSEE AGAINST THE REOPE NING THE ASSESSMENT VIDE ASSESSEES LETTER DATED 19.07.2006 FIXING THE CASE ON 19.10.2006 REQUESTING THE ASSESSEE TO FURNISH WRITTEN SUBMISSIONS ALONGWI TH EVIDENCES IN SUPPORT OF ITS CONTENTION. HOWEVER NOBODY APPEARED ON BEHALF OF THE ASSESSEE NOR ANY WRITTEN SUBMISSIONS IN RESPECT OF OBJECTIONS AGAINS T THE REOPENING OF THE CASE WERE FILED. THE AO THEREFORE DISPOSED OFF THE AS SESSEES OBJECTIONS VIDE HIS ORDER DATED 29.11.2007 WHEREBY HE REJECTED THE OBJ ECTIONS RAISED BY THE ASSESSEE. ITA NO. 2328/DEL/2008 PAGE 9 OF 28 9. THE AO THEN PROCEEDED TO COMPLETE THE ASSESSMENT AFTER ISSUING NOTICES U/S. 142(1) AND 143(2) OF THE ACT ISSUED FR OM TIME TO TIME AND THEN ULTIMATELY COMPLETED THE ASSESSMENT ON 06.12.2007 M AKING THE ADDITION OF RS. 10 52 62 889/- AND RS. 10 52 629/- ON ACCOUNT OF UNEXPLAINED SALE OF COTTON KNITTED FABRICS AND COMMISSION PAID FOR AVAI LING ACCOMMODATION ENTRIES RESPECTIVELY. 10. BEING AGGRIEVED THE ASSESSEE PREFERRED AN APPE AL BEFORE THE CIT(A) TAKING A GROUND AMONGST OTHERS THAT NOTICE U/S. 1 47 OF THE ACT WAS INVALID AND BAD IN LAW. 11. THE CIT(A) FRAMED THE ISSUE AS TO WHETHER THE P ROCEEDINGS U/S. 147 OF THE ACT WERE WITHOUT JURISDICTION IN AS MUCH AS WHE THER THERE WAS ANY MATERIAL ON RECORD ON THE BASIS OF THE REASONS RECO RDED TO HOLD THAT THE INCOME OF THE ASSESSEE COMPANY HAS ESCAPED ASSESSMENT. TH E CIT(A) ALSO FRAMED ANOTHER ISSUE WHETHER ADDITION MADE OF RS. 10 52 62 889/-REPRESENTING THE REALIZATION FROM SALE OF COTTON KNITTED FABRIC TO M /S. VIVEK LEAFIN PVT. LTD. COULD BE HELD TO BE THE SUM RECEIVED IN LIEU OF ACC OMMODATION ENTRIES AND THUS TAXABLE U/S. 68 OF THE ACT AND AS TO WHETHER THE ASSESSEE COMPANY HAS PAID ANY COMMISSION OF RS. 10 52 629/- FOR OBTAININ G SUCH ACCOMMODATION ENTRIES. 12. THE CIT(A) THEN DISCUSSED THE FACTS IN RESPECT OF TRANSACTION OF PURCHASE AND SALE OF COTTON KNITTED FABRICS BY THE COMPANY AND AFTER ITA NO. 2328/DEL/2008 PAGE 10 OF 28 CONSIDERING THE ASSESSEES SUBMISSIONS AND AOS ORD ER AND THE RELEVANT FACTS CAME TO A CONCLUSION THAT NO ADDITION OF RS. 10 52 62 889/- AND RS. 10 52 629/- AS MADE BY THE AO IS NOT AT ALL CALLED FOR AND THEREFORE THE CIT(A) DELETED THE ADDITION. THE CIT(A) FURTHER ME NTIONED THAT IN THE LIGHT OF HIS FINDING ON THE BASIS OF WHICH THE ADDITION M ADE BY THE AO WAS DELETED BY HIM HE DID NOT DEEM IT NECESSARY OR EXPEDIENT T O CONSIDER AND DECIDE THE GROUNDS RAISED BY THE ASSESSEE REGARDING ASSUMPTION S OF JURISDICTION U/S. 147 OF THE ACT. 13. FROM THE ORDER OF THE LD. CIT(A) IT IS CLEAR T HAT THE ADDITION MADE BY THE AO IN THE REASSESSMENT HAS BEEN DELETED BY THE CIT(A) ON ITS MERIT AND SINCE THE ADDITION WAS DELETED HE DID NOT FIND IT NECESSARY OR EXPEDIENT TO CONSIDER AND DECIDE THE GROUND TAKEN BY THE ASSESSE E REGARDING ASSUMPTIONS OF JURISDICTION U/S. 147 OF THE ACT. HOWEVER IN TH IS APPEAL THE ASSESSEE HAS RAISED THIS GROUND FOR OUR CONSIDERATION. ALL THE FACTS RELATING TO THE GROUND REGARDING ASSUMPTIONS OF JURISDICTION U/S. 147 OF T HE ACT BY THE AO ARE ON RECORD AND SINCE THE CIT(A) HAS NOT DECIDED THIS IS SUE IT IS PRESUMED THAT IT HAS GONE AGAINST THE ASSESSEE. SINCE THIS GROUND G OES TO THE ROOT OF THE MATTER REGARDING VERY ASSUMPTION OF JURISDICTION U/S. 147 OF THE ACT BY THE AO AND ALL THE FACTS RELATING TO THIS ARE AVAILABLE ON REC ORD WE FIND IT FIT TO CONSIDER AND DECIDE THIS ISSUE AFTER HEARING BOTH THE PARTIE S. ITA NO. 2328/DEL/2008 PAGE 11 OF 28 14. THE LD. SR. COUNSEL FOR THE ASSESSEE SHRI C.S. AGGARWAL ASSISTED BY SHRI GAUTAM JAIN HAS CONTENDED THAT FROM THE PERUS AL OF THE REASONS RECORDED FOR INITIATING PROCEEDINGS U/S. 147 OF THE ACT IT IS MORE THAN EVIDENT THAT REASONS RECORDED ARE NOT ONLY VAGUE UNSPECIFIED B UT ALSO MISCONCEIVED AND ARE BASED ON NO MATERIAL. HE FURTHER POINTED OUT T HAT THE AO AS IS APPARENT FROM THE REASONS RECORDED HAD INITIATED PROCEEDING S ON ASSUMPTIONS THAT THE ASSESSEE HAD RAISED LOANS/SHARE CAPITAL BY AVAILING ACCOMMODATION ENTRIES THOUGH IN FACT THE ASSESSEE COMPANY HAD NEITHER R AISED ANY LOANS NOR ANY SHARE CAPITAL IN THE YEAR UNDER CONSIDERATION. HE FURTHER SUBMITTED THAT THE PROCEEDINGS U/S. 147 OF THE ACT HAS BEEN INITIATED BY THE AO ON NON EXISTENT GROUND AND THUS THE PROCEEDINGS INITIATED U/S. 1 47 OF THE ACT ARE INVALID BEING WITHOUT JURISDICTION. IN SUPPORT OF HIS CONT ENTION THE LD. COUNSEL FOR THE ASSESSEE HAS RELIED UPON THE FOLLOWING DECISIONS:- (I) UNITED ELECTRONICALS VS. CIT 258 ITR 317 (DEL.) (II) CIT VS. VED & CO. 302 ITR 328 (DEL.) (III) CIT VS. RAINEE SINGH DECIDED ON 20 TH AUGUST 2009 IN ITA NO. 566/2009 BY HONBLE DELHI HIGH COURT. (IV) ITO VS. LAKHMANI MEWAL DAS 103 ITR 437 (V) PARSHURAM POTTERY WORKS LTD. VS. ITO 106 ITR 1 ITA NO. 2328/DEL/2008 PAGE 12 OF 28 (VI) CIT VS. (1) ATUL JAIN AND (2) SMT. VINITA JAI N (DEL.) 299 ITR 383 15. THE LD. DR ON THE OTHER HAND SUBMITTED THAT I N THE PRESENT CASE NO REGULAR ASSESSMENT U/S. 143(3) WAS MADE BEFORE ISSU ING NOTICE U/S. 148 OF THE ACT. THE RETURN OF INCOME FILED BY THE ASSESSEE WA S MERELY PROCESSED U/S. 143(1) AND THUS THERE BEING NO ASSESSMENT U/S. 14 3(3) THE AO HAD EVERY JURISDICTION TO INITIATE PROCEEDINGS U/S. 147 OF TH E ACT ON THE BASIS OF INFORMATION COMING TO HIS KNOWLEDGE THAT THE INCOME OF THE ASSESSEE HAD ESCAPED ASSESSMENT. HE FURTHER SUBMITTED THAT ON T HE BASIS OF THE INFORMATION RECEIVED FROM INVESTIGATION WING THE AO HAD SUFFIC IENT REASON TO ENTERTAIN A BELIEF THAT INCOME OF THE ASSESSEE HAD ESCAPED ASSE SSMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT. HE FURTHER SUBMITTED TH AT AT THE TIME WHEN NOTICE U/S. 148 WAS ISSUED THE AO IS REQUIRED TO ENTERTAI N A PRIMA FACIE BELIEF BASED ON SOME MATERIAL THAT INCOME HAD ESCAPED ASSESSMENT AND THE SUFFICIENCY AND CORRECTNESS OF THE MATERIAL IS NOT A THING TO BE CO NSIDERED AT THAT STAGE. HE THEREFORE SUBMITTED THAT IN THE LIGHT OF THE REASO NS RECORDED BY THE AO FOR ISSUING THE NOTICE U/S. 148 OF THE ACT IT IS CLEAR THAT THE NECESSARY CONDITION FOR INITIATING PROCEEDINGS U/S. 147 OF THE ACT HAS BEEN SATISFIED IN AS MUCH AS THE AO HAD RELEVANT MATERIAL AVAILABLE WITH HIM TO ENTERTAIN A REASONABLE BELIEF THAT INCOME HAD ESCAPED ASSESSMENT. THE LD. DR PLACED RELIANCE UPON THE FOLLOWING DECISIONS:- ITA NO. 2328/DEL/2008 PAGE 13 OF 28 (I) RAYMOND WOOLLEN MILLS VS. ITO (1999) 236 ITR 34 (SC) (II) ACIT VS. RAJESH JHAVERI STOCK BROKERS PVT. LTD . (2007) 291 ITR 500 (SC). (III) CIT VS. HIGHGAIN FINVEST PVT. LTD. (2008) 304 ITR 325 (DEL.) 16. RIVAL CONTENTIONS OF BOTH THE PARTIES HAVE BEEN CONSIDERED AND ORDERS OF THE AUTHORITIES BELOW HAVE BEEN GONE THROUGH. WE H AVE ALSO DELIBERATED UPON THE POSITION OF LAW CONTAINED IN THAT BEHALF AS WEL L THE DECISIONS CITED AT THE BAR. 17. SECTION 147 AUTHORIZES AND PERMITS THE ASSESSIN G OFFICER TO ASSESS OR REASSESS INCOME CHARGEABLE TO TAX IF HE HAS REASON TO BELIEVE THAT INCOME FOR ASSESSMENT YEAR HAS ESCAPED ASSESSMENT. IT IS ALSO WELL SETTLED THAT WORDS REASON TO BELIEVE USED IN SECTION 147 OF THE ACT ARE STRONGER THAN THE WORDS IS SATISFIED. THE BELIEF ENTERTAINED BY THE AO F OR THE PURPOSE OF INITIATING PROCEEDINGS U/S. 147 OF THE ACT MUST NOT BE ARBITRA RY OR IRRATIONAL. IT MUST BE REASONABLE. IN OTHER WORDS IT MUST BE BASED ON RE ASONS WHICH ARE RELEVANT AND MATERIAL AS HELD BY THE HONBLE SUPREME COURT I N THE CASE OF GANGA SARAN AND SONS PVT. LTD. VS. ITO (1981) 130 ITR 1. IT IS ALSO WELL SETTLED THAT THE COURT OF COURSE CANNOT INVESTIGATE INTO THE A DEQUACY OR SUFFICIENCY OF THE REASONS WHICH HAVE WEIGHED WITH THE AO IN COMING TO THE BELIEF BUT THE COURT CAN CERTAINLY EXAMINE WHETHER REASONS ARE REL EVANT AND HAVE A BEARING ON THE MATTERS IN REGARD TO WHICH HE IS REQUIRED TO ENTERTAIN A BELIEF BEFORE HE ITA NO. 2328/DEL/2008 PAGE 14 OF 28 CAN ISSUE NOTICE U/S. 147/148 OF THE ACT. IF THERE IS NO RATIONAL OR INTELLIGIBLE NEXUS OR LINK BETWEEN THE REASON TO BELIEVE SO THA T ON SUCH REASONS NO ONE PROPERLY INSTRUCTED ON FACT AND LAW COULD REASONABL Y ENTERTAIN THE BELIEF THE CONCLUSION WOULD BE INESCAPABLE THAT THE AO COULD N OT HAVE REASON TO BELIEVE THAT ANY PART OF THE ASSESSEES INCOME HAD ESCAPED ASSESSMENT AND THE NOTICE ISSUED BY HIM WOULD BE LIABLE TO BE STRUCK DOWN AS INVALID. 18. SIMILARLY IN THE CASE OF ITO & OTHERS VS. LAKH MANI MEWAL DAS (1976) 103 ITR 437 (SC) THE HONBLE APEX COURT OF THE LAN D HAS HELD THAT THE REASONS FOR THE FORMATION OF THE BELIEF CONTEMPLATE D BY THE SECTION 147 OF THE ACT FOR REOPENING OF THE ASSESSMENT MUST HAVE RATIO NAL CONNECTIONS OR RELEVANT BEARING ON THE FORMATION OF BELIEF. RATIO NAL CONNECTION POSTULATES THAT THERE MUST BE DIRECT NEXUS OR LIVE LINK BETWEE N THE MATERIAL COMING TO THE NOTICE OF THE AO AND THE FORMATION OF HIS BELIEF TH AT THERE HAS BEEN ESCAPEMENT OF THE INCOME OF THE ASSESSEE IN THE PAR TICULAR YEAR. IT WAS FURTHER HELD THEREIN THAT IT IS NOT DOUBT TRUE THAT COURT C ANNOT GO INTO THE SUFFICIENCY OR ADEQUACY OF THE MATERIAL AND SUBSTITUTES ITS OWN OPINION FOR THAT OF THE AO ON THE POINT AS TO WHETHER ACTION SHOULD BE INITIAT ED FOR REOPENING THE ASSESSMENT. AT THE SAME TIME IT IS TO BE BORNE 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 B ELIEF RELATING TO THE ESCAPEMENT OF THE INCOME OF THE ASSESSEE FROM ASSES SMENT. ACTION U/S. 147 OF ITA NO. 2328/DEL/2008 PAGE 15 OF 28 THE ACT CAN NOT THEREFORE BE TAKEN FOR REOPENING THE ASSESSMENT IF THE INFORMATION IS WHOLLY VAGUE INDEFINITE FAR-FETCHE D OR REMOTE. THE REASON FOR FORMATION OF THE BELIEF MUST BE HELD IN GOOD FAITH AND SHOULD NOT BE MERE PRETENCE. THE EXISTENT OF THE BELIEF CAN BE CHALLE NGED BY THE ASSESSEE BUT NOT THE SUFFICIENCY OF THE REASONS FOR THE BELIEF. THU S THE EXPRESSION REASON TO BELIEVE DOES NOT MEAN PURELY SUBJECTIVE SATISFACTI ON ON THE PART OF THE AO. IT IS OPEN TO COURT TO EXAMINE WHETHER THE REASONS FOR THE FORMATION OF THE BELIEF HAVE A RATIONAL CONNECTION WITH OR 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 AO IN STARTI NG THE PROCEEDINGS U/S. 147 OF THE ACT IN RESPECT OF INCOME ESCAPING ASSESSMENT IS OPEN TO CHALLENGE IN COURT OF LAW. 19. SIMILARLY IN THE CASE OF RAYMOND WOOLLEN MILLS VS. ITO (1999) 236 ITR 34 (SC) THE HONBLE SUPRME COURT HAS HELD THAT THE COURT CAN ONLY CONSIDER WHETHER THERE WAS A PRIMA FACIE CAUSE FOR REOPENING THE ASSESSMENT AND SUFFICIENCY OF MATERIAL CANNOT BE CONSIDERED AT THE STAGE OF ISSUING THE NOTICE U/S. 148 OF THE ACT. IN DETERMINING WHETHER COMMENCEMENT AND REASSESSMENT PROCEEDINGS WAS VALID IT HAS ONLY TO BE SEEN WHETHER THERE WAS PRIMA FACIE SOME MATERIAL ON THE BASIS OF WHICH THE DEPARTMENT COULD REOPEN THE CASE AND THE SUFFICIENCY AND CORRECTNESS OF TH E MATERIAL IS NOT A THING TO BE CONSIDERED AT THAT STAGE. ITA NO. 2328/DEL/2008 PAGE 16 OF 28 20. APPLYING THE DECISION IN THE CASE OF RAYMOND WO OLLEN MILLS VS. ITO (SUPRA) AND ANOTHER AND IN THE CASE OF SELECTED D ALURBAND COAL CO. PVT. LTD. (1996) 217 ITR 597 (SC) THE HONBLE SUPREME COURT IN THE CASE OF ACIT VS. RAJESH JHAVERI STOCK BROKERS PVT. LTD. (SUPRA) HAS CONSIDERED THE SCOPE AND MEANING OF THE WORDS REASON TO BELIEVE USED IN SE CTION 147 OF THE ACT AND THUS HELD AND OBSERVED AS UNDER:- SECTION 147 AUTHORIZES AND PERMITS THE ASSESSING OFFICER TO ASSESS OR REASSESS INCOME CHARGEABLE TO TAX IF HE HAS REASON TO BELIEVE THAT INCOME FOR ASSESSMENT YE AR HAS ESCAPED ASSESSMENT. THE WORD REASON IN THE PHRAS E REASON TO BELIEVE WOULD MEAN CAUSE OR JUSTIFICATI ON. IF THE ASSESSING OFFICER HAS CAUSE OR JUSTIFICATION TO KNOW OR SUPPOSE THAT INCOME HAS ESCAPED ASSESSMENT IT CAN BE SAID TO HAVE REASON TO BELIEVE THAT AN INCOME HAD E SCAPED ASSESSMENT. THE EXPRESSION CANNOT BE READ TO MEAN THAT THE ASSESSING OFFICER SHOULD HAVE FINALLY ASCERTAIN ED 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. VS. ITO [1991] 191 ITR 662 FOR INITIATION OF ACTION U/S. 1 47 (A) (AS THE PROVISION STOOD AT THE RELEVANT TIME) FULFILLME NT OF THE TWO REQUISITE CONDITIONS IN THAT REGARD IS ESSENTIA L. AT THAT STAGE THE FINAL OUTCOME OF THE PROCEEDINGS IS NOT RELEVANT. IN OTHER WORDS AT THE INITIATION STAGE WHAT IS RE QUIRED IS REASON TO BELIEVE BUT NOT THE ESTABLISHED FACT O F ESCAPEMENT OF INCOME. AT THE STAGE OF ISSUE OF NOT ICE THE ONLY ISSUE WHETHER THERE WAS RELEVANT MATERIAL ON W HICH A REASONABLE PERSON COULD HAVE FORMED A REQUISITE BEL IEF. WHETHER THE MATERIAL WOULD CONCLUSIVELY PROVE THE ESCAPEMENT IS NOT THE CONCERN AT THAT STAGE. THIS IS SO BECAUSE THE FORMATION OF BELIEF BY THE ASSESSING OF FICER IS WITHIN THE REALM OF SUBJECTIVE SATISFACTION (SEE IT O VS. SELECTED DALURBAND COAL CO. P. LTD. [1996] 217 ITR 597 ITA NO. 2328/DEL/2008 PAGE 17 OF 28 (SC); RAYMOND WOOLLEN MILLS LTD. VS. ITO [1999] 236 ITR 34 (SC). 21. IN THE CASE OF CIT VS. (1) ATUL JAIN AND (2) S MT. VINITA JAIN (SUPRA) THE HONBLE DELHI HIGH COURT HAS REITERATED THAT THERE MUST BE REASON TO BELIEVE WARRANTING THE ISSUANCE OF A NOTICE OF REASSESSMENT BY THE AO. IF THERE ARE NO REASONS THEN THE ENTIRE FOUNDATION FOR INITIATING PROCEEDINGS IS BAD AND THE NOTICE INITIATING PROCEEDINGS MUST BE QUASHED. MER E SATISFACTION OF THE AO FOR ISSUANCE OF A NOTICE IS NOT ENOUGH THERE MUST BE REASONS ON RECORD WHICH LED HIM TO BELIEVE THAT A NOTICE SHOULD BE ISSUED. AFTER A FOUNDATION BASED ON INFORMATION IS SET-UP THERE MUST STILL BE SOME REA SONS WHICH WARRANT THE HOLDING OF A BELIEF SO AS TO NECESSITATE THE ISSUAN CE OF A NOTICE U/S. 148 OF THE ACT. IN THIS CASE THE HONBLE DELHI HIGH COURT HA S APPLIED THE RATIO OF THE DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF C HHUGAMAL RAJPAL VS. CHALIHA (SP) (1971) 79 ITR 663. IN THE CASE OF CHH UGAMAL RAJPAL VS. CHALIHA (SUPRA) THE REASSESSMENT PROCEEDINGS WERE STRUCK D OWN BY THE HONBLE SUPREME COURT ON THE GROUND THAT IN THE REASONS REC ORDED BY HIM THE AO HAD VAGUELY REFERRED TO CERTAIN COMMUNICATIONS THAT HE HAD RECEIVED; HE DID NOT MENTION THE FACTS CONTAINED IN THOSE COMMUNICATIONS EXCEPT THAT FROM THOSE COMMUNICATIONS: IT APPEARS THAT THESE PERSONS (ALL EGED CREDITORS) ARE NAME LENDERS AND THE TRANSACTIONS ARE BOGUS; HE DID NOT COME TO ANY PRIMA FACIE CONCLUSION THAT THE REFERRED TRANSACTIONS ARE NOT G ENUINE; HE APPEARED TO HAVE A VAGUE FEELING THAT THE REFERRED TRANSACTIONS MAY BE BOGUS TRANSACTIONS AND ITA NO. 2328/DEL/2008 PAGE 18 OF 28 FINALLY HIS CONCLUSIONS WAS TO THE EFFECT THAT A P ROPER INVESTIGATION REGARDING THE LOANS IS NECESSARY. 22. IN THE CASE OF CIT VS. (I) ATUL JAIN AND (II) SMT. SMITA JAIN (SUPRA) THE HONBLE DELHI HIGH COURT HAS ALSO MADE A REFERENCE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GANGA SARAN DA S & SONS VS. ITO (SUPRA) AND ITS OWN DECISION IN THE CASE OF UNITED ELECTRICAL CO. PVT. LTD. VS. CIT (2002) 258 ITR 317 AND IN THE CASE OF BAWA ABHA I SINGH VS. DEPUTY CIT (2002) 253 ITR 53 (DEL.) WHEREIN IT WAS OBSERVED T HAT REASON TO BELIEVE POSTULATES THE FOUNDATION BASED ON INFORMATION AND A BELIEF BASED ON REASONS. 23. THE EXPRESSION INFORMATION MUST BE SOMETHING MORE THAN A MERE RUMOUR OR GOSSIP OR A HUNCH AS SO OBSERVED BY THE D IVISION BENCH OF DELHI HIGH COURT IN THE CASE OF L. R. GUPTA VS. UNION OF INDIA (1992) 194 ITR 32. OF COURSE THIS WAS IN THE CONTEXT OF SECTION 132 O F THE ACT BUT AS HELD IN UNITED ELECTRICAL CO. LTD. (SUPRA) THE LOGIC IS EQ UALLY APPLICABLE TO A CASE U/S. 147 OF THE ACT. 24. FROM THE AFORESAID DECISIONS WE MAY NOTE THE F OLLOWING PROPOSITION TO DECIDE THE QUESTION AS TO WHETHER THE REASONS RECOR DED BY THE AO ARE SUFFICIENT TO INITIATE PROCEEDINGS U/S. 147 OF THE ACT:- (I) FORMATION OF THE REQUIRED OPINION AND THE BELIE F BY THE AO IS A CONDITION PRECEDENT TO EXERCISE JURISDICTION TO INI TIATE PROCEEDINGS U/S. 147 OF THE ACT. THE FULFILLMENT O F THIS CONDITION ITA NO. 2328/DEL/2008 PAGE 19 OF 28 IS NOT A MERE FORMALITY BUT IT IS MANDATORY. THE FAILURE TO FULFILL THAT CONDITION WOULD VITIATE THE ENTIRE PROCEEDINGS . (II) THE REASONS FOR THE FORMATION OF THE REQUIRED BELIEF MUST HAVE RATIONAL CONNECTION WITH OR RELEVANT BEARING ON THE FORMATION OF BELIEF. THE RATIONAL CONNECTION POSTULATES THAT TH ERE MUST BE DIRECT NEXUS OR LIVE LINK BETWEEN THE MATERIAL COMI NG TO THE NOTICE OF THE AO AND THE FORMATION OF THE BELIEF TH AT THERE HAS BEEN ESCAPEMENT OF INCOME OF THE ASSESSEE FROM THE ASSESSMENT IN THE PARTICULAR YEAR. (III) IT IS NOT ANY AND EVERY MATERIAL HOWSOEVER VAGUE AND INDEFINITE OR DISTANT REMOTE OR FAR-FETCHED WHICH WOULD WARR ANT THE FORMATION OF THE BELIEF RELATING TO THE ESCAPEMENT OF INCOME OF THE ASSESSMENT. (IV) IF THERE IS NO RATIONAL AND INTELLIGIBLE NEXUS BETWEEN THE REASONS AND THE BELIEF SO THAT ON SUCH REASONS NO ONE CA N PROPERLY INSTRUCTED ON FACTS AND LAW COULD REASONABLY ENTERT AIN A BELIEF THE CONCLUSION WOULD BE INESCAPABLE THAT THE AO COU LD NOT HAVE REASON TO BELIEVE. IN SUCH A CASE THE NOTICE ISSU ED BY HIM WOULD BE LIABLE TO BE STRUCK DOWN AS INVALID. 25. IN OTHER WORDS IT IS WELL SETTLED THAT REASON TO BELIEVE U/S. 147 MUST BE HELD IN GOOD FAITH AND SHOULD HAVE RATIONAL CONN ECTION AND RELEVANT BEARING ITA NO. 2328/DEL/2008 PAGE 20 OF 28 ON THE FORMATION OF THE BELIEF AND IT SHOULD NOT BE EXTRANEOUS OR IRRELEVANT. HOWEVER IT IS ALSO EQUALLY TRUE THAT THE SUFFICIEN CY OF THE MATERIAL COULD NOT BE GONE INTO BUT RELEVANCY CERTAINLY BE GONE INTO. 26. IN THE PRESENT CASE THE CONTENTION OF THE LD. SR. COUNSEL FOR THE ASSESSEE IS THAT THERE EXIT NO DIRECT NEXUS OR LIVE LINK BET WEEN THE MATERIAL COMING TO THE NOTICE OF THE AO AND THE FORMATION OF HIS BELIE F THAT THERE HAS BEEN ESCAPEMENT OF INCOME OF THE ASSESSEE FROM ASSESSMEN T IN THE YEAR UNDER CONSIDERATION. THE LD. COUNSEL FOR THE ASSESSEE HA S SUBMITTED THAT THERE IS NO RATIONAL OR INTELLIGIBLE NEXUS BETWEEN THE REASONS AND THE BELIEFS ENTERTAINED BY THE AO THAT INCOME OF THE ASSESSEE IN THE NATURE OF BOGUS LOANS/SHARE CAPITAL HAS ESCAPED ASSESSMENT. HE FURTHER CONTEND ED THAT THE MATERIAL RELIED UPON BY THE AO ARE EXTRANEOUS OR IRRELEVANT FOR ENT ERTAINING A BELIEF THAT INCOME HAS ESCAPED ASSESSMENT IN AS MUCH AS NO LOAN OR SHARE CAPITAL HAS EVER BEEN INTRODUCED BY THE ASSESSEE IN THE BOOKS OF ACC OUNTS OF THE YEAR UNDER CONSIDERATION AND THAT FACT OR POSITION WOULD BE C LEAR FROM THE ASSESSMENT ORDER ITSELF WHERE THE AO HAS MADE THE ALLEGED ADDI TION ON ACCOUNT OF SALE RECEIPTS OF COTTON KNITTED FABRIC SOLD TO M/S. VIVE K LEAFIN PVT. LTD AND NO ADDITION ON ACCOUNT OF ANY BOGUS LOAN OR SHARE CAPI TAL HAS BEEN MADE. 27. ON THE OTHER HAND THE LD. DR SUBMITTED THAT TH E REASONS RECORDED BY THE AO ARE SPECIFICALLY RELATED TO TRANSACTION BETW EEN THE ASSESSEE AND M/S. VIVEK LEAFIN PVT. LTD. SUGGESTING THAT A BOGUS ENT RY OR TRANSACTION HAS BEEN ITA NO. 2328/DEL/2008 PAGE 21 OF 28 GENERATED BY WAY OF AVAILING ACCOMMODATION ENTRIES AND THEREFORE ON THE FACTS OF THE PRESENT CASE IT IS ESTABLISHED THAT T HERE WAS A LIVE LINK OR A DIRECT NEXUS BETWEEN THE MATERIAL WHICH SUGGESTED ESCAPEME NT OF INCOME AND THE INFORMATION ON THE BASIS OF WHICH A BELIEF COULD BE ENTERTAINED THAT INCOME HAS ESCAPED ASSESSMENT. HE FURTHER CONTENDED THAT AT THE STAGE OF ISSUING NOTICE U/S. 148 OF THE ACT IT IS NOT NECESSARY TO ESTABLISH CONCLUSIVELY THAT INCOME HAD ACTUALLY BEEN ESCAPED ASSESSMENT AND AT THAT STAGE SUFFICIENCY OR THE CORRECTNESS OF THE MATERIAL IS NOT A THING TO B E CONSIDERED. 28. WE HAVE CAREFULLY PERUSED THE REASONS RECORDED BY THE AO FOR ENTERTAINING A BELIEF THAT INCOME HAD ESCAPED ASSES SMENT WITHIN THE MEANING OF SECTION 147 OF THE ACT. THE REASONS SO RECORDED BY THE AO HAS ALREADY BEEN REPRODUCED IN PARA 5 ABOVE OF THIS ORDER. ON PERUSAL OF THE REASONS RECORDED BY THE AO IT IS CLEAR THAT THE AO PROCEED ED TO INITIATE PROCEEDINGS U/S. 147 OF THE ACT ON THE FOLLOWING ASSUMPTIONS:- (I) THAT DURING THE COURSE OF INVESTIGATION AND THE SEARCH AND SEIZURE OPERATION AGAINST SHRI P.K. RUIA AND HIS GROUP COMP ANIES IT WAS GATHERED THAT A LARGE NUMBER OF COMPANIES WERE FLOA TED AND BOGUS ENTRIES WERE GIVEN TO NUMBER OF BENEFICIARIES BY CHARGING COMMISSION AND IN TURN BENEFICIARIES PAID CASH TO OBTAIN THE BOGUS ENTRIES OF LOANS. ITA NO. 2328/DEL/2008 PAGE 22 OF 28 (II) ONE OF SUCH BENEFICIARIES IS THE PRESENT ASSE SSEE COMPANY AND IN VIEW OF THE TRANSACTIONS BETWEEN THE ASSESSEE CO MPANY AND M/S. VIVEK LEAFIN PVT. LTD. THE ASSESSEE COMPANY H AS BEEN SHOWING BOGUS LOANS/SHARE CAPITAL WHICH RESULTED I N THE ESCAPEMENT OF THE ASSESSEES INCOME FROM ASSESSMENT TO THAT EXTENT. 29. IT IS THUS CLEAR THAT THE AO HAS INITIATED PR OCEEDINGS U/S. 147 OF THE ACT AFTER ENTERTAINING A BELIEF THAT INCOME OF THE ASSESSEE WHICH HAS BEEN SHOWN AS BOGUS LOANS/SHARE CAPITAL HAS ESCAPED ASS ESSMENT TO THE EXTENT OF AMOUNT OF LOANS/SHARE CAPITAL MENTIONED IN THE REAS ONS RECORDED. IN OTHER WORDS THE AO HAS INITIATED THE PROCEEDINGS U/S. 14 7 OF THE ACT ON ASSUMPTIONS THAT THE ASSESSEE HAD RAISED BOGUS LOAN S/SHARE CAPITAL RESULTING INTO ESCAPEMENT OF ASSESSEES INCOME. HOWEVER ON PERUSAL OF THE ASSESSMENT ORDER AND THE BASIS ON WHICH THE ADDITION OF RS. 10 52 62 889/- AND RS. 10 52 629/- HAS BEEN MADE IT IS SEEN THAT THE ADDI TION HAS BEEN MADE ON ACCOUNT OF RECEIPTS OF SALE OF FABRICS SOLD BY THE ASSESSEE TO M/S. VIVEK LEAFIN PVT. LTD. FROM THE DETAILS OF THE TRANSACTIONS BET WEEN M/S. VIVEK LEAFIN PVT. LTD. AND THE ASSESSEE IT IS CLEAR THAT THE ASSESSE E COMPANY HAD NEITHER RAISED ANY LOANS NOR ANY SHARE CAPITAL AND NO ADDITION ON ACCOUNT OF ANY BOGUS LOANS/SHARE CAPITAL ALLEGEDLY RAISED BY THE ASSESSE E FROM M/S. VIVEK LEAFIN PVT. LTD. HAS BEEN EVEN MADE IN THE ASSESSMENT ORD ER. IT IS THUS BEYOND ANY ITA NO. 2328/DEL/2008 PAGE 23 OF 28 DOUBT THAT THE NATURE OF THE TRANSACTION REFERRED T O IN THE INFORMATION SUPPLIED BY DCIT CC VI KOLKATA TO DCIT CIRCLE 4(1) NEW DELHI AND REFERRED TO IN THE REASONS RECORDED BY THE AO IN ENTERTAININ G A BELIEF REQUIRED U/S. 147 OF THE ACT HAS NOT BEEN ACTUALLY LOOKED INTO AND VE RIFIED BUT IT IS FOUND TO BE NON-EXISTENT. THE INFORMATION SUPPLIED BY DCIT CC VI KOLKATA THAT ASSESSEE COMPANY HAS OBTAINED BOGUS LOANS/SHARE CAP ITAL FROM M/S. VIVEK LEAFIN PVT. LTD. A DUMMY COMPANY OF SHRI P.K. RUIA IS NOT BASED ON FACTS FOUND DURING THE SEARCH. THUS THE AOS BELIEF THA T THE INCOME OF THE ASSESSEE COMPANY IN THE NATURE OF BOGUS LOANS/SHARE CAPITAL HAS ESCAPED ASSESSMENT TO THAT EXTENT IS NOT BASED ON ANY RELEVANT MATERIA L FOUND DURING THE COURSE OF THE SEARCH CONDUCTED AGAINST SHRI P.K. RUIA AND HIS GROUP COMPANIES. THIS THUS MAKES IT CLEAR THAT THE PROCEEDINGS U/S. 147 HAS BEEN INITIATED BY THE AO ON NON-EXISTENT GROUND OR FACT IN AS MUCH AS THERE IS NO MATERIAL ON RECORD TO ENTERTAIN A BELIEF THAT THE ASSESSEE HAD BOGUS LOAN S/SHARE CAPITAL FROM COMPANIES CONTROLLED BY SHRI P.K. RUIA AND THUS T HERE EXIST NO DIRECT NEXUS OR LIVE LINK BETWEEN THE MATERIAL FOUND DURING THE COURSE OF THE SEARCH RELATING TO THE PRESENT ASSESSEE AND THE BELIEF ENTERTAINED BY THE AO THAT THE ASSESSEE HAD RAISED BOGUS AND CREDITS DURING THE YEAR UNDER CONSIDERATION WHICH RESULTED INTO ESCAPEMENT OF INCOME. WE FIND THAT T HE AO HAS ENTERTAINED A BELIEF MERELY ON THE BASIS OF UNFOUNDED AND NON-EXI STENT INFORMATION SUPPLIED BY DCIT CC- 6 KOLKATA THAT THE ASSESSEE HAD RAIS ED BOGUS LOANS/SHARE ITA NO. 2328/DEL/2008 PAGE 24 OF 28 CAPITAL FROM GROUP OF COMPANIES CONTROLLED BY SHRI RUIA WITHOUT MAKING ANY EFFORT TO SATISFY HIMSELF AS TO WHETHER THE INFORMA TION RECEIVED FROM THE OFFICE OF THE DCIT CC 6 KOLKATA THAT THE ASSESSEE HAD RAISED LOANS/SHARE CAPITAL IS BASED ON SOME RELEVANT MATERIAL OR NOT. WE FIND THAT THE PROCEEDINGS U/S. 147 OF THE ACT HAVE BEEN INITIATED BY THE AO IN A M ECHANICAL MANNER AND ON VAGUE GROUNDS AND WITHOUT APPLICATION OF MIND. WE THEREFORE HOLD THAT THE INITIATION OF PROCEEDINGS MADE BY THE AO U/S. 147 O F THE ACT ARE PURELY BASED ON MERE SUSPICION AND NON-EXISTENT GROUND OR FACT HAVING NO NEXUS OR LIVE LINK BETWEEN THE NATURE OF THE TRANSACTION BETWEEN THE ASSESSEE AND M/S. VIVEK LEAFIN PVT. LTD. AND THE FORMATION OF BELIEF BY THE AO. 30. THERE IS NO QUARREL IN ACCEPTING THE CONTENTION OF THE DR THAT SUFFICIENCY OR CORRECTNESS OF THE MATERIAL IS NOT A THING TO BE CONSIDERED AT THE STAGE OF ISSUING NOTICE U/S. 148 OF THE ACT BUT TH E DEPARTMENT SHOULD SHOW SOME RELEVANT MATERIAL TO FORM A PRIMA FACIE BELIEF ON THE PART OF THE AO THAT THE ASSESSEES INCOME HAS ESCAPED ASSESSMENT FOR TH E REASONS THAT THE ASSESSEE HAS OBTAINED CERTAIN BOGUS LOANS/SHARE CAPITAL. IN THE PRESENT CASE AS ALREADY OBSERVED ABOVE NO MATERIAL OR BASIS WAS AVAILABLE BEFORE THE AO ON THE BASIS WHICH HE COULD PRIMA FACIE REASONABLY ENTERTAIN THE BELIEF SAID THAT INCOME IN THE NATURE OF BOGUS LOANS/SHARE CAPITAL HAD ESCAPED ASSESSMENT. AS DISCUSSED ABOVE THE ALLEGATION REGARDING RAISING A BOGUS LOA NS/SHARE CAPITAL BY THE ASSESSEE IS UNDOUBTEDLY FOUND TO BE INCORRECT AND BASELESS. THEREFORE IT ITA NO. 2328/DEL/2008 PAGE 25 OF 28 CANNOT BE SAID THAT THERE ARE SOME PRIMA FACIE MATE RIAL AVAILABLE ON RECORD ON THE BASIS OF WHICH ANYONE PROPERLY INSTRUCTED ON FA CT AND LAW COULD REASONABLY ENTERTAINED A BELIEF THAT ANY PART OF TH E INCOME OF THE ASSESSEE HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 14 7 OF THE ACT. THEREFORE THE DECISIONS RELIED UPON BY THE LD. DR GIVES NO AS SISTANCE TO THE DEPARTMENT RATHER THEY SUPPORT THE ASSESSEES CASE THAT THE RE ASONS RECORDED BY THE AO ARE IRRELEVANT AND HAVE NO BEARING ON THE MATTERS IN RE GARD TO WHICH THE AO WAS REQUIRED TO ENTERTAIN A BELIEF THAT INCOME HAS ESCA PED ASSESSMENT. WE THEREFORE HOLD THAT THE BELIEF ENTERTAINED BY THE AO THAT THE ASSESSEE HAS RAISED BOGUS LOANS/SHARE CAPITAL AND TO THAT EXTENT THE ASSESSEES INCOME HAS ESCAPED ASSESSMENT IS ARBITRARY OR UNREASONABLE BE ING BASED ON IRRELEVANT AND NON-EXISTENT MATERIAL. WE FURTHER HOLD THAT THERE IS NO RATIONAL OR INTELLIGIBLE NEXUS BETWEEN REASONS AND THE BELIEF SO THAT ON SU CH REASONS ANY ONE CAN PROPERLY INSTRUCTED ON FACTS AND LAW COULD REASONAB LY ENTERTAIN A BELIEF THAT THE ASSESSEE HAD RAISED BOGUS LOANS AND SHARE CAPIT AL AND THE ASSESSEES INCOME TO THAT EXTENT HAS ESCAPED ASSESSMENT. 31. IN SUPPORT OF THE VIEW WE HAVE TAKEN ABOVE WE MAY RELY UPON THE DECISION OF HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. RAINEE SINGH (SUPRA) WHERE IT WAS FOUND THAT VERY BASIS FOR INI TIATING PROCEEDINGS U/S. 147 WAS ON WRONG PREMISE AS IT WAS NEITHER FACTUALLY CO RRECT THAT M/S. RATHI ISAPAAT LTD. WAS LOSS MAKING COMPANY AND ON THE OTH ER HAND IT WAS ALSO ITA NO. 2328/DEL/2008 PAGE 26 OF 28 ESTABLISHED THAT PAYMENT WAS RECEIVED BY M/S. RATHI ISPAAT LTD. FOR SERVICES RENDERED BY IT TO THE ASSESSEE WHICH WAS SHOWN AS INCOME IN ITS RETURN AND DULY TAXED BY INCOME TAX DEPARTMENT. IN THAT CASE THE AO PROCEEDED TO INITIATE PROCEEDINGS U/S. 147 OF THE ACT ON THE ASS UMPTION THAT THE ASSESSEE HAS DIVERTED HER INCOME AMOUNTING TO RS. 6.30 CRORES BY WAY OF SHOWING THE BOGUS PAYMENT TO M/S. RATHI ISPAAT LTD. WHICH WAS A LOSS MAKING COMPANY BUT THAT ASSUMPTION OF THE AO WAS FOUND TO BE NON-E XISTENT AND FACTUALLY INCORRECT. SIMILARLY IN THE CASE BEFORE US THE V ERY BASIS FOR INITIATING PROCEEDINGS U/S. 147 AGAINST THE PRESENT ASSESSEE T HAT THE ASSESSEE RAISED BOGUS LOANS/SHARE CAPITAL FROM GROUP COMPANIES CONT ROLLED BY SHRI PAWAN KUMAR RUIA IS FACTUALLY INCORRECT AND BASED ON WRO NG PREMISES AND NON- EXISTENT MATERIAL. THEREFORE AFORESAID DECISION O F HONBLE DELHI HIGH COURT IS SQUARELY APPLIES TO THE PRESENT CASE. SIMILARLY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. (1) ATUL JA IN AND (2) SMT. VINITA JAIN (2008) 299 ITR 383 (DEL.) ALSO SUPPORTS THE ASSESSE ES CASE AS IN THAT CASE THE AO ENTERTAINED A BELIEF THAT INCOME HAD ESCAPED ASS ESSMENT ONLY ON THE BASIS OF INFORMATION THAT THE ASSESSEE HAD TAKEN A BOGUS ENTRY OF CAPITAL GAIN BY PUTTING CASH ALONGWITH SOME PREMIUM FOR TAKING A C HEQUE FOR THAT AMOUNT BUT THAT INFORMATION DID NOT INDICATE THE SOURCE OF THE CAPITAL GAINS AND THERE WAS NO INFORMATION WHICH SHARES HAS BEEN TRANSFERRE D AND WITH WHOM THE TRANSACTION HAS TAKEN PLACE AND FURTHER THE AO D ID NOT VERIFY THE CORRECTNESS ITA NO. 2328/DEL/2008 PAGE 27 OF 28 OF THE INFORMATION RECEIVED BY HIM BUT MERELY ACCEP TED THE TRUTH OF THE VAGUE INFORMATION IN MECHANICAL MANNER. IN THOSE CIRCUMST ANCES THE ACTION OF THE AO IN INITIATING PROCEEDINGS U/S. 147 WAS FOUND TO BE NOT SUSTAINABLE. SIMILARLY IN THE PRESENT CASE THERE IS NO INFORMA TION ON RECORD THAT THE ASSESSEE HAS ACTUALLY TAKEN LOANS/SHARE CAPITAL FRO M THE ALLEGED COMPANIES. BUT ON CONTRARY THIS BASIS HAS BEEN FOUND TO BE IN CORRECT IN AS MUCH AS THE AMOUNT RECEIVED BY THE COMPANY M/S. VIVEK LEAFIN PV T. LTD. IS ON ACCOUNT OF RECEIPT TOWARDS SALE OF COTTON KNITTED FABRICS SOLD BY THE ASSESSEE TO M/S. VIVEK LEAFIN PVT. LTD. 32. FOR THE REASONS AFORESAID WE THEREFORE HOLD THAT THE ACTION OF THE AO IN ASSUMING THE POWER CONFERRED U/S. 147 OF THE ACT IS WITHOUT JURISDICTION AND IS THUS LIABLE TO BE CANCELLED. RESULTANTLY THE ASSESSMENT ORDER MADE BY THE AO AFTER INVOKING HIS JURISDICTION U/S. 147 OF THE ACT IS CANCELLED BEING VOID BAD IN LAW AND WITHOUT JURISDICTION. 33. IN THE LIGHT OF THE DECISION WE HAVE TAKEN ABOV E WITH REGARD TO THE VALIDITY OF ASSESSMENT MADE U/S. 147 OF THE ACT THA T THE ASSESSMENT MADE BY THE AO U/S. 147 BEING INVALID AND BAD IN LAW IS LIA BLE TO BE CANCELLED AND STRUCK DOWN WE DO NOT FIND IT NECESSARY TO ENTER I NTO THE MERIT OF THE ADDITION DELETED BY THE LD. CIT(A) AND TO DECIDE THE APPEAL FILED BY THE REVENUE AS THE SAME BAS BECOME REDUNDANT AT THIS STAGE. THIS UNDER STANDING WAS GIVEN BY BOTH THE PARTIES AT THE TIMES OF HEARING. ITA NO. 2328/DEL/2008 PAGE 28 OF 28 34. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED AS INFRUCTUOUS AND THE CROSS OBJECTION FILED BY THE ASSESSEE IS AL LOWED. 35. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 16 TH APRIL 2010. SD/- (SHAMIM YAHYA) ACCOUNTANT MEMBER SD/- (C.L. SETHI) JUDICIAL MEMBER DATED: 16 TH APRIL 2010 *NITASHA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT NEW DELHI. BY ORDER DEPUTY REGISTRAR