Rajiv Agarwal Through: Mr S. Krishnan, Advocate v. Assistant Commissioner Of Income

Signed By:RAM DATTSigning Date:01.10.2024 16:36Certify that the digital and physical file havebeen compared and the digital data is as perthe physical file and no page is missing. *IN THE HIGH COURT OF DELHI AT NEW DELHI11.+W.P.(C) 9659/2015 i& CM No.23056/2015 RAJIV AGARWAL Through: Mr S. Krishnan, Advocate. Petitioner versus 13.^ ASSISTANT COMMISSIONER OF INCOME TAX & ANR. Respondents Through: Mr Dileep Shivpuri, Senior StandingCounsel and Mr Sanjay Kumar, Junior StandingCounsel. AND W.P.(C) 9661/2015 & CM No.23059/2015 VIJAY LAXMI AGARWAL Petitioner Through: Mr S. Krishnan, Advocate. versus ASSISTANT COMMISSIONER OF INCOMETAX & ANR. RespondentsThrough: Mr Dileep Shivpuri, Senior StandingCounsel and Mr Sanjay Kumar, Junior StandingCounsel. CORAM:JUSTICE S.MURALIDHARJUSTICE VIBHU BAKHRUORDER%16.03.2016 1. These petitions have been filed by the Assessees, inter alia, impugningseparate notices dated 3D' March, 2015 issued under Section 148 of theIncome Tax Act (hereinafter the Act') for Assessment Year (AY) 2008-09 and further proceedings initiated pursuant thereto. At the request of theAssessees, the reasons for re-opening the assessments was disclosed tothem. The said reasons as provided to the Assessees indicate thatfor re-assessments were initiated on the basis of a proceedings complaintreceived by the Income Tax Authorities. Since the reasons disclosed as wellas the issues involved are similar, these petitions were heard together. 2. Briefly stated the relevant facts are as under: 2.1 Both the Assessees (Rajiv Agarwal - Petitioner in W.P.(C)No.9659/2015 and Vijay Laxmi Agarwal - Petitioner in W.P.(C)No.9661/2015) were at the material time - during the Financial Year 2007-08 - directors of a company, namely, M/s Scan Holdings (P) Ltd (hereafter'SHPL'). The said Assessees filed their return of income for the AY 2008-09 disclosing income from salaries from SHPL as well as income under theheads 'Income from House Property' and 'Income from Other Sources'. 2.2 Apparently, there is some dispute between the company VI/s SHPLand its erstwhile auditor, Naveen Chaudhary, with regard to theremuneration payable to the said auditor. The Court was also informed thata complaint alleging misconduct on the part of Naveen Chaudhary was filedby Rajiv Agarwal before the Institute of Chartered Accountants of India(ICAI). The Board of Discipline of the ICAI, in its order dated 3"^ February,2011 found the said Chartered Accountant guilty of "other misconduct"within the meaning of Clause (2) of Part IV of First Schedule to theChartered Accountants Act, 1949 and his name was removed/suspendedfrom the rolls of ICAI for a period of three months. The appeal against the th said order was rejected by the Appellate Authority by an order dated 24September, 2011. 2.3 It is contended on behalf of the Assessees that in view ofdisputes/animosity, Shri Naveen Chaudhary has made repeated complaintsto various authorities in order to harass the Assessees; and the complaintmade to the Income Tax Authorities is also one such complaint. 2.4 On the basis of a complaint of tax evasion dated 10^^ December, 2014,the Assessing Officer ('AO') initiated the proceedings for re-opening of theassessments for AY 2008-09 and on 31'^ March 2015, issued notices underSection 148 of the Act calling upon the Assessees to file their return ofincome for AY 2008-09. In response to the aforesaid notice, the Assesseesfiled a copy of their respective original return of income for the relevant AYand requested for the reasons for re-opening of their assessment. Into the aforesaid the AO letters dated 27 response request, by separate April2015 provided the reasons as requested by the Assessees. In the case ofRajeev Agarwal, the Assessee/Petitioner in W.P. (C) No.9659/2015 thereasons recorded reads as under: "Income Tax Return Jar the A.Y 2008-09 was filed by theassessee on 29.07.2008 declaring income of Rs. 14,64,950/-. "Income Tax Return Jar the A.Y 2008-09 was filed by theassessee on 29.07.2008 declaring income of Rs. 14,64,950/-. In this case, the information in the form of complaint of taxevasion dated 10.12.2014 pertaining to Sh. Rajiv Agarwal hasbeen received in this office. Kevman Insurance In the said complaint, it is stated that the company (M/s ScanHoldings Pvt Ltd) in the which Shri Rajiv Agarwal is one of the Director of the Company has paid premium for thepolicies of directors amounting to Rs. 20 lakh up to financialyear 2007-08 (i.e. AY 2008-09) and claimed as businessexpenses. Before it is due for maturity and liable for tax, thepolicies were shown as sold in FY 2007-08 for a meageramount of Rs. 4.16 lakhs to its directors. It has been used totooi to avoid tax and transferred the money to its directorswithout payment of tax. The exact amount of each director isstill to be quantified, therefore, it is clear that un quantifiedincome in this case but quantified income of Rs. 20,00,000/-(in the case of both the Directors of the company) has escapedassessment because the assessee has not disclosed fully andtruly all material facts in the return of income and the samecould not be verified/assessed to tax as the case was notselected under scrutiny assessment. Therefore, I have reasonsto believe that the assessee has not offered the income referredabove which needs to be scrutinized and hence income asabove has escaped assessment within the meaning of section147(b) of the I. T. Act, 1961 in the interest of revenue/toprotect the revenue. The case of assessee was not assessed u/s 143(3) of the Actand Since 4 years has lapsed and the case falls under section151 (2) of the I. T. Act, 1961, therefore, the reason are put upbefore Addl. CIT, Range-22, New Delhi for necessaryapproval for issuing notice u/s 148 of the I. T. Act, 1961." 2.5 The reasons recorded in the case of Vijay Laxmi Agarwal,Petitioner/Assessee in W.P.(C) No.9661/2015, but for the figure of herreturned income, is identical to the reasons as recorded in the case of RajivAgarwal. 2.6 The Assessees, by separate letters dated 15^'' May, 2015, filed theirobjections to the reasons recorded for re-opening of the assessments and raised several contentions. It was, inter alia, contended by the Assessees thatthe complaint on the basis of which their assessments were sought to be reopened was malafide and stemmed from the disputes with NaveenChaudhary, the erstwhile auditor of SHPL. Rajeev Agarwal further assertedthat there was no transaction whereby any Insurance Policy was assigned bySHPL to him during the relevant period and, therefore, the fundamentalpremise on the basis of which his assessments were sought to be re-openedwas factually erroneous. Insofar as Vijay Laxmi Agarwal is concerned, shestated that during the Financial Year 2007-08, a Keyman Insurance Policy(Policy No. 122936684) was assigned to her against a consideration ofRs.2,08,000/- (Rupees Two Lakhs and Eight Thousand) and the surrendervalue of the said policy at the material time was Rs.2,07,236/- (Rupees TwoLakhs Seven Thousand Two Hundred and Thirty Six). Therefore, noincome could be said to accrue to her pursuant to the said transactions in theFinancial Year 2007-08. She also provided a copy of the resolution passedby the Board of Directors of SHPL for such assignment and a letter fromLife Insurance Corporation of India confirming the guaranteed surrendervalue of the said policy as on 23'^'^ October 2007. 2.7 The Assessees further contended that a complaint of evasion could notpossibly form tangible material on the basis of which the concludedassessments could be re-opened. They also sought a copy of the complaintdated 10^^ December, 2014 referred to by the AO in the reasons recorded byhim. 2.8 The objections raised by both the Assessees were rejected by the AO 2.7 The Assessees further contended that a complaint of evasion could notpossibly form tangible material on the basis of which the concludedassessments could be re-opened. They also sought a copy of the complaintdated 10^^ December, 2014 referred to by the AO in the reasons recorded byhim. 2.8 The objections raised by both the Assessees were rejected by the AO by separate orders dated September, 2015 which are more or lesssimilarly worded. The AO held that the sufficiency or the correctness of thematerial for re-opening could not be questioned. The request of theAssessees to be provided a copy of the complaint on the basis of which theassessments were sought to be re-opened was also rejected. The AO afterreferring to several decisions, including the Supreme Court and this court,held that since the reports were not scrutinized under Section 143(3), awas The Assessee's contention that there was nodeeper scrutiny required. failure on their part to truly and fully disclose all material facts was rejectedby holding that whether omission was deliberate or inadvertent was notrelevant and that the AO would have jurisdiction to re-open the assessmentsif there was omission or failure on the part of the Assessees. 3. Mr S. Krishnan, learned counsel appearing for theAssessees/Petitioners has contended that the entire exercise of initiating reassessment proceedings is based on a mere suspicion and the AO had nomaterial to form a reason to believe that income of the Assessees hadescaped assessment. He contended that a mere complaint by a person couldnot possibly constitute tangible material on the basis of which the AO couldform a belief that income of the Assessees has escaped assessment. Herelied upon the decision of this Court in CIT v. Atul Jain (2008) 299 ITR383(Delhi) and drew the attention of this court to paragraph 16 and 17which read as under: "16. In United Electrical Co. Pvt. Ltd. v. Commissioner of IncomeTax (2002) 258 ITR 317, this Court considered the entire issueafresh. It was observed that the expression "reason to believe"occurring in Section 147 of the Act is crucial. Reference was made to Bawa Abhai Singh v. Deputy Commissioner of IncomeTax (2002) 253 ITR 86 wherein it was observed that "reason tobelieve" postulates a foundation based on information and a beliefbased on reasons. In so far as "information" is concerned, aDivision Bench of this Court held in L.R. Gupta v. Union ofIndia :[1992] 194 ITR 32 (Delhi) that; "The expression 'information' must be something morethan a mere rumour or a gossip or a hunch." "17. Of course, this was in the context of Section 132 of the Act butas held in United Electrical Co. P. Ltd. [2002] 258 ITR 317 (Delhi)the logical is equally applicable to a case under Section 147 of theAct." 4. Mr Shivpuri, learned Senior Standing counsel appearing for theRevenue the issuance of notices as well as the AO ssupported impugned orders rejecting the objections raised by the Assessees. He referred to thedecision of the Supreme Court in the case of Assistant Commissioner ofIncome Tax v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2007) 291 ITR 500(SC) and contended that at the stage of issuing a notice under Section 148,the AO was not required to apply its mind to determine whether the incomeof the Assessee had escaped assessment but was only required to form aprima facie view. He contended that the question whether any taxableincome arose in the hands of the Assessee which had escaped assessmentwould be finally determined during the re-assessment proceedings initiatedby the AO. 5. We have heard the learned counsel for the parties. 6. It is apparent from the plain reading of the reasons recorded by the 5. We have heard the learned counsel for the parties. 6. It is apparent from the plain reading of the reasons recorded by the AO that the AO has relied solely on a complaint dated 10^ December, 2014received by the AO and assumed that certain Keyman Policies, on which apremium aggregating Rs.20 lakhs had been paid, was sold to the Assesseesfor a sum of Rs.4.16 lakhs and this transaction had resulted in an income ofRs.20 lakhs in the hands of both the Directors. Insofar as arising RajeevAgarwal is concerned, it is not disputed that no policy was assigned and nosuch transaction as recorded by the AO in the reasons to believe that theincome had escaped assessment was entered into by Rajeev Agarwal withSHPL. In the circumstances, the fundamental premise on which theassessment of Rajeev Agarwal was sought to be re-opened is bereft of anyfactual foundation. We note that Rajeev Agarwal had specifically pointedout the said fact in his objections against the reasons recorded by the AO.However, the same was neither considered nor adverted to by the AO in itsorder dated -11^*" September, 2015 disposing of the said objections. 7. Since the foundation on the basis of which re-assessment proceedingshave been initiated in the case of Rajeev Agarwal is absent, the same mustfail on this ground alone. 8. In the case of Vijay Laxmi Agarwal, the Assessee had filed objectionsbefore the AO on 15'*^ May, 2015 and had informed the AO that SHPL hadassigned a Keyman Policy to the said Assessee for a consideration ofRs.2,08,000/- and the surrender value of the said policy as on 23"* October,2007 was Rs.2,07,236/- and thus, there was no question of any incomearising or accruing to the Assessee on account of that transaction. A perusalof the AO's order dated 1 l'''September,2015 rejecting the objections raised by the Assessees indicate that the AO had simply ignored the facts pointedout and simply proceeded on the basis that those were not required to beconsidered at that stage and would be considered during the re-assessmentproceedings. 9. In our view, the proceedings for re-assessment under Section 147commenced by the AO are fundamentally flawed for several reasons. First-of all, it is apparent that the proceedings have been initiated merely on anunsubstantiated complaint. It is now well settled by a nuniber of decisionsthat concluded assessments cannot be re-opened merely on suspicion and theAO must have "reason to believe" that income has escaped assessment andthis is quite different from merely having a reason to suspect. The SupremeCourt in the case of Income Tax Officer, Calcutta & Ors. v. LakhmaniMewal Das (1976) 103 ITR 437 (SC) had explained the same in thefollowing words: "The powers of the Income-tax Officer to reopen assessmentthough wide are not plenary. The words of the statute are"reason to believe" and not "reason to suspect". The reopeningof the assessment after the lapse of many years is a seriousmatter. The Act, no doubt, contemplates the reopening of theassessment if grounds exist for believing that income of theassessee has escaped assessment. The underlymg reason for thatis that instances of concealed income or other income escapingassessment in a large number of cases come to the notice of theincome-tax authorities after the assessment has been completed.The provisions of the Act in this respect depart from the normalrule that there should be, subject to right of appeal and revision,finality about orders made in judicial and quasi- judicialproceedings. It is, therefore, essential that before such action istaken the requirements of the law should be satisfied." 10. In the present case, it is doubtful whether the AO even had any .ground to suspect that income had escaped assessment. Apparently, apartfrom an unsubstantiated complaint there was no material which couldpossibly lead the AO to suspect that income had escaped assessment. This isfrom the fact that the AO was also clueless of the fact that noquite apparent such transaction as alleged had in fact been entered into between SHPL andRajeev Agarwal. In Rajesh Jhaveri Stock Brokers (supra), the SupremeCourt had that the 'reason to believe' would meanexplained expression justification to know or suppose that income had escaped assessment.While, it is correct that it is not necessary for the AO to finally ascertainwhether income had escaped assessment, nonetheless, the AO must havesufficient cause to believe that it has. 11. Secondly, the AO's belief that income of an Assessee has escapedassessment must be based on tangible material. It has been explained in anumber of decisions that there must be a 'close nexus' or 'live link' betweentangible material and the reason to believe that income has escapedassessment. It follows that the material on the basis of which re-assessmentproceedings can be initiated must be credible material which could lead tosuch belief. Clearly, an unsubstantiated complaint cannot be the sole basisfor forming a belief that income of an assessee has escaped assessment.Even in cases where the AO comes across certain unverified information, itis necessary for him to take further steps, make inquiries and gamer furthermaterial and if such material indicates that income of an assessee hasescaped assessment, form a believe that income of the Assessee has escaped assessment. Plainly, in this case, the Assessee had not acquired any materialto form such belief. On the contrary, when it is pointed out to the AO thatSHPL had not assigned any policy to Rajeev Agarwal, the said fact wascompletely overlooked. Similarly, in the case of Vijay Laxmi Agarwal, theAO failed to take into account the fact that the Assessee had paid a sum ofRs.2,08,000/-, which was more than surrender value of the policy, forof the in her favour. This too was assignment policy completely ignored bythe AO. 12. Thirdly, the procedure for providing reasons to believe to an assesseeand thus enabling him to file his objections after he has filed his return - asdirected by the Supreme Court in G. K. N. Driveshafts (India) Ltd. v. ITO(2003) 259 ITR 19 (SC) - is not a purposeless exercise. The procedure asestablished is an essential safeguard provided to an Assessee againstarbitrary initiation of re-assessment proceedings. It is thus, necessary that anAO consider the objections in a meaningful manner. In the present case, theAO has completely ignored the objections filed by the Assessee and hasfailed to apply its mind to any of the facts or material presented by theAssessee, thus rendering the entire exercise meaningless. 13. In our view, Mr Shivpuri's contention that the AO is not required toapply his mind to the facts in relation to the escapement of income at thestage of considering objections is wholly without merit. Whilst, the AO isnot expected to finally decide whether income of an assessee has escapedassessment at the stage of considering the objections he, nonetheless, has toconsider the facts presented in support of the objections in a meaningful manner and at least to consider whether his reason to believe that incomeescaped assessment is justified or is without sufficient basis. Since in thepresent case, the AO has failed to consider the objections filed by theAssessees, the order dated if^ September 2015 passed by the AO rejectingthe objections raised cannot be sustained 14. Accordingly, the writ petitions are allowed. The impugned noticesdated 31'' March, 2015 issued under Section 148 of the Act as well as theorders dated ll''' September 2015 passed by the AO rejecting the objectionsfiled by the respective Assessees, are set aside. 15. No order as to costs. S.MURALIDHAR, J MARCH 16, 2016MK VIBHU BAKHRU, J