Rakesh Gupta v. Commissioner Of Income Tax, Panchkula And Another

IN THE HIGH COURT OF PUNJAB AND HARYANAAT CHANDIGARH CWP? No. 27068 of 2016DATE OF DECISION : 27.04.2018 Rakesh Gupta _.. PETITIONER Versus Commissioner of Income Tax, Panchkula and another ... RESPONDENTS CORAM :- HON'BLE MR. JUSTICE S.J. VAZIFDAR, CHIEF JUSTICEHON'BLE MR. JUSTICE AVNEESH JHINGAN Present :Mrs. Radhika Suri, Senior Advocate, withMr. M.S. Kanda, Advocate,for the petitioner. Mr. Yogesh Putney, Senior Standing Counsel,for the respondents. "SRO AVNEESH JHINGAN, J. The petitioner is an assessee under the Income Tax Act, 1961(for short, the Act’). This petition has been filed challenging the noticedated 31.03.2016 for re-assessment, and the order dated 07.10.2016rejecting the objections raised for re-opening. |For the assessment year 2009-10, the petitioner filed his returnshowing his income to be Nil’. There was a deemed acceptance of returnunder Section 143 (1) of the Act. The petitioner during the relevant year wasengaged in trading in shares through his broker M/s Competent Finman Pvt.Ltd. A trading loss of|=46,56,820/- was claimed. 3]The Principal Diurector of Income ‘Tax (Investigation), CWP No. 27068 of 2016 ~)_ Ahmedabad, conducted a survey under Section 133-A of the Act at thepremises of twelve brokers. During investigation, 1t was found that ClientCode Modification (CCM) was being used as a tool for tax evasion. Thelosses were being shifted out of the profit of the clients. A detailedinvestigation report was sent to respondent No.2 in a Compact Disc. In theinvestigation report, the details of Client Code Modification (CCM) used bythe broker of the petitioner were also there. 4 A notice dated 31.03.2016 under Section 148 of the Act wasserved upon the petitioner by the respondent, after obtaining necessarysatisfaction of the Principal Commissioner of Income Tax, Panchkula. The petitioner vide letter dated 26.08.2016 sent a copy of theincome tax return filed for the assessment year 2009-10 stating that it betreated as the return filed in response to the notice under section 148. Thepetitioner also requested the respondent to furnish the reasons for re-opening the assessment. 4 At the petitioner's request, the reasons for initiating|proceedings under Section 147 of the Act were supplied to the assessee. Thereasons read as follows :- “The assessee has filed return of incomefor the Assessment Year 2009-10 on 30.09.2009showing total income as Rs. Nil. Information has been received fromPrincipal Director ofIncome Tax (Investigation),Ahmedabad vide his Letter No. PDIT (UInv)/AHDCCM/Dissemination/15-16 dated 08.03.2016through Range head ofthis office. CWP No. 27068 of 2016 .B. The information pertains to modusoperandi adopted Share Brokers duringModification of Client Code to manipulateincome/loss of their clients. The investigationteam has conducted surveys u/s 133A ofIncomeTax Act, 1961 at the premise of twelve brokersand few of their clients across India on23.05.2015 and a detailed investigation reporthas been sent to the undersigned in CD, which ispart of record. It has been revealed that ClientCode Modification (CCM) has been used as atoolfor tax evasion by the brokers and they havebooked losses and shifted out profits of theirclients. Information has revealed that the assesseehad been engaged in trading of shares throughhis broker M/s Competent Finman Pvt. Ltd. andduring the relevant period has shifted-in lossesamounting to a~ 46,56,520/- through his brokeand has definitely reduced his profits fromtrading in shares. In view ofabove I have reasonto believe that the income ofa°46,56,520/- haveescaped assessment within the meaning ofsection147 of the Income Tax Act, 1961. Proceedings are thus initiated against theassessee under section 147 ofthe Income Tax Act,1961. Notice u/s 148 of the Income Tax Act, 1961for the assessment year 2009-10 is being issuedin the case.” 6.A notice dated 05.09.2016 was issued fixing the case forhearing on 26.09.2016. The petitioner was called upon to furnish various documents. Information has revealed that the assesseehad been engaged in trading of shares throughhis broker M/s Competent Finman Pvt. Ltd. andduring the relevant period has shifted-in lossesamounting to a~ 46,56,520/- through his brokeand has definitely reduced his profits fromtrading in shares. In view ofabove I have reasonto believe that the income ofa°46,56,520/- haveescaped assessment within the meaning ofsection147 of the Income Tax Act, 1961. Proceedings are thus initiated against theassessee under section 147 ofthe Income Tax Act,1961. Notice u/s 148 of the Income Tax Act, 1961for the assessment year 2009-10 is being issuedin the case.” 6.A notice dated 05.09.2016 was issued fixing the case forhearing on 26.09.2016. The petitioner was called upon to furnish various documents. CWP No. 27068 of 2016 _4_ TiThe petitioner by a letter dated 07.09.2016 raised objections asto the jurisdiction of the respondent for issuing the notice under Section 147ot the Act. By the impugned order dated 07.10.2016, the respondentrejected the objections. It was held that re-opening was justified. Therespondent held that there was sufficient material to form the belief that theincome of the assessee had escaped assessment. The petitioner was directedto submit his reply and to avail the opportunity of being heard. |Mrs. Suri, the learned Senior Counsel appearing on behalf ofthe petitioner submitted that the assumption of jurisdiction was withoutthere being reason to believe that the income has escaped assessment; thatthe proceedings were merely on the directions of the Principal Director ofIncome Tax (Investigation), Ahmedabad; that the AO had acted only uponborrowed satisfaction, instead of satisfying himself and the satisfactionrecorded by the Principal Commissioner of Income Tax, Panchkula underSection 151 was in a mechanical manner and without application of mind. Q The relevant provisions of the Act are as follows :- 143. (1)Where q return has been madeunder section 139, or in response to a noticeunder sub-section (1) ofsection 142, such returnshall be processed in the following manner,namely :— (a)the total income or loss shall be computedafter making the following adjustments,namely :— CWP No. 27068 of 2016 (i)|any arithmetical error in the return,OrOr (ii)an incorrect claim, if such incorrectclaim is apparent from anyinformation in the return,claim is apparent from anyinformation in the return, (b)the tax and interest, if any, shall becomputed on the basis of the total incomecomputed under clause (a);computed on the basis of the total incomecomputed under clause (a); (c)|the sum payable by, or the amount ofrefund due to, the assessee shall bedetermined after adjustment of the tax andinterest, if any, computed under clause (b)by any tax deducted at source, any taxcollected at source, any advance tax paid,any relief allowable under an agreementunder section 90 or section YOA, or anyrelief allowable under section 91, anyrebate allowable under Part A of ChapterVIL, any tax paid on self-assessment andany amount paid otherwise by way of taxor interest,| (d) an intimation shall be prepared orgenerated and sent to the assesseespecifying the sum determined to bepayable by, or the amount ofrefund due to,the assessee under clause (c); andthe amount ofrefund due to the assessee inpursuance of the determination underclause (c) shall be granted to the assessee: (e) Provided that an intimation shallalso be sent to the assessee in qa caswhere the loss declared in the return by the CWP No. 27068 of 2016 assessee is adjusted but no tax or interestis payable by, or no refund is due to, him:Provided further that no intimationunder this sub-section shall be sent afterthe expiry of one year from the end of thefinancial year in which the return is made. Explanation—For the purposes of this sub-section,— (d) an intimation shall be prepared orgenerated and sent to the assesseespecifying the sum determined to bepayable by, or the amount ofrefund due to,the assessee under clause (c); andthe amount ofrefund due to the assessee inpursuance of the determination underclause (c) shall be granted to the assessee: (e) Provided that an intimation shallalso be sent to the assessee in qa caswhere the loss declared in the return by the CWP No. 27068 of 2016 assessee is adjusted but no tax or interestis payable by, or no refund is due to, him:Provided further that no intimationunder this sub-section shall be sent afterthe expiry of one year from the end of thefinancial year in which the return is made. Explanation—For the purposes of this sub-section,— (a)“an incorrect claim apparent from anyinformation in the return” shall mean aclaim, on the basis of an entry, in thereturn,—_information in the return” shall mean aclaim, on the basis of an entry, in thereturn,—_ (i)of an item, which is inconsistentwith another entry of the same orsome other item in such return,with another entry of the same orsome other item in such return, (ii)in respect of which the informationrequired to be furnished under thisAct to substantiate such entry hasnot been sofurnished; orrequired to be furnished under thisAct to substantiate such entry hasnot been sofurnished; or (iii) in respect of a deduction, wheresuch deduction exceeds specifiedstatutory limit which may have beenexpressed as monetary amount orpercentage or ratio orfraction,such deduction exceeds specifiedstatutory limit which may have beenexpressed as monetary amount orpercentage or ratio orfraction, (b)the acknowledgement ofthe return shall bedeemed to be the intimation in a casewhere no sum is payable by, or refundableto, the assessee under clause (c), andwhere no adjustment has been made underclause (a).deemed to be the intimation in a casewhere no sum is payable by, or refundableto, the assessee under clause (c), andwhere no adjustment has been made underclause (a). CWP No. 27068 of 2016 147.If the Assessing Officer has reason tobelieve that any income chargeable to tax hasescaped assessment for any assessment year, hemay, subject to the provisions of sections 148 to153, aSSeSS OY reassess Such income and also anyother income chargeable to tax which hasescaped assessment and which comes to hisnotice subsequently in the course of theproceedings under this section, or recompute theloss or the depreciation allowance or any otherallowance, as the case may be, for theassessment year concerned (hereafter in thissection and in sections 148 to 153 referred to asthe relevant assessment year) : Provided that where an assessment under sub-section (3) ofsection 143 or this section has beenmade for the relevant assessment year, no actionshall be taken under this section after the expiryof four years from the end of the relevantassessment year, unless any income chargeableto tax has escaped assessment for suchassessment year by reason of the failure on thepart of the assessee to make a return undersection 139 or in response to a notice issuedunder subsection (1) of section 142 or section148 or to disclose fully and truly all materialfacts necessary for his assessment, for thatassessment year : Provided further that the Assessing Officer mayassess or reassess such income, other than theincome involving matters which are the subject-matter of any appeal, reference or revision, CWP No. 27068 of 2016 which is chargeable to tax and has escapedassessment. Explanation 1.—Production before the AssessingOfficer of account books or other evidence fromwhich material evidence could with due diligencehave been discovered by the Assessing Officerwill not necessarily amount to disclosure withinthe meaning oftheforegoing proviso. Explanation 2.—For the purposes of this section,the following shall also be deemed to be caseswhere income chargeable to tax has escapedassessment, namely :—| Provided further that the Assessing Officer mayassess or reassess such income, other than theincome involving matters which are the subject-matter of any appeal, reference or revision, CWP No. 27068 of 2016 which is chargeable to tax and has escapedassessment. Explanation 1.—Production before the AssessingOfficer of account books or other evidence fromwhich material evidence could with due diligencehave been discovered by the Assessing Officerwill not necessarily amount to disclosure withinthe meaning oftheforegoing proviso. Explanation 2.—For the purposes of this section,the following shall also be deemed to be caseswhere income chargeable to tax has escapedassessment, namely :—| (a)where no return of income has beenfurnished by the assessee althoughhis total income or the total incomeof any other person in respect ofwhich he is assessable under thisAct during the previous’ yeaexceeded the maximum amountwhich is not chargeable to income-LAX ,furnished by the assessee althoughhis total income or the total incomeof any other person in respect ofwhich he is assessable under thisAct during the previous’ yeaexceeded the maximum amountwhich is not chargeable to income-LAX , (b)where a return of income has beenfurnished by the assessee but noassessment has been made and it isnoticed by the Assessing Officer thatthe assessee has understated theincome or has claimed excessiveloss, deduction, allowance or reliefin the return ; furnished by the assessee but noassessment has been made and it isnoticed by the Assessing Officer thatthe assessee has understated theincome or has claimed excessiveloss, deduction, allowance or reliefin the return ; (c)|where an assessment has beenmade, but—made, but— CWP No. 27068 of 2016 (i)income chargeable to tax hasbeen underassessed ,; orbeen underassessed ,; or (ii)such income has beenassessed at too low arate ; orassessed at too low arate ; or (iil)such income has been madethe subject of excessive reliefunder this Act ; orthe subject of excessive reliefunder this Act ; or (iv)|excessive loss or depreciationallowance or any otherallowance under this Act hasbeen computed.allowance or any otherallowance under this Act hasbeen computed. 10.There was a substantial change made 1n Section 143 (1) of theAct with effect from 01.06.1999. Earlier, the AO could make assessmentunder Section 143 (1) of the Act without requiring the presence of theassessee but the order of assessment had to be passed. After the amendment,under Section 143 (1) of the Act no assessment order is required to bepassed but the intimation sent under Section 143 (1) of the Act was deemedto be an assessment order. It 1s only in cases selected for scrutiny thatassessment under Section 143 (3) of the Act 1s passed. 11.During the relevant assessment year, in order to initiateproceedings under Section 147 of the Act, 1n case assessed under Section143 (1) of the Act, the AO should have reason to believe that the incomechargeable to tax has escaped assessment. The petitioner was assessed under Section 143 (1) of the Act,The only requirement is that the AO had reason to believe that there isescapement of income chargeable to tax. CWP No. 27068 of 2016 -10- 12.Before considering Mrs. Suri's submissions, especially as towhether the respondent himself had reason to believe that income hadescaped assessment or whether it was on borrowed satisfaction on his part,it is necessary to examine the material that was before the respondent. 11.During the relevant assessment year, in order to initiateproceedings under Section 147 of the Act, 1n case assessed under Section143 (1) of the Act, the AO should have reason to believe that the incomechargeable to tax has escaped assessment. The petitioner was assessed under Section 143 (1) of the Act,The only requirement is that the AO had reason to believe that there isescapement of income chargeable to tax. CWP No. 27068 of 2016 -10- 12.Before considering Mrs. Suri's submissions, especially as towhether the respondent himself had reason to believe that income hadescaped assessment or whether it was on borrowed satisfaction on his part,it is necessary to examine the material that was before the respondent. 13,In this regard, a letter dated 08.03.2016 from the PrincipalDirector of Income-Tax (Investigation) Ahmedabad, 1s of vital importance,The letter was addressed to the Chief Commissioner of Income-tax,Panchkula. The subject of the letter referred to a survey report in respect ofClient Code Modification (CCM) being forwarded regarding thedissemination of beneficiary clients who have taken losses and shifted outprofits during the financial years 2008-09 to 2011-12. The letter explainsthat modification of the client code is a practice under which brokers changethe client code in sale and purchase orders of securities after the trades areconducted. It further rightly explains that while it 1s permissible to rectifyinadvertent errors, there were concerns that modifications could be made tomanipulate the activities in the market. Thus, for instance, 1f a particulartransaction 1s undertaken in the name of a client, it cannot be shifted to thename or account of another client unless 1t was on account of an inadvertenterror. The letter stated that SEBI had conducted a probe into the matterpursuant to the observations by the Finance Ministry about many suchmodifications having taken place in derivative transactions 1n the NationalStock Exchange during March, 2010. Accordingly, the AhmedabadInvestigation Directorate, carried out coordinated limited purpose surveysunder Section 133A of the Act at the premises of twelve brokers and a few CWP No. 27068 of 2016 -|]- of their clients across India on 23.03.2015. The ADIT prepared a report,which on the basis of the above information concluded that CCM had beenused as a tool for tax evasion. In the result, for four years, 4890 assesseeshad availed contrived losses of over|=1206 crores. The letter enclosed a pendrive, the contents whereof are tabulated in the letter. The report was in twoparts. Part | pertained to the survey report containing 593 pages. Part 2contained Annexures B, C, D, T and Utilities. Annexure B containeda list ofthe assessees who had taken losses of.41,00,000 and above and assesseeswho had shifted out profits of |=1,00,000 and above. The rationale ofsettingL1,00,000 as the limit was a threshold monetary limit of41,00,000for re-opening the cases beyond four years. Annexure C contained details ofcases proposed for centralization where contrived losses and shifting ofprofits were to the tune otf41 crore or more. Annexure DPD contained thoriginal data received from the Bombay Stock Exchange and the NationalStock Exchange; analysis of CCM data done at CFL, Ahmedabad, anddetails of trades and shifting of contrived profits in respect of eachtransaction for the particular day. Annexure S contained submissions, surveyfolders and annexures. Annexure |] contained the PAN details of eachbeneficiary and an analysis of the utilisation of the modified client data.Paragraphs 7 and 8 of the letter read as under :- oT|The _ beneficiaries pertaining to yojurisdiction may be segregated by using the “Sort& Filter” tools of MS Excel on Column NO. 7“Jurisdictional Pr. CCIT”. The data for F-Ys2008-09 to 2011-12 startsfrom column No. O tojurisdiction may be segregated by using the “Sort& Filter” tools of MS Excel on Column NO. 7“Jurisdictional Pr. CCIT”. The data for F-Ys2008-09 to 2011-12 startsfrom column No. O to oT|The _ beneficiaries pertaining to yojurisdiction may be segregated by using the “Sort& Filter” tools of MS Excel on Column NO. 7“Jurisdictional Pr. CCIT”. The data for F-Ys2008-09 to 2011-12 startsfrom column No. O tojurisdiction may be segregated by using the “Sort& Filter” tools of MS Excel on Column NO. 7“Jurisdictional Pr. CCIT”. The data for F-Ys2008-09 to 2011-12 startsfrom column No. O to CWP No. 27068 of 2016 AA of Annexure-B whereas net effect in all thefour years is mentioned in column AA_ oAnnexure-B|oeThe reopening of cases for FY 2008-09 isgetting barred by limitation of time on31.03.2016. You are, therefore, requested toinitiate necessary action in the case of thebeneficiary clients pertaining to yourjurisdictionnoted in the Pen Drive. These cases may also beclosely monitored as huge revenue Stake isinvolved. 14.Based on the above information, details regarding the petitionerwere tabulated. The table contained several details regarding the petitioner.These details pertained to the alleged sham transactions between thepetitioner and his broker M/s Competent Finman Pvt. Ltd. What isimportant to note is that between 19.12.2008 to 10.09.2009 1.e. within aperiod of about nine months, there were 74 modifications. In our view, thismaterial undoubtedly justifies the need to investigate the transactions andthe manner in which they have been recorded by the broker. These were notstray cases of modification. There were 74 modifications within a period ofabout nine months. There may well be a valid explanation for the same. Thefact however remains that the number of modifications would justify aconsideration of the matter. It would be necessary for instance to examinethe circumstances and the reasons for which the errors allegedly occurred.In other words, it 1s necessary to ascertain whether these were inadvertenterrors or were deliberate adjustments/shifts from the broker's other clients, CWP No. 27068 of 2016 -|3- as a result whereof either the petitioner alone or the petitioner and thecorresponding client derived benefits.15.It was suggested, though not pleaded, that these modificationswere carried out mala fide at the behest of a third party. We do not expressany view in this regard. It 1s always open to the petitioner to disclose thename of the third party to the AO who would undoubtedly consider the sameand the effect thereof.16)The next question 1s whether the respondent considered thisevidence himself or whether he initiated the proceedings for re-opening onthe directions of the Principal Director of Income Tax (Investigation),Ahmedabad. A reading of the reasons as a whole indicate that therespondent applied his own mind to the information furnished to him andwas satisfied himself that the material is sufficient to warrant initiation ofproceedings under sections 147 and 148 of the Act. The reasons do recordthat information has been received. They also record the nature of theinformation, namely that it pertained to the modus operandi adopted by theshare brokers during Modification of Chent Code. The respondent howeverrecorded that it had been revealed that the (CM has been used as a tool fortax evasion. The respondent also recorded that the information had revealedthat the assessee had been engaged in trading of shares through his brokerM/s Competent Finman Pvt. Ltd. and that during the relevant period hadshifted-in losses amounting to aboutL46,56,820/- through his broker andthereby had reduced his profits. In other words, the respondent was satisfiedthat the information received revealed the said facts. It1is important to note CWP No. 27068 of 2016 _|4- CWP No. 27068 of 2016 _|4- that the said letter dated 08.03.2016 addressed by the Principal Director ofIncome-Tax (Investigation) Ahmedabad, does not refer to any particularclient or broker. Nor did it refer to any particular transaction or transactions.It has supplied the material in a 128 GB pen drive. It is obviously from thismaterial that the respondent tabulated the transactions regarding thepetitioner. As we noted earlier, the table at Annexure R-2 contained 74 suchalleged errors. The details of each of these have been tabulated. It 1sobvious, therefore, that the respondent himself analysed the materialpertaining to the petitioner and pursuant thereto initiated proceedings undersections 147 and 148 of the Act. 17.Mrs. Suri relied upon a letter dated 27.10.2016, by which therespondent sought certain information from the broker of the petitioner,including the Client Code of the assessee during the Financial Year 2008-09, the number of times the Client Code had been changed, the totalinvestment made and a complete copy of the contract notes and copy of theaccount of the assessee in the books of the broker. She contended that theinformation having been sought after the reasons indicated that the decisionto re-open the assessment was not passed on any material. 1&8This would be a narrow reading of the letter. As we havealready indicated, the respondent had sufficient reasons for initiatingproceedings for re-assessment. An AO seeking further information and allthe material on the basis of which he formed the opinion that the incomehad escaped assessment does not nullify the decision to re-open theassessment. In fact, this indicates that the AO intends considering the case CWP No. 27068 of 2016 -|4- on merits before passing the final assessment order. 19.It is evident that the AO before issuing the notice had appliedhis mind independently to the information received from the InvestigationWing. Although the information was derived from the Investigation Wing,the satisfaction to the effect that Client Code Modification (CCM) has beenused for shifting losses and to manipulate the income by the petitioner 1shis. It is not a case where merely on receipt of information a notice had beenissued. Thus although the information may be borrowed the satisfaction wasnot. The respondents with their reply have annexed the material chart on thebasis of which the AO recorded his reasons. The merely receipt ofinformation from another source would not be a ground to challenge theinitiation of proceedings. The only requirement would be the satisfaction ofthe AO regarding and based on the said information. The issue of borrowedsatisfaction and issuance of notice on the direction of a higher authority 1snot there. The data qua the petitioner was analysed by the AO and thereafter,notice was issued. The reliance on the concluding lines of the informationreceived from Ahmedabad to contend that it contained a direction to initiateproceedings 1s ill founded. It was only a suggestion to the concerned AO, 20.From a perusal of the chart, it is evident that 1t was not a case ofOne or two CCMs. The CCM has been used 7/74 times between 19.12.20and 10.09.2009. 21.In.Sheo Nath Singh Vs. Appellate Assistant Commissioner of Income- Tax (Central), Calcutta and others(1971) 82 ITR 147 (SC), reliedupon by Mrs. Suri, the Supreme Court held :- CWP No. 27068 of 2016 -16- 20.From a perusal of the chart, it is evident that 1t was not a case ofOne or two CCMs. The CCM has been used 7/74 times between 19.12.20and 10.09.2009. 21.In.Sheo Nath Singh Vs. Appellate Assistant Commissioner of Income- Tax (Central), Calcutta and others(1971) 82 ITR 147 (SC), reliedupon by Mrs. Suri, the Supreme Court held :- CWP No. 27068 of 2016 -16- “In our judgment, the law laid down bythis court in the above case is fully applicable tothe facts of the present case. There can be nomanner of doubt that the words “reason tobelieve” suggest that the beliefmust be that ofanhonest and reasonable person based uponreasonable grounds and that the Income-taxOfficer may act on direct or circumstantialevidence but not on mere suspicion, gossip orrumour. The Income-tax Officer would be actingwithout jurisdiction if the reason for his beliefthat the conditions are satisfied does not exist oris not material or relevant to the belief requiredby the section. The court can always examine thisaspect though the declaration or sufficiency ofthe reasons for the belief cannot be investigatedby the court.” It is important to note that the Supreme Court found in that case that there was no material or fact which had been stated in the reasons forstarting the proceedings for re-opening the assessment. In the case beforeus, as already discussed, this is not so, 2).As we will now indicate it 1s not necessary that the AO mustknow or be certain that income has escaped assessment. The AO must havereason to believe it has. He may finally accept the assessee's case. Thatwould make no difference to the validity of the invocation of sections 147and 148. >|In|Income-lax Officer Vs. Purushottam Das Bangur and another,(1997) 224 ITR 362 (SC), relied upon by Mr. Putney, the Supreme CWP No. 27068 of 2016 -|7/ Court rejected the contention of the assessee that the information receivedfrom the Deputy Director, Directorate of Inspector (Investigation) was not adefinite information and should not be acted upon by the Income TaxOfficer for taking action under Section 147 of the Act. It was held that theinformation contained in the letter could form the basis for forming anopinion that there was reason to believe that income had escaped assessmentwithout any further verification. In that case, the assessee claimed to havesuffered a long term capital loss. The AO accepted the case and made theassessment order. What happened thereafter and the decision of the SupremeCourt 1n respect thereof 1s as follows :- “Subsequently, the Income Tax Officer received aletter dated March 21, 1974 from Shri S.M,Bagai, Deputy Director, Directorate ofInspector(Investigation), Special Cell, New Delhi, whereinit was Stated that on information obtained fromthe Bombay Stock Exchange Directory the bookvalue per equity share ofMaharaja Shree UmaidMills Ltd, rose form Rs. 318.55 for the yearending December 21, 1965, to Rs. 401 for theyear ending December 31, 1970, and the earningper share rose from Rs. 8.37 per share to Rs. 44per share during the abovementioned period andthat the dividend percentage also rosefrom 2 percent to 10 per cent, for the same period, but thequotations of the shares in Calcutta StockExchange fell from Rs. 168 to Rs. 85 per shareduring this period. In the said letter ofShri Bagaiit was Stated that it was clear from these facts| CWP No. 27068 of 2016 CWP No. 27068 of 2016 that the quotations appearing are as a result ofcertain manipulated transactions between thegroup and in cannot be said that to reflect thefairmarket value of the company. Alongwith the saidletter Shri Bagai had annexed the informationwhich was gathered by him on the basis of theBombay Stock Exchange Directory and otherinformation. The said letter of Shri Bagai wasreceived by the Income Tax Officer on March 26,1974. On March 27, 1974, he issued a noticeunder Section 147 (b) of the Act whereby theassessee was informed that the Income TaxOfficer had the reason to believe that assessee’sincome chargeable to taxfor the assessment year1969-70 had escaped assessment and, therefore,the assessing authority proposed to reassess theincome for the said assessment year and_ thassessee was required to deliver to him a returnin the prescribed form of his income for the saidyear. Feeling aggrieved by the said notice, theassessee filed Writ Petition No. 1177 of 1974 inthe Rajasthan High Court. &&& On the basis of the information containedin the letter of Shri Bagai and the documentsannexed to it, the Income Tax Officer could havehad reason to believe that thefair market value ofthe shares was far more than the sale price andthe market quotations from Calcutta StockAssociation shown by the assessee at the time oforiginal assessment were manipulated ones andas a result income chargeable to tax had escaped CWP No. 27068 of 2016 assessment. It could not be said that theinformation that was contained in paragraph 2 ofthe letter of Shri Bagai was not definiteinformation and it could not be acted upon by theIncome Tax Officer for taking action underSection 147 (b) of the Act. Ms. Gauri Rasgotra, the learned counselappearingfor the respondents, has urged that theletter of Shri Bagai was received by the Income-tax Officer on March 26, 1974 and on the verynext day, that is, on March 27, 1974, he issuedthe impugned notice under Section 147 (b) of theAct and that he did not have conducted anyinquiry or investigation into the information sentby Shri Bagai. -Merely because_the_ impugnednotice was sent on_the next day _after_receipt othe letter_of Shri_Bagai does not mean_that_theIncome Tax Officer did not apply his mind to theinformation contained in the said letter _of ShrBagai. On_the_ basis _of the _said_facts information contained in _the_said_ letter, thIncome ___Tax _ officer, without _any__ fuinvestigation, could have formed the opinion thatthere was reason to believe that the income of theassessee chargeable _to __tax _had__ esassessment. The High Court, in our opinion, wasin_error_in proceeding on the basis that it couldnot be said that the Income Tax Officer had in hispossession information on the basis of which hecould _ have reasons to believe that income of tassessee chargeable _to__tax _had__ escassessment for the relevant assessment years.For CWP No. 27068 of 2016 -20- the reasons aforementioned, we are unable touphold the impugned judgment of the High Court.The appeal is, therefore, allowed, the impugnedjudgment of the High Court is set aside and theWrit Petitions filed by the respondents aredismissed. No order as to costs.” (emphasissupplied) The judgment clearly applies to the case before us. The reliance upon theinformation supplied by the ADIT was justified. There is nothing to indicatethat the information collected did not pertain to or was not concerned withthe persons referred to. The respondent made his own inferences on thebasis thereof. CWP No. 27068 of 2016 -20- the reasons aforementioned, we are unable touphold the impugned judgment of the High Court.The appeal is, therefore, allowed, the impugnedjudgment of the High Court is set aside and theWrit Petitions filed by the respondents aredismissed. No order as to costs.” (emphasissupplied) The judgment clearly applies to the case before us. The reliance upon theinformation supplied by the ADIT was justified. There is nothing to indicatethat the information collected did not pertain to or was not concerned withthe persons referred to. The respondent made his own inferences on thebasis thereof. D4.In|AGR Investment Ltd. Vs. Additional Commissioner ofIncome-lax and another,(2011) 333 ITR 146 (Delhi), relied upon by Mr,Putney, in a challenge to the initiation of proceedings under Section 147 ofthe Act, the Delhi High Court held that specific information receivedfrom the office of Director of Income Tax (Investigation) regardingtransactions entered into by the assessee Company for accommodationentries 1s not a change of opinion and 1s material for the AO having reasonto believe that income had escaped assessment. We respectfully agree withthis view) D5.The AO had in his possession information collected by a Wingof the department, specially constituted for the purpose of collectinginformation. The data concerning the assessee was part of the informationreceived. The information was specific and not vague. In challenge to CWP No. 27068 of 2016 ~)]- initiation of proceedings the Court has to prima facie satisfy itself regardingexistence of reasons to believe. It is not for this Court to go into thesufficiency of the reasons. Even the final outcome of the proceedings 1s notrelevant. Reliance was rightly placed on the following decisions of theHon'ble Apex Court to justify the proceedings under Sections 147/148 inview thereof. 26.In|M/s Kantamant Venkata Narayana and Sons Vs. FirstAdditional Income Tax Officer, Rajahmundry,1967 AIR (SC) 587, theSupreme Court held as under :- “The High Court has pointed out that no finaldecision about failure to disclose fully and trulyall material facts bearing on the assessment ofincome and consequent escapement of incomefrom assessment and tax could be recorded in theproceedings before them. It certainly was notwithin the province of the High Court to finallydetermine that question. The High Court wasonly concerned to decide whether the conditionswhich invested the Income Tax Officer withpower to re-open the assessment did exist, andthere is nothing in the Judgment of the HighCourt which indicates that they disagreed withthe view of the Trial Court that the conditions didexist” D7]In|Central Provinces Manganese Ore Co. Ltd. Vs. 1.1.0.Nagpur,1991 (4) SCC 166, the Supreme Court held as under :- “II. So far as the first condition is concernedthe Income-tax Officer, in his recorded reasons, CWP No. 27068 of 2016 ~)’) has relied upon the fact as found by the CustomAuthorities that the appellant under-invoiced thegoods he exported. It is no doubt correct that thesaidfinding may not be binding upon the Income-tax authorities but it can be a valid reason tobelieve that the chargeable income has beenunder-assessed. The final outcome of theproceedings is not relevant. What is relevant isthe existence of reasons to make the Income-taxOfficer believe that there has been under-assessment of the assessee’s income for aparticular year. We are satisfied that the firstcondition to invoke the jurisdiction of theIncome-tax Officer under Section 147 (a) of theAct was satisfied. DS|In Raymond Woollen Mills Ltd. Vs. Income-Tax Officer andothers,(1999) 236 ITR 34 (SC), relied upon by Mr. Putney, the SupremeCourt held :- has relied upon the fact as found by the CustomAuthorities that the appellant under-invoiced thegoods he exported. It is no doubt correct that thesaidfinding may not be binding upon the Income-tax authorities but it can be a valid reason tobelieve that the chargeable income has beenunder-assessed. The final outcome of theproceedings is not relevant. What is relevant isthe existence of reasons to make the Income-taxOfficer believe that there has been under-assessment of the assessee’s income for aparticular year. We are satisfied that the firstcondition to invoke the jurisdiction of theIncome-tax Officer under Section 147 (a) of theAct was satisfied. DS|In Raymond Woollen Mills Ltd. Vs. Income-Tax Officer andothers,(1999) 236 ITR 34 (SC), relied upon by Mr. Putney, the SupremeCourt held :- “In this case, we do not have to give a finaldecision as to whether there is suppression ofmaterial facts by the assessee or not. We haveonly to see whether there was prima facie somematerial on the basis of which the Departmentcould reopen the case. The _ sufficiency ocorrectness of the material is not a thing to beconsidered at this stage. We are of the view thatthe court cannot strike down the reopening ofthecase in thefacts ofthis case. It will be open to theassessee to prove that the assumption of factsmade in the notice was erroneous. The assessee CWP No. 27068 of 2016 ~)3- may also prove that no new facts came to theknowledge of the Income-tax Officer aftercompletion of the assessment proceeding. We arenot expressing any opinion on the merits of thecase. The questions offact and law are left opento be investigated and decided by the assessingauthority. The appellant will be entitled to takeall the points before the assessing authority. Theappeals are dismissed. There will be no order asto costs.” 29|In|Assistant Commissioner ofIncome-lax Vs. Rajesh Jhaverit Stock Brokers P. Ltd.,(2007) 291 ITR 500 (SC), relied upon by Mr. Putney,the Supreme Court held :- “T6Section 147 authorises and permits theAssessing Officer to assess or reassess incomechargeable to tax if he has reason to believe thatincome for any assessment year has escapedassessment. The word “reason” in the phrase“veason to believe” would mean cause orjustification. Ifthe Assessing Officer has cause orjustification to know or suppose that income hadescaped assessment, it can be said to have reasonto believe that an income had_ escapeassessment. The expression cannot be read tomean that the Assessing Officer should havefinally ascertained the fact by legal evidence orconclusion. The function of the Assessing Officeris to administer the statute with solicitude for thepublic exchequer with an inbuilt idea offairnessto taxpayers. As observed by the Supreme Courtin Central Provinces Manganese Ore Co. Ltd. v. CWP No. 27068 of 2016 ~D4A ITO [1991] 191 ITR 662, for initiation of actionunder section 147 (a) (as the provision stood atthe relevant time) fulfilment of the two requisiteconditions in that regard is essential. At thatstage, the final outcome of the proceeding is notrelevant. In other words, at the initiation stage,what is required is “reason to believe”, but notthe established fact of escapement of income. Atthe stage of issue of notice, the only question iswhether there was relevant material on which qreasonable person could have formed a requisitebelief. Whether the materials would conclusivelyprove the escapement is not the concern at thatstage. This is so because the formation of beliefby the Assessing Officer is within the realm ofsubjective satisfaction (see ITO vy. SelectedDalurband Coal Co. P. Ltd. [1996] 217 ITR 597(SC) ; Raymond Woollen Mills Ltd. v. ITO [1999]236 1ITR 34 (SC). 30,Mrs. Suri's reliance upon an interim order passed by theBombay High Court in |Coronation Agro Industries Ltd. Vs. DeputyCommissioner ofIncome Tax,reported as (2017) 390 ITR 464 (Bombay),wherein it was recorded that the reason mentioned prima facie appeared tobe a reason to suspect and not to believe is not well founded. It 1s only aninterim order. No final order has been produced. 3].Mrs. Suri's reliance upon the decision of this Court inCommissioner ofIncome Tax Vs. Smt. Parampit Kaur,(2009) 311 ITR 38(P&H) is not well founded. In that case, the Court found that there was noreason to believe and that re-opening was merely on suspicion.| ~)4- 3).Mrs. Suri relied upon a decision of the Delhi High Court inCommissioner of Income-lax Vs. Gupta Abhushan P. Ltd.,(2009) 312)ITR 166 (Delhi). In that case, the re-opening of an assessment was set asideas the material found 1n the survey conducted for the assessment year 2002-03 was being used in the assessment year 1999-2000 without there beingany basis that the material pertained to the relevant assessment years. It wasobserved that the reason recorded was that the AO had a mere suspicion thatthere was a likelihood of there being a discrepancy in the stocks in theearlier years also based on the fact that there was a discrepancy 1n the stockwhen the survey was conducted on 07.03.2002. There Court, therefore, heldthat this was merely a reason to suspect and not a reason to believe. In thecase before us, the material pertained to the assessment year 1n question1tself. 33.Decision of the Allahabad High Court in |Dass FriendsBuilders P. Ltd. Vs. Deputy Commissioner of Income- Tax(2006) 280 ITR77 (Allahabad) does not support the petitioner's case. The Allahabad HighCourt set aside the re-opening as rejection of the account books for theassessment year 1996-97 was being made a basis to determine the profitpercentage for the assessment year 1995-96 without there being anymaterial for the relevant assessment year. 34)Mrs. Suri relied upon the following observations of theSupreme Court 1n Income lax Officer, Calcutta and Ors. Vs. LakhmaniMewal Das,(1976) 3 SCC 757 = (1976) 103 ITR 437 (SC) : CWP No. 27068 of 2016 “II. As stated earlier, the reasons for theformation of the belief must have a rationalconnection with or relevant bearing on_ thformation of the belief. Rational connectionpostulates that there must be a direct nexus orlive link between the material coming to thenotice of the Income-tax Officer and_ theformation of his belief that there has beenescapement of the income of the assessee fromassessment in the particular year because of hisfailure to disclose fully and truly all materialfacts. It is no doubt true that the Court cannot gointo the sufficiency or adequacy of the materialand substitute its own opinion for that of theIncome-tax Officer on the point as to whetheraction should be_ initiated for reopeninassessment. At the same time we have to bear inmind that it is not any and every material,howsoever vague and indefinite or distant,remote andfar-fetched, which would warrant theformation of the belief relating to escapement ofthe income of the assessee from assessment. Thefact that the words “definite information” whichwere there in Section 34 ofthe Act of 1922 at onetime before its amendment in 1948 are there inSection 147 of the Act of 1961 would not lead tothe conclusion that action can now be taken forreopening assessment even if the information iswholly vague, indefinite, far-fetched and remote.The reason for theformation ofthe beliefmust beheld in good faith and should not be a merepretence. -)6- CWP No. 27068 of 2016 -)6- CWP No. 27068 of 2016 12.The powers of the Income-tax Officer toreopen assessment though wide are not plenary.The words of the statute are “reason to believe”and not “reason to suspect.’ The reopening ofthe assessment after the lapse ofmany years is aserious matter. The Act, no doubt, contemplatesthe reopening of the assessment if grounds existfor believing that income of the assessee hasescaped assessment. The underlying reason forthat is that instances of concealed income orother income escaping assessment in a largenumber of cases come to the notice of theincome-tax authorities after the assessment hasbeen completed. The provisions of the Act in thisrespect depart from the normal rule that thereshould be, subject to right ofappeal and revision,finality about Orders made in judicial and quasiindicial proceedings. It is, therefore, essentialthat before such action is taken the requirementsof the law should be satisfied. The live link orclose n