Rajiv Agarwal v. Assistant Commissioner of Income Tax

1. These petitions have been filed by the Assessees, inter alia, impugning separate notices dated 3D' March, 2015 issued under Section 148 of the Income Tax Act(hereinafter the Act')for Assessment Year(AY)2008-09 W.P. (C)Nos.9659/2015&9661/2015 Page[1] of12 2016:DHC:8999-DB and further proceedings initiated pursuant thereto. At the request of the Assessees, the reasons for re-opening the assessments was disclosed to them. The said reasons as provided to the Assessees indicate that proceedings for re-assessments were initiated on the basis of a complaint received bytheIncome Tax Authorities. Sincethereasons disclosed as well asthe issuesinvolved are similar,these petitions were heard together.

2. Briefly stated the relevantfacts 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 ofa company,namely,M/s Scan Holdings(P)Ltd(hereafter 'SHPL').The said Assessees filed their return ofincome for the AY 2008- 09 disclosing income from salariesfrom SHPL as well as income under the heads'Incomefrom HouseProperty'and'Incomefrom Other Sources'. 2.[2] Apparently, there is some dispute between the company VI/s SHPL and its erstwhile auditor, Naveen Chaudhary, with regard to the remuneration payable to the said auditor. The Court was also informed that a complaint alleging misconducton the partofNaveen Chaudhary wasfiled by Rajiv Agarwal before the Institute of Chartered Accountants of India (ICAI). TheBoard ofDisciplineoftheICAI,in itsorderdated 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 the Chartered Accountants Act, 1949 and his name was removed/suspended from the rolls ofICAI for a period ofthree months.The appeal against the W.P.(C)Nos.9659/2015&9661/2015 2of12 th said order was rejected by the Appellate Authority by an order dated 24 September,2011. 2.[3] It is contended on behalf of the Assessees that in view of disputes/animosity, Shri Naveen Chaudhary has made repeated complaints to various authorities in order to harass the Assessees; and the complaint made to the Income Tax Authorities is also one such complaint. 2.[4] Onthebasis ofacomplaintoftax evasion dated 10^^December,2014, the Assessing Officer('AO')initiated the proceedings for re-opening ofthe assessments for AY 2008-09 and on 31'^ March 2015,issued notices under Section 148 of the Act calling upon the Assessees to file their return of income for AY 2008-09. In response to the aforesaid notice,the Assessees filed a copy oftheir respective original return ofincomefor the relevant AY and requested for the reasons for re-opening of their assessment. In responseto the aforesaidrequest,the AO by separate letters dated 27 April 2015 provided the reasons as requested by the Assessees. In the case of Rajeev Agarwal, the Assessee/Petitioner in W.P.(C) No.9659/2015 the reasons recorded reads as under: "Income Tax Return Jar the A.Y 2008-09 wasfiled by the assessee on 29.07.2008 declaring income ofRs. 14,64,950/-. In this case, the information in the form of complaint oftax evasion dated 10.12.2014 pertaining to Sh.Rajiv Agarwal has been received in this office. Kevman Insurance In the said complaint,it is stated that the company(M/s Scan Holdings Pvt Ltd)in the which Shri Rajiv Agarwal is one of W.P.(C)Nos.9659/2015&9661/2015 P«Se3of12 the Director of the Company has paid premium for the policies ofdirectors amounting to Rs.20 lakh up to financial year 2007-08 (i.e. AY 2008-09) and claimed as business expenses. Before it is due for maturity and liable for tax,the policies were shown as sold in FY 2007-08 for a meager amount ofRs. 4.16 lakhs to its directors. It has been used to tooi to avoid tax and transferred the money to its directors without payment oftax. The exact amount ofeach directoris still to be quantified, therefore, it is clear that un quantified income in this case but quantified income of Rs. 20,00,000/- (in the case ofboth the Directors ofthe company)has escaped assessment because the assessee has not disclosed fully and truly all material facts in the return ofincome and the same could not be verified/assessed to tax as the case was not selected under scrutiny assessment. Therefore, I have reasons to believe thatthe assessee has not offered the income referred above which needs to be scrutinized and hence income as above has escaped assessment within the meaning of section 147(b) of the I. T. Act, 1961 in the interest of revenue/to protectthe revenue. The case of assessee was not assessed u/s 143(3) of the Act and Since 4 years has lapsed and the case falls under section 151(2)ofthe I. T. Act, 1961,therefore,the reason are put up before Addl. CIT, Range-22, New Delhi for necessary approvalforissuing notice u/s 148oftheI.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 her returned income,is identical to the reasons as recorded in the case ofRajiv Agarwal. 2.[6] The Assessees, by separate letters dated 15^'' May, 2015, filed their objections to the reasons recorded for re-opening ofthe assessments and W.P. (C)Nos.9659/2015&9661/2015 4of12 raised several contentions.It was,inter alia, contended by the Assesseesthat the complaint on the basis ofwhich their assessments were soughtto be re opened was malafide and stemmed from the disputes with Naveen Chaudhary,the erstwhile auditor ofSHPL.Rajeev Agarwal further asserted thatthere was no transaction whereby any Insurance Policy was assigned by SHPL to him during the relevant period and, therefore, the fundamental premise on the basis ofwhich his assessments were soughtto be re-opened was factually erroneous. Insofar as Vijay Laxmi Agarwal is concerned,she stated that during the Financial Year 2007-08, a Keyman Insurance Policy (Policy No.122936684) was assigned to her against a consideration of Rs.2,08,000/-(Rupees Two Lakhs and Eight Thousand)and the surrender value ofthe said policy at the material time was Rs.2,07,236/-(Rupees Two Lakhs Seven Thousand Two Hundred and Thirty Six). Therefore, no income could be said to accrue to her pursuantto the said transactions in the Financial Year 2007-08. She also provided a copy ofthe resolution passed by the Board of Directors of SHPL for such assignment and a letter from Life Insurance Corporation of India confirming the guaranteed surrender value ofthe said policy as on 23'^'^ October2007. 2.[7] The Assessees further contended that a complaint ofevasion could not possibly form tangible material on the basis of which the concluded assessments could be re-opened. They also sought a copy ofthe complaint dated 10^^December,2014 referred to by the AO in the reasons recorded by him. 2.[8] The objections raised by both the Assessees were rejected by the AO IV.P.(C)Nos.9659/2015&9661/2015 Page5of12 by separate orders dated September, 2015 which are more or less similarly worded. The AO held thatthe sufficiency orthe correctness ofthe material for re-opening could not be questioned. The request of the Assesseesto be provided a copy ofthe complainton the basis ofwhich the assessments were sought to be re-opened was also rejected. The AO after referring to several decisions, including the Supreme Court and this court, held that since the reports were not scrutinized under Section 143(3), a deeper scrutiny was required. The Assessee's contention that there was no failure on their partto truly and fully disclose all material facts was rejected by holding that whether omission was deliberate or inadvertent was not relevant and thatthe AO would havejurisdiction to re-open the assessments ifthere was omission or failure on the part ofthe Assessees.

3. Mr S. Krishnan, learned counsel appearing for the Assessees/Petitioners has contended that the entire exercise ofinitiating re assessment proceedings is based on a mere suspicion and the AO had no material to form a reason to believe that income of the Assessees had escaped assessment. He contended thata mere complaintby a person could not possibly constitute tangible material on the basis ofwhich the AO could form a belief that income of the Assessees has escaped assessment. He relied upon the decision ofthis Court in CIT v. Atul Jain (2008)299ITR 383(Delhi) and drew the attention of this court to paragraph 16 and 17 which read as under: "16.In United Electrical Co.Pvt. Ltd. v. Commissioner ofIncome Tax (2002) 258 ITR 317, this Court considered the entire issue afresh. It was observed that the expression "reason to believe" occurring in Section 147ofthe Act is crucial. Reference was made W.P.(C)Nos.9659/2015& 9661/2015 Page6of12 to Bawa Abhai Singh v. Deputy Commissioner of Income Tax(2002) 253 ITR 86 wherein it was observed that "reason to believe" postulates a foundation based on information and a belief based on reasons. In so far as "information" is concerned, a DivisionBench ofthis Courtheld in L.R. Gupta v. Union ofIndia: [1992]194ITR 32(Delhi)that; "The expression'information' must be something more than a mere rumour or a gossip or a hunch." "17.Ofcourse,this wasinthe contextofSection 132ofthe Actbut as held in United Electrical Co.P.Ltd.[2002]258ITR 317(Delhi) the logical is equally applicable to a case under Section 147ofthe Act."

4. Mr Shivpuri, learned Senior Standing counsel appearing for the Revenue supported the issuance ofimpugned notices as well as the AOs orders rejecting the objections raised by the Assessees. He referred to the decision ofthe Supreme Court in the case ofAssistant Commissioner of Income Tax v. Rajesh JhaveriStockBrokersPvt.Ltd.(2007)291ITR 500 (SC)and contended that at the stage ofissuing a notice under Section 148, the AO was notrequired to apply its mind to determine whetherthe income of the Assessee had escaped assessment but was only required to form a prima facie view. He contended that the question whether any taxable income arose in the hands ofthe Assessee which had escaped assessment would be finally determined during the re-assessment proceedings initiated by the AO.

5. We have heard the learned counselforthe parties.

6. It is apparent from the plain reading ofthe reasons recorded by the W.P.(C)Nos.9659/2015& 9661/2015 t'age 7of12 AO thatthe AO has relied solely on a complaint dated 10^ December,2014 received by the AO and assumed that certain Keyman Policies,on which a premium aggregating Rs.20lakhs had been paid,was sold to the Assessees for a sum ofRs.4.16 lakhs and this transaction had resulted in an income of Rs.20 lakhs arising in the hands of both the Directors. Insofar as Rajeev Agarwal is concerned,it is not disputed that no policy was assigned and no such transaction as recorded by the AO in the reasons to believe that the income had escaped assessment was entered into by Rajeev Agarwal with SHPL. In the circumstances, the fundamental premise on which the assessment ofRajeev Agarwal was sought to be re-opened is bereft ofany factual foundation. We note that Rajeev Agarwal had specifically pointed out 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 its order dated-11^*" September,2015 disposing ofthe said objections.

7. Since the foundation on the basis ofwhich re-assessment proceedings have been initiated in the case ofRajeev Agarwal is absent,the same must fail on this ground alone.

8. In the case ofVijay Laxmi Agarwal,the Assessee had filed objections before the AO on 15'*^ May,2015 and had informed the AO that SHPL had assigned a Keyman Policy to the said Assessee for a consideration of Rs.2,08,000/- and the surrender value ofthe said policy as on 23"* October, 2007 was Rs.2,07,236/- and thus, there was no question of any income arising or accruing to the Assessee on accountofthattransaction. A perusal of the AO's order dated 1l'''September,2015 rejecting the objections raised t¥.P.(C)Nos.9659/2015& 9661/2015 Page8of12 by the Assessees indicate thatthe AO had simply ignored the facts pointed out and simply proceeded on the basis that those were not required to be considered at that stage and would be considered during the re-assessment proceedings.

9. In our view, the proceedings for re-assessment under Section 147 commenced by the AO are fundamentally flawed for several reasons. First -of all, it is apparent that the proceedings have been initiated merely on an unsubstantiated complaint. It is now well settled by a nuniber ofdecisions that concluded assessments cannotbere-opened merely on suspicion and the AO must have "reason to believe" that income has escaped assessment and this is quite differentfrom merely having a reason to suspect. The Supreme Court in the case ofIncome Tax Officer, Calcutta & Ors. v. Lakhmani Mewal Das (1976) 103 ITR 437(SC) had explained the same in the following words: "The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are "reason to believe" and not"reason to suspect". The reopening of the assessment after the lapse of many years is a serious matter.The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment.The underlymg reason forthat is that instances ofconcealed income or other income escaping assessment in a large number ofcases come to the notice ofthe income-tax authorities after the assessment has been completed. The provisions ofthe Actin this respect departfrom the normal rule thatthere should be,subjectto right ofappeal and revision, finality about orders made in judicial and quasi- judicial proceedings. It is,therefore, essential that before such action is taken the requirements ofthe law should be satisfied." W.P.(C)Nos. 9659/2015& 966I/20I[5] Page9of12

10. In the present case, it is doubtful whether the AO even had any. ground to suspect that income had escaped assessment. Apparently, apart from an unsubstantiated complaint there was no material which could possibly leadthe AOto suspectthatincome had escaped assessment.This is quite apparentfrom thefactthatthe AO wasalso cluelessofthefactthatno such transaction as alleged had in fact been entered into between SHPL and Rajeev Agarwal. In Rajesh Jhaveri Stock Brokers (supra), the Supreme Court had explained that the expression 'reason to believe' would mean justification to know or suppose that income had escaped assessment. While, it is correct that it is not necessary for the AO to finally ascertain whether income had escaped assessment, nonetheless, the AO must have sufficient cause to believe that it has.

11. Secondly, the AO's belief that income of an Assessee has escaped assessment must be based on tangible material. It has been explained in a number ofdecisions thatthere must be a'close nexus'or'live link' between tangible material and the reason to believe that income has escaped assessment. It follows that the material on the basis of which re-assessment proceedings can be initiated must be credible material which could lead to such belief. Clearly, an unsubstantiated complaint cannot be the sole basis for forming a belief that income of an assessee has escaped assessment. Even in cases where the AO comes across certain unverified information,it is necessary for him to take further steps,make inquiries and gamer further material and if such material indicates that income of an assessee has escaped assessment,form a believe thatincome ofthe Assessee has escaped W.P.(C)Nos.9659/2015&9661/2015 10of12 assessment.Plainly,in this case,the Assessee had not acquired any material to form such belief. On the contrary, when it is pointed out to the AO that SHPL had not assigned any policy to Rajeev Agarwal, the said fact was completely overlooked. Similarly,in the case ofVijay Laxmi Agarwal,the AO failed to take into account the fact that the Assessee had paid a sum of Rs.2,08,000/-, which was more than surrender value of the policy, for assignmentofthe policy in her favour. Thistoo was completely ignored by the AO.

12. Thirdly,the procedure for providing reasons to believe to an assessee and thus enabling him to file his objections after he has filed his return-as directed by the Supreme Court in G.K.N.Driveshafts(India)Ltd. v.ITO (2003)259ITR 19(SC)- is not a purposeless exercise. The procedure as established is an essential safeguard provided to an Assessee against arbitrary initiation ofre-assessment proceedings.It is thus,necessary that an AO consider the objections in a meaningful manner.In the present case,the AO has completely ignored the objections filed by the Assessee and has failed to apply its mind to any of the facts or material presented by the Assessee,thus rendering the entire exercise meaningless.

13. In our view, Mr Shivpuri's contention that the AO is not required to apply his mind to the facts in relation to the escapement of income at the stage of considering objections is wholly without merit. Whilst,the AO is not expected to finally decide whether income of an assessee has escaped assessment at the stage ofconsidering the objections he,nonetheless, has to consider the facts presented in support of the objections in a meaningful W.P.(C)Nos.9659/2015& 9661/2015 Page II of12 manner and at least to consider whether his reason to believe that income escaped assessment is justified or is without sufficient basis. Since in the present case, the AO has failed to consider the objections filed by the Assessees,the order dated if^ September 2015 passed by the AO rejecting the objections raised cannot be sustained

14. Accordingly, the writ petitions are allowed. The impugned notices dated 31'' March,2015 issued under Section 148 ofthe Act as well as the orders dated ll''' September 2015 passed by the AO rejecting the objections filed by the respective Assessees,are set aside.

15. No order as to costs.