Sarthak Securities vs. ITO (Delhi High Court)

S. 147 reopening on mechanical basis void even where s. 143(3) assessment not made

The assessee-company allotted shares to four companies. The allottee companies were active as per the records of the ROC and were allotted PAN and assessed to income-tax. Though the assessee filed a return, no assessment u/s 143(3) was made. The AO subsequently received information from the ADIT (Inv) unit that the assessee had received “bogus accommodation entries” in the form of share application money from the said four companies. The AO accordingly issued a notice u/s 148 seeking to reopen the assessment. The assessee challenged the reopening on the ground that (i) the reasons did not disclose the basis on which the ADIT had termed the subscription money as bogus accommodation entries and (ii) the AO had assumed the information provided by the ADIT as gospel truth without verification or application of mind and (iii) as the alleged bogus shareholders were on the records of the department, they should be pursued against and not the assessee. HELD upholding the challenge:

(i) The AO is required to form an opinion and record reasons before he proceeds to issue a notice u/s 148. Only the reason so recorded can be looked at for sustaining or setting aside a notice issued u/s 148. No addition, substitution or deletion is permissible nor can an inference be allowed to be drawn based on reasons not recorded. The reasons recorded should be clear and unambiguous and not suffer from any vagueness. The reasons cannot be supplemented by filing an affidavit or making an oral submission. Hindustan Lever 268 ITR 332 (Bom) followed;

(ii) The AO cannot reopen the assessment merely on the basis of information received without applying his mind to the information and forming an opinion. The reasons must show due application of mind to the information. He also cannot reopen merely because he has been directed to do so by a superior officer. SFIL Stock Broking 41 DTR 98 (Del) followed (included in the file);

(iii) On facts, the AO was aware of the existence of the companies with whom the assessee had entered into transaction. The said companies were not fictitious companies and their existence or identity was not disputed. The companies had bank accounts and payments were received by the assessee through banking channel. The argument that the companies were used as conduits is not acceptable in view of Lovely Exports 216 CTR 195 (SC) where it was held that share money cannot be regarded as undisclosed income u/s 68 if the names of the payers are given to the AO. The reasons showed no application of mind as to how income had escaped assessment.