By TIOL News Service:

AHEMDABAD, AUG 19, 2016: THE issue is - Whether mere fact of supply of an information to the AO by the Investigation Wing of the Department, would not mean that the AO cannot rely upon it after perusing the same and form his own opinion on the basis of the same. YES IS THE ANSWER.

Facts of the case:

The assessee, a partnership firm is engaged in manufacturing and selling gold and other ornaments. For the a.y 2008-2009, the assessee had filed its return declaring total income of Rs.88.63 and the same was taken in scrutiny. A search operation in the the case of Rajendra jain group, Sanjay chaudhary group & Dharmichand group was carried out during the subject year, wherein some information is received from ACIT. On going through the Information received, it was noticed that Rajendra jain group and Surendra jain were some of the entry providers operating in Mumbai, indulging in providing accommodation entries in the nature of bogus sales, and unsecured loans. During the course of search, they confessed on oath that they were not doing any real trading in diamonds but indulged in paper transaction only and they allow accommodation entries by issuing accommodation bill without effecting any sale to the assessee. On going through record it was noticed that assessee had purchased cut & polished diamonds of Rs.11,99,945/- from the company Sparsh export Pvt. Ltd managed by Rajendra Jain and Surendra Jain. As this was being a fake transaction of paper transaction only for accommodation entries without doing any real trading in diamonds or without effecting any sell to the assesses, the assessee had reduced its income by obtaining fake purchase bill from the above parties. lt was seen that the assessee had shown receipts of loan in gold from (i) Ashok Vachhraj Dholakia10.460kg. and (ii) Divyeshkumar Ashokbhai Dholakia 10.833kg. during the year under consideration. As per the information available, the aforesaid persons not have creditworthiness to allow gold in the quantity as loan to the assessee. In absence of creditworthiness of the aforesaid persons, the AO had reasons to believe that loan in fold shown in the name of aforesaid persons was not genuine. He therefore initiated reopening.

Having heard the parties, the High Court held that,

1. The reasons recorded indicate two reasons for reopening the assessment. The first reason is that the assessee had purchased cut and polished diamonds of Rs.11.99 lacs from one Sparsh Export Pvt. Ltd. which was managed by Rajendra Jain and Surendra Jain. The reasons record detail background of these persons who were subjected to search operations, during which, their statements were also recorded indicating that they were engaged in bogus billing and providing fake accommodation entries. The AO therefore noted that these persons were mere entry providers. They were indulging in providing accommodation in the nature of bogus sales. In the statements they had also confessed to this aspect stating that they are not really trading in diamonds but indulging in paper transaction only and provide accommodation entries by issuing accommodation bill without affecting actual sales to the assessee. According to the AO therefore, this being a fake transaction without real trading of the diamonds, the assessee had thereby reduced its income by claiming fake purchases. The second issue which the AO seeks to examine during the reopening pertains to loan of gold received by the assessee from Ashok Vachhraj Dholakia and Divyeshkumar Ashokbhai Dholakia. The AO noted that as per the information available, aforesaid persons do not have creditworthiness to allow gold in the quantity as loan to the assessee. In absence of creditworthiness of these persons, he had reason to believe that loan shown in the name of said persons was not genuine.

2. We may refer to second issue first. Though the AO has referred to information available to the effect that said Ashok Vachhraj Dholakia and Divyeshkumar Ashokbhai Dholakia did not have creditworthiness to give such quantity of gold as loan, he has not referred to any source of such information. In absence of any material which was not part of the original assessment or with respect to which it can be stated that the assessee failed to disclose true and full facts, it was not permissible for the AO to reopen the assessment on this basis. The fact that the assessee had taken gold loan from such person was very much part of the returns filed by the assessee. If during the scrutiny assessment, the Assessing Officer desired to examine such transactions in context of creditworthiness of these persons, it was always open for him to do so. However, scrutiny assessment cannot be reopened beyond a period of four years without there being anything to suggest that the income chargeable to tax had escaped assessment due to failure on part of the assessee to disclose truly and fully all material facts. Even otherwise, the AO had raised multiple queries during the original assessment and these queries were answered by the assessee. Thus this issue was examined by the AO during the original scrutiny assessment. On this basis, therefore, reopening of assessment would not be permissible, that too, beyond a period of four years from the end of relevant assessment year.

3. The first issue however, needs a closer scrutiny. Perusal of the reasons recorded show that the information was provided to the AO by DGIT (Investigation) Mumbai, concerning dubious transactions of Rajendra Jain and Surendra Jain who were managing Sparsh Export Pvt. Ltd. These persons were subjected to search during which they had also made certain confessional statements. The assessee had made purchases of cut and polished diamonds worth Rs.11.99 lacs from Sparsh Export Pvt. Ltd. On the basis of the information available at the command of the AO, he noted that Rajendra Jain and Surendra Jain merely provided accommodation entries without actual sale of diamonds. The assessee had thereby claimed higher expenditure and reduced the profit. It cannot be stated that the AO did not have tangible materials to form a belief that the income chargeable to tax had escaped assessment. Such information was not available during the original assessment. Obviously the assessee would not make such disclosures. The requirement for reopening of the assessment even beyond a period of four years are therefore, satisfied. Merely because such information was supplied to the AO by the investigation wing of the department would not mean that the AO cannot rely upon it after ofcourse, perusing the same and form his own opinion on the basis of the same.

(See 2016-TIOL-1772-HC-AHM-IT)