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Brij Mohan Agarwal v. Assistant Commissioner Of Income-Tax And Another
Factual and Procedural Background
This writ petition, heard by M. Katju, J., was filed challenging a notice under section 148 of the Income-tax Act, 1961 dated 14 November 2002 (annexure 6). The petitioner is a Hindu Undivided Family (HUF) with Brij Mohan Agarwal as karta; the relevant assessment year is 2001-02.
The petition states that the petitioner’s main source of income was from house property. In 1999 the petitioner purchased 8,400 shares of M/s. Charismatic Trade Links Ltd., shown in the return for that year (purchase certificate dated 4 June 1999 annexed as annexure I). During assessment year 2001-02 those shares were sold to M/s. Yadav and Co., and the sale was shown in the return (statement of income, acknowledgment and intimation under section 143(1) annexed as annexure 3).
The petitioner received summons from the Additional Director of Income-tax (Investigation) Unit-I, New Delhi (dated 17 January 2002 and 14/15 February 2002, annexures 4 and 5) and responded (letter dated 19 February 2002, annexure 5A). Despite this, the petitioner received the impugned notice under section 148. Subsequent queries under section 142 were received on 14 February 2003; the petitioner contended that time for issuing notice under section 143(2) had expired.
The petitioner requested the reasons recorded for initiating reassessment; reasons were supplied on 24 December 2003 (annexure 7). The stated reasons included material received from the Investigation Unit (letter dated 19 July 2002) and an investigation report arising from search and seizure operations under section 132 in the cases of several brokers. The investigation purportedly showed bogus sale entries amounting to Rs. 5,98,800 attributed to the petitioner (listed at serial no. 63 of the investigation list). The petitioner’s return showed a long-term capital gain of Rs. 7,62,282 on sale proceeds of Rs. 7,89,180, taxed at the special rate of 10%.
Legal Issues Presented
- Whether the Assessing Officer had a valid "reason to believe" under section 148 of the Income-tax Act, 1961 that the petitioner had concealed income or that the correct income had escaped assessment, thereby justifying issuance of the reassessment notice.
- Whether the material placed before the revenue (including investigation reports and statements arising from searches and seizures) constituted reasonable grounds for an honest and reasonable belief to initiate proceedings under section 148, as distinct from a mere change of opinion.
Arguments of the Parties
Petitioner's Arguments
- The purchase and sale of the shares were not in dispute and were shown in the returns; the company had not transferred the shares in favour of M/s. Yadav and Co., which undermines the basis for reassessment.
- Reassessment cannot be initiated merely on the basis of statements of third parties.
- The sale value had been disclosed in the original return and accepted; therefore the case did not involve escaped assessment.
- The petitioner asserted that the time-limit under section 143(2) had expired, rendering further action unauthorised.
Department's (Respondent's) Arguments
- The petitioner was one link in a chain engaged in bogus transactions (long-term and short-term capital gains, share capital, gifts) as revealed by an investigation report forwarded to the Income-tax Department (report dated July 19, 2002; received October 2002).
- Evidence from the investigation and search/seizure operations showed brokers admitted bogus transactions, counterfeit bank notes, and that the petitioner’s name appeared in the investigation list (serial No. 63). Bank statements were relied upon to show the petitioner received substantial amounts from bogus transactions.
- The petitioner had falsely shown Rs. 5,98,800 as share proceeds and paid tax at the special long-term capital gains rate of 10%, whereas such amounts were actually undisclosed income taxable under the normal rate (i.e., claimed under the wrong head to attract a lower rate).
- Statements recorded under section 132(4) indicated brokers disclaimed operation of accounts used for alleged cheques/drafts; the director of a stock broker admitted providing bogus accommodation entries for commission. These materials provided the Assessing Officer with ample grounds to believe income was concealed.
- The earlier assessment under section 143(1) involved no scrutiny; the investigation uncovered material justifying reassessment proceedings.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Ranbir Engineering Mills Store v. ITO, [1980] 126 ITR 512 (P&H) | Where raids and examination of books reveal accommodation entries (no money actually passed), proceedings under section 148 can be validly initiated. | The court relied on this decision as an example where s.148 proceedings were held valid after investigations showed accommodation/ bogus entries; it supports the proposition that the Assessing Officer may have reasonable belief based on such material. |
| Frontier Trading Co. v. P.N. Chaudhry, ITO, [1982] 136 ITR 503 (P&H) | Similar view as Ranbir Engineering — supporting validity of s.148 initiation in the presence of evidence of bogus/accommodation entries (as described in the opinion). | Placed in the series of authorities supporting the court's conclusion that investigation material can justify a reasonable belief for issuing s.148 notice. |
| Jash Bhai F. Patel v. Commissioner of Income-Tax, Amritsar-II, [1982] 136 ITR 799 (P&H) | Similar proposition (as cited in the opinion): authorities have sustained reassessment action in comparable factual contexts involving bogus entries. | Used as supporting precedent to demonstrate consistency of judicial approach in upholding reassessment notices where investigation discloses accommodation/bogus transactions. |
| Kirpa Ram Ramji Dass v. ITO, [1982] 135 ITR 68 (P&H) | Similar view cited by the court concerning the validity of initiating reassessment proceedings on the basis of investigation findings. | Relied upon as part of the line of decisions indicating that s.148 notices may be validly issued when investigating authorities uncover materials pointing to concealment. |
| M. Varadarajulu Naidu v. CIT, [1978] 111 ITR 301 (Mad) | Cited among authorities supporting reassessment initiation on the basis of investigative material (court described it as a similar view). | Relied upon collectively with other cases to demonstrate established precedent that supports the Assessing Officer's reasonable belief. |
| Hazi Amir Mohd. Mir Ahmed v. CIT, [1977] 110 ITR 630 (P&H) | Cited as another authority reflecting the same approach to the validity of reassessment proceedings based on investigation. | Referenced by the court to show consistency in precedent authorising reassessment where evidence of bogus transactions emerged from searches/investigations. |
Court's Reasoning and Analysis
The court examined the materials placed on record (petition, counter-affidavit, rejoinder and annexures). It noted the following analytical steps:
- Assessment of evidentiary material: The court considered the investigation report (dated 19 July 2002), the results of search and seizure operations under section 132, statements recorded under section 132(4) and bank records which, according to the Department, indicated the petitioner’s involvement in bogus transactions and receipt of significant sums.
- Standard for issuing section 148 notice: The court reiterated the legal standard that at the stage of issuing a notice under section 148, all that is required is that the Income-tax Officer entertain an honest and reasonable belief based upon reasonable grounds (and not mere suspicion, gossip or rumours) that income has been concealed or the correct income has escaped assessment.
- Application of facts to legal standard: The court concluded that the material received from the Investigation Wing — including the investigation report and ancillary documents — constituted relevant and material facts giving respondent No. 1 sufficient grounds to form an honest and reasonable belief that the petitioner had concealed income by using bogus transactions.
- Rejection of "change of opinion" contention: The court explicitly rejected the petitioner's contention that initiation of reassessment was merely a change of opinion, finding instead that very important materials had come before the income-tax authorities justifying action.
- Qualification of final adjudication: The court emphasised that it was not pronouncing a final verdict on the substantive allegations (i.e., whether the transactions were in fact bogus); the limited question for the writ court was only the existence of a reasonable belief at the notice stage.
- Reliance on precedent: The court referred to a line of authorities (including Ranbir Engineering Mills Store v. ITO and others) that upheld initiation of s.148 proceedings in comparable factual circumstances involving accommodation/bogus entries; these authorities were used to support the conclusion that the Assessing Officer’s belief was reasonable.
Holding and Implications
DISMISSED. The writ petition was dismissed for lack of merit.
Implications and direct effects:
- The court held that the Assessing Officer (respondent No. 1) had an honest and reasonable belief, based on material from the Investigation Wing and associated documents, that the petitioner had concealed income or that correct income had escaped assessment. Consequently, the issuance of the notice under section 148 was upheld.
- The court did not decide on the ultimate truth of the allegations (i.e., whether the transactions were in fact bogus); it confined itself to the limited legal question whether the prerequisite belief for issuing a s.148 notice existed.
- No new precedent was announced — the decision relies on and applies existing authorities holding that s.148 proceedings can be validly initiated where investigation discloses evidence of accommodation/bogus entries and provides reasonable grounds for belief.
M. Katju, J.:— This writ petition has been filed challenging the notice under section 148 of the Income-tax Act, 1961, dated November 14, 2002, annexure 6, to the writ petition.
2. Heard learned counsel for the parties. The petitioner is a Hindu undivided family and Brij Mohan Agarwal is the karta of the family. The relevant assessment year is 2001-02.
3. It is alleged in paragraph 6 of the petition that the main source of income of the petitioner is from house property. The petitioner enjoys income from the house property which is said to be commercial premises.
4. It is alleged in paragraph 7 of the petition that during the financial year 1999, the petitioner purchased 8,400 shares of M/s. Charismatic Trade Links Ltd. and the purchase of these shares was duly shown in the relevant income-tax return for that year. A true copy of the purchase certificate dated June 4, 1999, has been annexed as annexure I to the writ petition.
5. It is alleged in paragraph 8 of the petition that during the assessment year 2001-2002, the aforesaid shares were sold to one M/s. Yadav and Co. In paragraph 9 of the petition it is stated that this sale of shares was duly shown in the return of income. A true copy of the statement of income along with acknowledgment receipt as well as the intimation under section 143(1) has been annexed as annexure 3 to the writ petition.
6. Subsequently, the petitioner received a summon from the Additional Director of Income-tax (Investigation) Unit-I, New Delhi, vide summon dated January 17, 2002, by means of which certain information was required from the petitioner. A true copy of the notice has been annexed as annexure 4 to the writ petition. Thereafter the petitioner again received a summon dated February 14/15, 2002, by which certain more information was required vide annexure 5 to the writ petition. It is alleged in paragraph 12 of the petition that due compliance was made by the petitioner by letter dated February 19, 2002, vide annexure 5A.
7. However, the petitioner was surprised to receive the impugned notice under section 148 of the Act vide annexure 6 to the writ petition. On February 14, 2003, the petitioner received notice under section 142 of the Income-tax Act with certain queries. The petitioner replied that the time period for issuing the notice under section 143(2) has expired hence respondent No. 1 was not authorised to initiate the proceedings.
8. In paragraph 16 of the petition it is alleged that respondent No. 1 did not point out any reason to believe under section 148. It was also not informed by the respondents that the receipts in respect of sale of shares was doubtful according to the respondents. In compliance with the notice under section 148 the petitioner requested that the return already filed by him may be treated as compliance of the said notice. He also requested that copy of the reasons recorded for initiation of reassessment proceedings under section 148 may be supplied to him. On December 24, 2003, respondent No. 1 has supplied the reasons vide annexure 7 to the writ petition.
9. A perusal of the reasons shows that information relating to bogus entries for long-term capital gains/loss, share dealings, etc., was received from the Director of Income-tax (Investigation) Unit-I, New Delhi, vide letter dated July 19, 2002, along with the investigation report prepared by the Additional Director of Income-tax (Investigation) Unit-I, New Delhi. Search and seizure operation under section 132 of the Income-tax Act was conducted in the cases of the brokers, namely, M/s. Yadav and Co., Rakesh Nagar and Co., Sri Surendra Singh Mehta. During the course of investigation it was found that bogus entries of sale of shares amounting to Rs. 5,98,800 has been issued to Brij Mohan Agarwal, Hindu undivided family as per sl. No. 63 of the list of the investigation wing enclosed with the report. From a perusal of the record of the assessee it is revealed that the assessee in his return of income for the assessment year 2001-02 has claimed profit of Rs. 7,62,282 for long-term capital gain on sale of 8,400 shares for Rs. 7,89,180 and has claimed income-tax chargeable at 10 per cent, as special rate. From the findings of the investigation wing and as per the record the respondent had reason to believe that the assessee has diverted and has concealed his income of Rs. 5,98,800 by disclosing it to be sale proceeds of shares which is not correct as no real transaction of dealing in shares had ever taken place.
10. The petitioner has alleged in paragraph 20 of the writ petition that the purchase of shares is not in dispute, the sale of these shares is also not in dispute. The aforesaid shares have not been transferred in favour of M/s. Yadav and Co. by the concerned company. Merely on the basis of the statement of a third person, reassessment proceedings cannot be initiated against the petitioner. It is alleged in paragraph 22 of the writ petition that the sale value of shares has been disclosed and has been accepted and there is no dispute in respect of the sale value of the shares. The complete sale value has been shown in the original return of income filed by the petitioner and hence it cannot be said to be a case of escaped assessment.
11. The Department has filed a counter-affidavit and we have perused the same. In paragraph 4 of the counter-affidavit it is stated that the petitioner is one of the links in a chain which indulges in bogus transactions in long-term capital gains/short-term capital gains/share capital/gifts, etc. It is alleged that the petitioner has a very chequered history which was unravelled during an investigation, which was done by the Investigation Wing, Delhi, and the report was forwarded to the Income-tax Department in the month of October, 2002. This investigation report contained details of enquiries conducted, which showed that certain share brokers during the course of investigation had stated/admitted about the bogus transactions in shares through their several bank accounts opened in their names, which were denied by the stock brokers as their own and have denied the contract. Notes also issued by the banks were found counterfeit. The report also contained exhaustive list of persons who have indulged in such share transactions and the petitioner's name finds mention in the list at serial No. 63 vide annexure CA.-1 to the counter-affidavit. In the investigation report the name of the petitioner figures in the bogus transactions with M/s. Yadav and Co. who have already been indicted in another scam of Rs. 101 crores. A copy of the relevant extract of the investigation report dated July 19, 2002, is annexed as annexure CA-2 to the counter-affidavit. Statement of bank account No. 8273 of the petitioner maintained at the State Bank of India, Agra, is annexure CA-3 to the counter-affidavit, which goes to show that the petitioner was indulging in bogus transactions of shares. The transacted amounts are shown in the pass book which goes to show that the petitioner is actively involved in bogus transactions and was also the recipient of several lakh rupees arising out of these bogus transactions.
12. In paragraph 5 of the counter-affidavit it is stated that the petitioner has falsely shown share proceeds receipt of Rs. 5,98,800 on which he had only paid long-term capital gains tax. This amount has already been investigated and the balance is in the process of being investigated. The amounts shown are nothing but the receipt of undisclosed income for which there is ample material before the Assessing Officer. The petitioner has cleverly shown his undisclosed income under the head “Long-term capital gain” which is assessed at 10 per cent., which is a special rate, although the income of the petitioner should be shown under the head “Income from other sources” and was to be taxed at the normal rate.
13. In paragraph 6 of the counter-affidavit it is stated that the petitioner had diverted his funds obtained from these bogus transactions to long-term capital gain tax. In the search and seizure operation conducted in the premises of M/s. Yadav and Co., Rakesh Nagar and Co., Sri Surendra Singh Mehta, Sri O.P Yadav and Mahendra Singh Yadav of Yadav and Co. had categorically admitted in their statement recorded under section 132(4) of the Income-tax Act that they have never operated the bank accounts from where the alleged cheques and drafts were issued. The statement of Sri O.P Yadav along with affidavit of Mahendra Singh Yadav of Yadav and Co. recorded under section 132(4) have been annexed as annexures CA-4 and 5 to the counter-affidavit.
14. In paragraph 8 of the counter-affidavit it is stated that the petitioner further indulged in bogus transactions in purchase also whereby he purchased shares on bogus transaction from M/s. J.R.D Stock Broker (P.) Ltd. The director of M/s. J.R.D Stock Broker (P.) Ltd. Mr. Ashok Gupta has admitted in his statement that he was engaged in providing bogus accommodation entries in exchange of cash/cheques for certain commission. The copies of the statement of Mr. Ashok Gupta are annexures CA-5, 7 and 8 to the counter-affidavit. In paragraph 10 of the counter-affidavit it is stated that the petitioner is the recipient of several lakhs of rupees arising from the bogus transactions entered into through Yadav and Co. and through M/s. J.R.D Stock Broker (P.) Ltd. The petitioner has concealed all these relevant materials. The earlier assessment was done under section 143(1) of the Income-tax Act, in which there was no scrutiny of the material.
15. In paragraph 21 of the counter-affidavit it is stated that the petitioner has concealed income in his return. A sum of Rs. 7,88,298 was taxable under the normal rate under the head “Income from other sources” but it had been shown under the head “Long-term capital gain” and was taxed at a special rate of 10 per cent. Hence, the petitioner has furnished inaccurate income and has also shown lesser income and has been assessed at a lower rate. The contention of the petitioner that the Department has accepted the sale of shares is misleading. There is no finding of the Assessing Officer that the sale of shares ever took place. Whatever is shown are bogus entries.
16. We have also perused the rejoinder-affidavit.
17. From the facts stated in the counter-affidavit it is evident that the petitioner has been suppressing his correct income and has been indulging in bogus transactions as stated in the counter-affidavit. The contention of learned counsel for the petitioner that it is a mere change of opinion cannot be accepted. Very important materials have come before the income-tax authorities to show that the petitioner was suppressing his income by indulging in bogus transactions.
18. It may be mentioned that at this stage we are not pronouncing a final verdict about the allegations in the counter-affidavit. All that the court has to see at this stage is as to whether it can be said that the authority concerned to had reason to believe that the assessee had concealed his income or that the correct income of the assessee has escaped assessment. In view of the investigation made by the investigation wing of the Department, relevant and very material facts have come before respondent No. 1 that the petitioner was concealing his income by indulging in bogus transactions. All that is required at the stage of issuing of notice under section 148 is that the belief of the Income-tax Officer must be that of an honest and reasonable person based upon reasonable grounds and not on mere suspicion, gossip or rumours. In the present case, we are of the opinion that the belief of respondent No. 1 was an honest and reasonable belief on the material which he had received from the investigation wing of the Department. In Ranbir Engineering Mills Store v. ITO, [1980] 126 ITR 512 (P&H), consequent upon raids conducted by the Income-tax Department on certain brokers and examination of the books of a certain person, it was found that many of the transactions recorded in the books of the assessee as loans were accommodation entries in which no moneys had passed and the so-called lenders were name-lenders only. It was held that the proceedings under section 148 by the Assessing Officer had been validly initiated. Similar view has been taken in Frontier Trading Co. v. P.N Chaudhry, ITO, [1982] 136 ITR 503 (P&H); Jash Bhai F. Patel v. Commissioner Of Income-Tax, Amritsar-Ii., [1982] 136 ITR 799 (P&H); Kirpa Ram Ramji Dass v. ITO, [1982] 135 ITR 68 (P&H); M. Varadarajulu Naidu v. CIT, [1978] 111 ITR 301 (Mad) and Hazi Amir Mohd. Mir Ahmed v. CIT, [1977] 110 ITR 630 (P&H).
19. Thus there is no merit in this petition and it is dismissed.
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