Re-assessment proceedings initiated by AO based on report borrowed from Enforcement Directorate is unsustainable, more so if no independent reasons to believe have been formed: HC



ITA No. 1365/2018




S Muralidhar & Talwant Singh, JJ

Dated: August 06, 2019

Appellant Rep by: Ms Lakshmi Gurung, Sr. Standing Counsel, Mr Tushar Gupta & Mr Siddharth Gupta, Advs.
Respondent Rep by: 

Income Tax – Sections 147 & 148

Keywords – Reason to believe – Investigation by ED – Zero investigation

THE assessee organized export of certain commodities under the UN Oil for Food Progamme in the capacity of a partner in one M/s Hamdaan Export, New Delhi. The return for the relevant AY reflected only income from house property and income from other sources. After issuance of preliminary assessment result u/s 143(1), the ED conducted searches in the premises of the partnership firm and uncovered several incriminating documents. Evidence of income from UNOF Programme was discovered by the ED on a reference received from the Investigation Wing. Based on this report, the AO issued a re-assessment notice. The AO cited the investigation report of the ED characterising the amount as bribe paid to Jordanian officials from the account of the assessee to the Iraqi officials. Hence, this expenditure was not allowed as deduction as previously allowed. The CIT(A) affirmed the re-assessment. The ITAT, however, quashed the re-assessment notice.

Having heard the parties, the High Court held that,

Whether the AO is at liberty to borrow the investigation report of the Enforcement Directorate to issue a notice of re-assessment without explaining the formation of its own reason to believe – NO: HC

++ there was no reference to any inquiry conducted by the AO or the CIT (A) on examining the documents available with the AO. The crucial element of explaining how, on the basis of such record, the AO formed the reason to believe that income had escaped assessment is missing. As pointed out by the ITAT that the entire case is based upon borrowed investigation stated to have been conducted by Enforcement Directorate and no evidence has been brought on record to connect assessee with the amount of US $ 62,000, rather it is a case of zero investigation.

Revenue’s appeal dismissed


CM Appl.No. 50117/2018 (delay)

1. For the reason stated in the application, the delay of 50 days in re-filing the appeal is condoned and the application is disposed of.

ITA 1365/2018

2. The Revenue is an appeal against an order dated 9th March, 2018 passed by the Income Tax Appellate Tribunal in ITA No. 2482/Del/2012 for the Assessment Year 2001-2002.

3. The question sought to be urged by the Revenue is whether the ITAT erred in holding the re-opening of the assessment under Section 147 of the Act for AY in question to be bad in law?

4. The facts in brief are that the Assessee is a partner in M/s Hamdaan Export, New Delhi engaged in export of various commodities like food grains, medicine etc. It is stated that exports were primarily made to Russia and UK after procuring commodities locally from India.

5. After the Iraq War of 1991, the United Nations had approved a relief programme by the name of “UN Oil for Food Programme (“UNOF Programme.) which involved opening of a UN controlled Escrow account. Into the Escrow Account, sales receipts of proceeds by the State Oil Marketing Organization (SOMO) of Iraq were to be deposited and from that account payments were to be made for civil supplies to Iraq.

6. In the original return filed by the Assessee on 31st March, 2003 he declared a net income of Rs. 43,130/- which included income from house property at Rs.19,130/- and income from other sources at Rs. 24,000/-. Only an intimation was sent in respect of this return under Section 143(1) of the Act.

7. The Enforcement Directorate (ED) conducted searches in the premises of M/s Hamdaan Exports on 6th November, 2005 in the course of which several incriminating documents showing the involvement of the Assessee in the UNOF programme were found. These documents showed that he had executed two Oil contracts with the SOMO of Iraq. The five sets of documents gathered by the ED under the provisions of Foreign Exchange Management Act in different countries included the following:

“a. Documents from United Nations’ Independent Inquiry Committee (IIC) pertaining to payment of surcharge and other premium regarding allocation of oil under UNOF Programme.

b. Documents from Jordan (obtained from the Foreign Ministry of Jordan) pertaining to transactions through Jordan National Bank.

c. Documents from Iraq pertaining to correspondence with SOMO and contracts obtained from the Govt. Of Iraq.

d. Documents from U.K. obtained from serious fraud office, U.K.

e. Documents from the External Affairs, New Delhi pertaining to travel of delegations from India to Iraq/Jordan and certain letters issued by Embassy of India in Baghdad to various offices of the Iraqi Government, etc.”

8. The ED issued a show cause notice dated 2nd September, 2006 to the Assessee enclosing the aforementioned documents. According to the ED a reference had been received from the Investigation Wing on 17th March, 2008 that a sum of Rs. US$ 62,000/- was paid by M/s Masefield AG to the account of the Assessee on 5th March, 2001 in the Jordan National Bank on account of commission for sale of Iraqi Oil to Masefield A.G. sale of oil was deducted. On the basis that this amount of 62,000 US$ was not disclosed by the Assessee in his return of income and notice was issued to him under Section 148 of the Act on 26th March, 2008. This amount was characterised as the bribe paid to Jordan from his account to officials in the Iraqi Regime and therefore this was held not to be allowed as deduction.

9. The objections raised by the Assessee against the re-opening were rejected by the AO. In the re-assessment proceedings an order was passed on 22nd December, 2008 by the AO making an addition of Rs. 29,29,850/- as undisclosed income.

10. The Assessees appeal was dismissed by the CIT(A) on 23rd March, 2012. The reasoning of the CIT(A) was that Assessee had not denied that he was not involved in the UNOF programme and that even as per the findings of the Inquiry Committee headed by Justice R.S Pathak the Assessee.s involvement and ownership of the account in which money is deposited “proved beyond reasonable time”. It was held that although the proceedings under the Act and the ED proceedings were independent when the Assessee was asked to request the ED for an early adjudication he did not want to make such a request and it was therefore inferred that “the Assessee was only inclined to stall assessment proceedings”.

11. In the impugned order in the appeal filed by the Assessee before it, the ITAT has observed in paras 12,13 & 14 as under:-

“12. The next contention raised by ld. AR for the assessee that the adjudication proceedings before Enforcement Directorate are still pending and AO has not conducted independent enquiry but based his findings on the material collected by the Enforcement Directorate only. When no such document has been placed before the Bench, it is proved that the AO has not made any independent enquiry by collecting necessary documents but merely based his findings on the basis of letter received from Enforcement Directorate.

13. Not only this, assessee even filed a Writ Petition No.l3559 of 2009 in the Hon’ble High Court of Delhi, copy of order available at pages 33 to 39 of the paper book, seeking direction to the Directorate of Income tax to supply copies of documents pertaining to the alleged transfer of US $ 62,000 in the account of assessee before proceeding further. Deciding the writ petition in favour of the assessee, the Hon’ble High Court directed the Department to furnish the copies of the documents relied upon. But those documents have not been seen by AO nor CIT (A), nor the same have been supplied to the assessee, but AO on the basis of assumption has taken the letter received from Enforcement Directorate as a gospel truth and made addition thereof.

14. AO on the basis of surmises even stated that, “it is understandable because the facts suggest that in the instant case, only the name of Hamdaan Exports was used by Sh. Andleeb Sehgal but the money was actually pocketed by him. Further more, it is seen that Sh. Andaleeb Sehgal paid a sum of US $ 60,000 from his account to the Iraqi Regime. ” These findings go to prove that without an iota of evidence, addition has been made by the AO and confirmed by ld. CIT (A).”

12. When asked whether there was any specific averment in the appeal that the factual findings in paras 12 and 13 that the documents relied upon by the AO were not produced either before the CIT (A) or the ITAT, learned counsel for the Revenue pointed to grounds A, E & F in the memorandum of the present appeal which read as under-

“a. Because the Hon’ble ITAT’s order is perverse insofar as it held that the Ld. AO and Ld. CIT(A) did not peruse any documents while arriving at their decisions. As is evident from the order of the Ld. AO dated 22.12.2008 and the Ld. CIT(A) dated 23.03.2012, documents seized by the ED were perused and examined by the lower authorities and their findings were not based on a mere reference

e. The oil trade in Iraq was controlled by the UN. There was a difference in the price between what was permitted to the Iraqis (and fixed by the UN) and the prevalent market price. Therefore, the Iraqis had started offering Oil Contracts to non-contracting beneficiaries for a premium. As per the procedure adopted by the Government of Iraq, before the allocation of oil was given to beneficiaries, a letter from the non-contractual beneficiary had to be written to SOMO indicating the person to whom the Oil Ministry should extend its cooperation and assistance in completing the oil transaction. Letters written by Sh. K Natwar to various Iraqi Oil Ministers revealed that he recommended Sh. Andaleeb Sehgal’s name for this purpose. These letters, dated 30.01.2001, 26.04.2001 and 16.08.2001, were seized by the ED as evidence.

f. While the company to lift oil was being finalized, Sh. Andaleeb Sehgal in his letter dated 25.01.2001 to Mr. Adnan Ameen, Manager SOMO confirmed that he would be providing the necessary documents for lifting oil. This was evident from page 28 of the documents received from Iraq by the ED.”

13. The Court finds that in none of the above grounds is there any reference to any inquiry conducted by the AO or the CIT (A) on examining the above documents, which were available with the AO. The crucial element of explaining how, on the basis of such record, the AO formed the reason to believe that income had escaped assessment is missing. As pointed out by the ITAT in para 17 “the entire case is based upon borrowed investigation stated to have been conducted by Enforcement Directorate and no evidence has been brought on record to connect assessee with the amount of US $ 62,000, rather it is a case of zero investigation.”

14. It is one thing to state that the above documents were available but an entirely different thing to state that on examining those documents the AO found the live link for forming the reason to believe that the sum added had escaped assessment. It must be recalled that these were re-assessment proceedings and not at the stage where it was enough to form a prima facie view for re-opening the assessment. In the re-assessment proceedings the AO was expected to undertake a full-fledged inquiry into the documents produced before him to come to the conclusion that the addition sought to be made was justified. As pointed out by the ITAT or that the AO seems to have done is to simply borrow the conclusions drawn by the ED without making any independent inquiry himself into the matter. Even before the ITAT, the Revenue was unable to show the precise documents or material on the basis of which the AO formed the reason to believe that 60,000 US$ had been paid as bribe to the Iraqi officials and therefore was required to be added to the income of the Assessee.

15. Consequently, the Court is unable to find any perversity in the impugned order of the ITAT allowing the appeal of the Assessee. No substantial question of law arises. The appeal is dismissed.