ITAT Delhi: Reopening under Section 147 on mere suspicion of fund rotation is unsustainable

Background of the dispute

The Delhi Bench of the Income Tax Appellate Tribunal, in the case of East Delhi Leasing Pvt. Ltd. Vs ITO (ITAT Delhi), addressed the legality of a reassessment initiated under Section 147 of the Income Tax Act 1961 for Assessment Year 2010-11.

The assessee, a company engaged in financing and leasing, had originally filed its return of income on 15.10.2010 declaring Nil income. No scrutiny assessment under Section 143(3) was completed at that time. Subsequently, the Assessing Officer (AO), ACIT, Circle-35(1), Delhi, reopened the assessment on the basis of information received from the Investigation Wing regarding frequent RTGS transactions and total bank deposits aggregating to Rs. 7,56,49,303 in a bank account maintained with CITI Bank.

The reassessment culminated in an addition of Rs. 5.42 crore under Section 68, treating the share application money received from various companies as unexplained cash credits. The National Faceless Appeal Centre [CIT(A)] confirmed the addition. The assessee challenged both the validity of the reopening and the addition before the Tribunal.

The Tribunal first examined the jurisdictional issue – whether the AO had a valid “reason to believe” as required by Section 147, or whether the reopening was based merely on suspicion, leading to a fishing and roving enquiry.

Reasons recorded for reopening under Section 147

The AO recorded detailed reasons for issuing notice under Section 148, which can be summarised as follows (substance retained, language recast):

  • The assessee filed its return for AY 2010-11 on 15.10.2010, declaring Nil income.
  • As per the return and financial details, the assessee reflected:
    • Paid-up share capital of Rs. 3,02,11,700
    • Securities premium of Rs. 4,50,00,000
    • Investments of Rs. 6,60,47,400
    • Bank balance of Rs. 1,45,62,170
    • Sundry creditors of Rs. 55,18,945
  • The AO noted that no business activity had been shown for the year.

Information was then received from the Investigation Wing (Income Tax Officer, Unit-1, New Delhi) that:

  • There were regular RTGS credits of Rs. 1 crore and Rs. 50 lakh from multiple entities into the assessee’s bank account (No. 0026654227 with CITI Bank, Jeewan Bharti, 3, Sansad Marg, New Delhi-110001).
  • Outgoing RTGS transfers were made from this account to entities such as M/s BGS Credit Pvt. Ltd., M/s ARS Metals Ltd., and M/s Leasing Estates Ltd.
  • The total deposits in the said bank account for the year amounted to Rs. 7,56,49,303.

The Investigation Wing, after examining the bank accounts of related parties, observed:

  • Various entities were routing “huge funds” amongst themselves through RTGS.
  • The amounts were perceived as revolving repeatedly through the bank accounts of all these parties.
  • According to the AO, the source of these revolving funds remained unexplained.

On this basis, the AO concluded in the reasons that:

  • The assessee had received and transferred significant funds via RTGS to related parties.
  • The assessee had received securities premium of Rs. 4,50,00,000 and made investments of Rs. 6,60,47,400 without demonstrating any business activity.
  • The “source of funds” both in the assessee’s hands and in the hands of related parties was allegedly unexplained before the Investigation Wing.
  • The total credits of Rs. 7,56,49,303 in the assessee’s CITI Bank account were to be treated as unexplained credits under Section 68.

Relying on this, the AO stated that there was reason to believe that income of Rs. 7,56,49,303 had escaped assessment for AY 2010-11 due to the assessee’s alleged failure to fully and truly disclose material facts. A notice under Section 148 was issued thereafter.

Assessee’s objections to reopening

The assessee filed detailed objections challenging the assumption of jurisdiction under Section 147. In essence, the assessee contended: