Kishore Trading Company Vs ITO (ITAT Kolkata)

Income Tax Appellate Tribunal (ITAT) Kolkata has set aside the reassessment of Kishore Trading Company for the Assessment Year 2012-13. The case arose when the Assessing Officer (AO) reopened the assessment under Section 147, based on information from the Investigation Wing that the assessee allegedly received accommodation entries disguised as commodity profits. The Tribunal found that the reassessment was initiated without independent verification and merely relied on borrowed satisfaction, making it legally untenable.

Kishore Trading Company had initially filed its income tax return declaring ₹48,600, which was processed under Section 143(1). The AO reopened the assessment in March 2019, citing undisclosed income of ₹20 lakh through bogus commodity transactions. However, during assessment proceedings, the assessee demonstrated that the declared profits already included the disputed ₹20 lakh, rendering the reassessment unjustified. The AO further questioned the assessee’s transactions with Kali Commodity Pvt. Ltd. and Shree Krishna Bhatter, treating them as unexplained cash credits under Section 68. The appellate authority upheld the AO’s findings, rejecting set-offs against speculative losses.

Before the ITAT, the assessee argued that the reassessment was void since it was solely based on third-party information without independent application of mind. The Tribunal referenced multiple judicial precedents, including Meenakshi Overseas (395 ITR 677) and G&G Pharma (384 ITR 147), which emphasized that reopening based on borrowed satisfaction is impermissible. The Tribunal held that since the reassessment was initiated without due diligence, it was legally unsustainable.

Given the lack of fresh tangible material and the AO’s failure to apply an independent mind, ITAT Kolkata quashed the reassessment proceedings. This ruling reinforces the principle that reassessments must be backed by independent verification rather than merely relying on investigative reports. Consequently, the assessee’s appeal was allowed, nullifying the reassessment.

FULL TEXT OF THE ORDER OF ITAT KOLKATA

This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 19.06.2024 for the AY 2012-13.

02. At the time of hearing the ld. Counsel for the assessee pressed only legal issue taken assailing the reopening of assessment u/s 147 read with section 148 of the Act which is simply on the basis of information received from the investigation wing without any independent application of mind/ tangible material and is on the borrowed satisfaction and therefore ,bad in law.

03. The facts in brief are that the assessee is a partnership firm and has filed the return of income on 09.2012, declaring total income of ₹48,600/-, which was processed u/s 143(1) of the Act on 26.02.2013. Thereafter, the case of the assessee was reopened u/s 147 of the Act, after the ld. AO received information from DDIT, Investigation, Kolkata that assessee is a beneficiary of accommodation entries in the form of commodity profit of ₹20 lacs and thus, the income has escaped assessment to that extent within the meaning of Section 147 of the Act. The notice u/s 148 of the Act was issued on 31st March, 2019, after recording the reason to believe u/s 148(2) of the Act and after obtaining approval of competent authority. The assessee complied with the notice u/s 148 of the Act by filing the return of income on 29.04.2019, declaring total income of ₹48,600/-. Thereafter, the statutory notices were duly issued and served upon the assessee during the assessment proceedings. The assessee furnished the details/ information/ evidences comprising Profit and Loss account, balance sheet, etc. and covers notes. The ld. AO on the basis of said information furnished by the assessee observed that the assessee has disclosed the speculation profit of ₹6,682.12/- the details whereof are as under:-

F&O/ speculation Share Loss from Fort Comtrade Pvt .ltd. (-) ₹9344927.36 F&O /Speculation Share Profit from Shree Krishna Bhatter ₹9,05,925/- Commodity Profit from Kali Commodity Private Limited ₹84,45,684.48/- Net Speculation Profit Shown as income in the income tax return ₹6682.12

04. The ld. AO in order to verify transactions, also issued notices u/s 133(6) of the Act to Multi Commodity Exchange of India Ltd, Mumbai, which was replied by the said exchange that assessee has not made any transactions at MCX platform through Kali Commodity Pvt. Ltd. during F.Y. 2011-12. It was informed that the assessee has done transactions in commodity derivatives resulting in overall profit of ₹88,45,684/-, which was claimed to have been made through Kali Commodity Pvt. Ltd. at Multi Commodity Exchange of India which according to the AO could not be proved. Accordingly, the assessee was called upon to furnish the complete details and was also directed to ensure the personal appearance of the said parties on 10.12.2019, but the assessee failed to do so. Finally, the ld. AO concluded that the assessee was unable to substantiate of his claim of profit of ₹84,45,684/- and accordingly, show cause notice was issued as to why the same should not be treated as income of the assessee as credit u/s 68 of the Act. The ld. AO also noted that the assessee has claimed to have made transactions in Future and Options / speculation segment at Calcutta Exchange through Krishna Bhattar and earned profit of ₹9,05,925/- for which the assessee furnished the contract notes. The ld. AO issued notice u/s 133(6) of the Act to Calcutta Stock Exchange and observed from the response to said notice by Calcutta Stock Exchange furnished that assessee has not made any transactions at the said platform through M/s Krishna Bhattar. The AO observed that these transactions were also not substantiated by the assessee. The ld. AO further noted that the assessee has made transactions through Fort Comtrade Pvt. Ltd. in F & O segment and incurred losses of ₹93,44,927/-. The AO issued notice u/s 133(6) of the Act to Fort Comtrade Pvt. for furnishing the details, which were accordingly, furnished. The ld. AO on perusal of the said reply concluded that the assessee has traded in commodity derivative at MCX and MCDX Platform and as such as per the provisions of Section 43(5) of the Act, transactions were in commodity derivatives during A.Y. 2011-12 were speculative transactions and hence, the loss of ₹93,44,927/-, was speculation loss. Finally, after discussing the modus operandi of the accommodation providers finally, the ld. AO observed that the speculation loss of ₹93,44,927/- could not be set off against any other income during A.Y. 2012-13 and accordingly, the speculation claim was rejected with non-speculative income of ₹9,05,925/- and 84,45,684/-, which was assessed as u/s 68 of the Act and made addition of ₹93,44,927/- in the assessment framed u/s 143(3) read with section 147 of the Act vide order dated 30.12.2019.

05. In the appellate proceedings, the ld. CIT (A) dismissed the appeal of the assessee vide para 1 as under:-

“1. Ground no.1 objects to treating income of ₹8445684 as bogus entry. The assessee contends that the transaction was done through registered brokers. The AO found that the claim of the assessee of profit of Rs.8445684 and Rs.905925 from Kali Commodities Pvt. Ltd. and Shree Krishna Battar respectively has been found incorrect and rightly added as cash credits u/s68 and the same are non-speculative incomes. As per provisions of section 73 of the Act, any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. The assessee had speculative loss of Rs.9344927/- made through Fort comtrade Pvt Ltd. But the assesse had not any speculative profits/gains for AY.2012-13. Thus, the speculative loss of Rs.9344927/-can not be set off with any income of the assesse for AY.2012-13. Accordingly, the claim of the set set off speculative loss of Rs.9344927/- with non-speculative incomes of Rs.905925/- and Rs.8445684/-(both being assessed u/s68 of the Act) is hereby rejected and consequently an addition of Rs.9344927/- is hereby made to the total income of the assessee for Ay.2012- 13.”

06. The ld. Counsel for the assessee at the outset submitted that the reopening of assessment by the ld. AO is invalid and void ab initio as the same is based on the information received by the ld. AO from DDIT-Investigation, Kolkata without any independent verification and application of mind and thus, is a patent case of borrowed satisfaction. The ld. Authorized Representative submitted that the case of the assessee was reopened that assessee is a beneficiary of accommodation entry to the tune of ₹20 lacs in the garb of commodity profits which were bogus which have been made through Kali Commodity Pvt. Ltd. The ld. Authorized Representative further argued that the AO has not applied his mind to the information received and available before him and straightway reopened the case based on the information received from DDIT, Investigation, Kolkata. The ld. Authorized Representative, while taking us through the details furnished as regards the speculation profits and losses of the assessee which has been extracted above, contended that the amount of ₹20 lacs which were stated to have escaped assessment was included in the third item i.e. commodity profit from transactions done through Fort Comtrade Pvt. Ltd. which is ₹84,45,648.48 and it is only after ₹ 93,44,927/- set off against speculation profit ,the net income was shown at ₹6682.12. The ld. Authorized Representative therefore, prayed that the ground on which the assessment was reopened stood offered to tax by the assessee itself in the return of income and therefore, the reopening based on the borrowed satisfaction without any application of mind and only on the basis of the information received is invalid in law. The ld. authorized Representative reliedon the following decisions:-

“1. G & G Pharm 384 ITR 147

2. Meenakshi Overseas 395 ITR 677

3. CIT RMG Polyvinyl (I) Ltd. (2017) 396 ITR 5 (Del.)

4. CIT Anupam Kapoor 299 ITR 179

5. CIT Paramjit Kaur 311 ITR 38

6. CIT Shiv Shakti Flour Mills Pvt. Ltd. (2010) 327 ITR 430 (Gauhati)

7. CIT Insecticides (India) Ltd. (2013) 357 ITR 330 (Delhi)

8. Signature Hotels (P) Vs. ITO 338 ITR 51 (Delhi)”

07. The ld. authorized Representative therefore prayed that in view of the above facts and the decisions of various judicial forums, the reopening of assessment may kindly be quashed.

08. The ld. DR on the other hand, submitted that the reasons were recorded based on the information received from DDIT Investigation, Kolkata that assessee is a beneficiary of bogus commodity profits through M/s Kali Commodity Pvt. Ltd. to the tune of ₹20 lacs which has escaped assessment and submitted that it is only after reopening and doing necessary verification, the truth could be dug out. The ld. DR however prayed before the Bench that some time may be allowed so that the exact status could be found from the ld. AO on this issue. accordingly, the time was allowed and the ld. DR was directed to furnish the reply within a period of 1 week.

09. Now time granted to the department has already expired and department has not come up with any report of the ld. AO and therefore, this case is being disposed off on the basis of arguments of both the parties and facts available on records.

010. After hearing the rival contentions and perusing the materials available on record. We find that the case has been reopened after recording the reason to believe u/s 148(2) of the Act and after obtaining permission from the competent authority. We observe from the said reasons that the assessee has earned bogus commodity profits through Kali Commodity pvt. Ltd. amounting to ₹ 20 lacs, which according to the ld. AO were not disclosed and thus, have escaped assessment. However, on the other hand, we note that the assessee has disclosed a details of commodity profits from transactions done through Kali Commodity Ltd. amounting to ₹84,45,684.48, which is inclusive of ₹20 lacs as per the arguments presented before us which could not be controverted b y the ld. DR. Thus, the very basis of the reopening fails and therefore, it is adequately clear that the reopening has been made on the basis of information received without any independent verification and application of mind and is a case of in fact borrowed satisfaction, which is not permissible under the Act. The case of the assessee is supported by the decision of Meenakshi Overseas (supra) and various other decisions as cited before us. Considering the facts of the case in the light of the decisions, we are inclined to hold that the reopening of assessment has been made invalidly and is bad in law. Accordingly, we quash the reopening of assessment.

011. In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 08.01.2025.