Hawala Transaction


vimal punmiya

Accommodation Times News Service

Vimal Punmiya

Currently the sales tax department notified various parties as Hawala Operator. List of those parties is also available on MVAT site. Due to this racket Income tax department re-open the cases of those parties who have transaction with these parties. Because hawala operators open concerns in name of uneducated poor people. These operators received commission of .01 % to 5% depend upto sector to sector. Therefore, beneficiary should becareful because department made addition/disallowance on account of transaction with hawala parties on following grounds that –

–          assessee transaction are bogus.

–          Assessee books of account are not correct,

–          Assessee take accommodation entries to adjust his profit

–          Assessee take Bill to adjust his stock quantity


Transaction is 100% genuine

Purchase from “A” and Bill of “B”

100% Bogus

Combination of these 3

Loss NOT Loss due to adjustment in G.P. % of transaction as commission will be added. Because sale cannot be made without purchase Some loss
Reason of Loss All Evidences are available therefore no addition will be made. Purchases are genuine but parties are not genuine. In this case inference was drawn that assessee take bill of “B” to reduce G.P. Whole business is bogus. Main business is only for commission. In this case some evidences are available. So, whole purchases cannot be denied. But some amount may be disallowed
Power to Assessing officer Rectification U/s 154, Re-assessment U/s 148, Revision of order u/s 263 and survey or search action.
Evidence in support of claim:-  Purchase Bill, Purchase Order, Freight Receipt, Weigh bridge, Stock register Inward register, Outward register, Consumption registered, consumption certificate from appropriate person, Vat payment by purchaser Confirmation, and Bank Statement.
Remedy to assessee File objection against the Notice u/s 148 and proceeding u/s 154 and 263, Petition to CIT 273A for reduce or waive penalty, Appeal for waiver of interest may be filed before the CIT(A) and Tribunal, file appeal against the proceeding u/s 148,154 and 263 against appellant authority. 
Procedure for challenging notice u/s 148. File return of income in response to notice and demanded “Copy of reason recorded for reopening of case”. 


Specimen copy of letter to AO








REG:-Assessee Name



Respected sir,


In connection with the aforesaid subject matter and under  instruction from our aforesaid client. We would like to state that—

The Assessee has filed the return of income for the Assessment Year ………. dated ………. The Original return filed on …………. should be considered as return U\s 148.


We request your good self to kindly provide us the reasons recorded for re-opening the assessment. Which would enable us to file proper objection/ details.


Thanking You

For …………………….


Basis of Objection
  1. Sales Tax Department called them as‘Suspicious’ Dealers and not ‘confirmed hawala dealers’ .i.e. It is possibility that dealers may be hawala dealers. Addition cannot be made on presumption basis.
  2. The name of the selling dealer is placed on the MAHAVAT list only as a ‘suspicious’ dealer i.e. a person who is suspected for issuing fake bills without selling the goods. The law on reassessment is clear to the effect that an assessment can be opened only if the Assessing Officer has reasons to believe that income of the assessee has escaped assessment. The formation of this belief is a jurisdictional condition and its absence can vitiate the re-assessment proceedings. The Court would be entitled to quash the reassessment proceedings if the reasons to believe are non-existent. The reasons must be genuine and not a pretence. An assessment cannot be re-opened on mere suspicion. After all, ‘reason to believe’ is not the same thing as ‘reason to suspect’.
SheoNath Singh v. AAC (1971) 82 ITR 147 (SC) is a good authority for the proposition that an assessment cannot be re-opened on the basis of mere suspicion.
  1. A general confession by a person that all his transactions are bogus or that he has indulged only in bogus transactions cannot be basis for re-opening the assessment of an assessee who has transactions with this person. This is more particularly so when the assessee has not been specifically named in the confession.

ITO v. LakhmaniMewal Das (1976) 101 ITR 427 (SC)

the assessee had obtained a loan from a lender. The lender had given a confessional statement subsequently to the Income-tax department that he had ‘only’ indulged in name lending transactions ‘only’. The assessment of the assessee was proposed to be re-opened on the basis of this statement. The Apex Court held that reassessment proceedings must be constituted by ‘reasons to believe’ based on relevant material on hand. There must be a live connection between the materials and the belief. If the materials itself were vague, then the belief founded on the same would be as good as non-existent.

S. P. Agarwalla v. ITO (1983) 140 ITR 1010 (Cal.), the assessment of the assessee was proposed to be re-opened on the ground that the lender had given a confessional statement that ‘all’ his loan transactions were bogus. The assessee’s loan transaction was not specifically referred as bogus.

  1. assessee disclosed fully and truly all material facts necessary for his assessment, and all the facts readly available to assessing officer at the time of original assessment, therefore re-opening of assessment is bad-in law.

Judicial Pronouncement

  1.      I.        Jashan Textiles Mills P. Ltgd. Vs. DCIT (2006) 284 ITR 542 (Bom):

Tribunal having concluded that all the material facts were fully and truly disclosed by the assessee at the time of original assessment, invoking the of provisions of S. 147 after the expiry of four years from the end of the relevant asst. year was not valid.

  1.    II.         BalakrishnaHiralalWani vs. ITO (2010) 321 ITR 519 (Bom.)

There was no tangible material before the Assessing Officer to form the belief that the income had escaped assessment and therefore, reopening of assessment under section 147 was not valid.

  1.  III.        WelIntertrade (P) Ltd &Anr vs. ITO (2009) 308 ITR 22 (Asstyr 2000-2001)

Assessee having fully and truly disclosed all the material facts necessary for the assessment as required by the AO, the precondition for invoking the proviso to S. 147 was not satisfied and therefore AO acted wholly without jurisdiction in issuing notice u/s. 148 beyond four years period mentioned in S. 147.

  1.  IV.        Purity Techtextile (P) Ltd. vs. ACIT &Anr. (2010) 325 ITR 459 (Bom.)

Where the deduction under section 80IB of the Act was allowed to the assessee by the assessing officer in the original assessment order under section 143(3) of the Act after considering the audit report in Form 10CCB and the other details filed by the assessee, it cannot be said that there was a failure on the part of the assessee to disclose fully and truly all the facts for the assessment so as to invoke the provisions of section 147 for re-examining the deduction under section 80 IB of the Act, after expiry of four years from the end of the assessment year.

  1.    V.        Full and true disclosures of all material facts: Re-opening is invalid.

a)   BhagwatiShankariKarkhana (2004) 269 ITR 186 (Bom)

b)   Western Outdoor Interactive (2006) 286 ITR 620 (Bom)

c)    Hindustan Lever Ltd. (2004) 267 ITR 161 (Bom)

d)   Prashant Project Ltd. vs. Asst. CIT (2011) 333 ITR 368 (Bom)

e)    Hindustan Petroleum Corporation Ltd. vs. Dy. CIT (2010) 328 ITR 534 (Bom)

f)     Nihilent Technologies (P) Ltd v Dy CIT (2011) 59 DTR 281 (Bom)

g)    Shriram Foundry Ltd v. Dy.CIT( 2012) 250 CTR 116 (Bom.)

h)   Monitor India (P) Ltd v. UOI ( 2012) 68 DTR 313 (Bom)

i)     HCL Corporation Ltd. v. ACIT (2012) 66 DTR 473 (Delhi)(High Court)

j)     Kimplas Trenton Fittings Ltd. v.ACIT (2012) 340 ITR 299 (Bom.)


  1.  VI.        Titanor Components Limited vs ACIT (2011) 60 DTR 273 (Bom.) (High Court)

It is necessary for the AO to first state that there is a failure to disclose fully and truly all material facts. If he does not record such a failure he would not be entitled to proceed u/s 147.There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts.

Editorial?Hindustan Lever( 2004) 268 ITR 332 (Bom) followed).


  1. CIT vs. Amitabh Bachchan (Bombay High Court)

S. 147 Reopening in the absence of “fresh tangible material” is invalid


For AY 2002-03, the assessee filed a ROI declaring income of Rs.14.99 crores. A revised ROI was then filed claiming 30% adhoc expenses (Rs. 6.31 crores) and offering income of Rs. 8.11 crores. When the AO asked the assessee to substantiate the expenses, he withdrew the claim. The AO passed a s. 143(3) assessment determining the income at Rs.56.41 crores. The AO then issued a s. 148 notice (within 4 years) to reopen the assessment on the ground that the claim for expenses (which was withdrawn) had to be assessed as “unexplained expenditure” u/s 69. The CIT (A) & Tribunal struck down the reassessment order on the ground that the material on the basis of which the assessment was sought to be reopened was always available at the time of the original proceeding and there was no new material. On appeal by the department to the High Court, HELD dismissing the appeal:


The assessee had made a claim for 30% adhoc expenditure. This was withdrawn by the assessee when asked by the AO to substantiate. The reopening on the basis that the said adhoc expenditure constituted “unexplained expenditure” u/s 69 was based on the same material. There was no fresh tangible material before the AO to reach a reasonable belief that the income liable to tax has escaped assessment. It is a settled position of law that review under the garb of reassessment is not permissible.

5. Basis of argument at the time of re-assessment proceeding.


a)      Whether a transaction is genuine or not is basically a question of fact. Where there was concurrent finding of facts by CIT (A) as well as the Tribunal that the transaction of purchases and sale of jute was genuine and the assessee suffered loss therein, the loss cannot be disallowed on the basis of some discrepancies noticed in the books of the seller.

The assessee could not be punished for mistake in the seller’ books. The Tribunal held that the transaction was genuine and allowed loss.The finding of the Tribunal was held justified.

CIT v. Basant Investment Corporation [1999] 238 ITR 680 (Cal),

b)   The genuineness of transaction was doubted by the AO. The assessee furnished the name of the company, number of share purchased, date of sale amount of purchase and sale money etc. The assessee had discharged its initial burden.

The claim of the assessee could not be denied merely because the broker, through whom the shares were purchased and sold, failed to produce his books. That does not mean that the transaction was not genuine.



II)     No addition will be made without any evidence.

Addition were made to the income of the assessee on the ground that the purchases were fictitious. The Tribunal found that there was no evidence that purchases were bogus. Deletion of addition was held to be justified.


SARASWATHI OIL TRADERS V. CIT [2000] 254 ITR 259 (SC),174 CTR 108 (SC)-The Tribunal deleted the additions made on account of bogus purchased as well as addition made on account of unaccounted sales. No question of law arose.


III)      Without find any discretionary in books of account, books of account cannot be rejected.


Contd in next part….


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