What is Accommodation entries
In
an economy where unaccounted income is a big menace, there are always efforts
made by the tax evaders to bring their unaccounted income back to their books
of account without paying any tax on the same. Numerous methods and techniques
are used for this purpose and there are lots of techniques that Income Tax
Department know about and probably countless others that have yet to be
uncovered. Routing the unaccounted income back to the books of account disguised
as loan or share capital is one of such methods widely used by the tax evaders
in our country. The method is most prevalent and perhaps also one of the most
organized one to bring the unaccounted money back to the books of account and
even the established business houses resort to this method to bring their
unaccounted money back to their business without paying any tax on the same.
The process to bring the money back in this manner is commonly known in
business parlance as Jamakharchi entries or accommodation entries. This is a
well organized racket controlled and conducted by persons known as entry
providers.
As
per the Directorate of Income Tax (Investigation) Kolkata report in case of “Project
Bogus LTCG through BSE Listed Penny Stocks”, Accommodation entry is a financial
transaction between the two parties where one party enters the financial
transaction in its books to accommodate the other party in lieu of cash of
equal amount and commission charged over and above at certain fixed percentage.
These accommodation entries are taken by various beneficiaries for introducing
their unaccounted cash into their books of accounts without paying the due
taxes.
An
entry operator
As
per the DIT (investigation) report, an entry operator is
the person who is in the business of giving accommodation entries in lieu of
cash/cheque of equal amount after charging certain percentage of commission in
cash.
Modus operandi
An
accommodation entry provider accepts cash from an Assessee and arranges to have
a cheque issued from his own account or some other account, usually of ‘paper’
or fake entities, to make it appear to be a loan or an investment in share
capital. The accommodation entry provider usually charges a commission which is
deducted upfront.
The
method of providing accommodation entry entails breaking up large amounts of
money into smaller, less-suspicious amounts. In India, this smaller amount has
to be below Rs. 50,000/- as deposit of cash below this amount does not require
providing PAN of the depositors. The money is then deposited into one or more
bank accounts either by multiple people or by a single person over an extended
period of time. Also, even larger amounts are deposited in the banks with PAN
numbers of individuals who are mostly illiterate and work for these entry
operators for small salary or commission. The money is then routed through paper
companies controlled by these operators. These companies are incorporated by
taking care of all formalities such as registering with ROC but having only
postal addresses with no real office or employees. The directors of such
companies are again individuals who are mostly illiterate or semiliterate and
work for the entry operators for small salaries or commission. At first sight,
most of these companies would pass of as finance, investment or technology
companies. But as the entry operators would secretly admit, these are only
paper companies used to route the unaccounted income and, at the same time,
clean hoards of unaccounted income for their clients. These companies used for
routing the unaccounted money are basically fake companies that exist for no
other reason than to ‘layer’ the entries or pass it on to the beneficiary as
loan or share capital. They take in unaccounted money as “loan or share
capital” and pass it on to either another such paper company for ‘layering’ of
the transaction or directly to the beneficiary as loan or share capital. They
simply create the appearance of legitimate transactions through fake entries of
loans or share capital in their books of account. As has been exposed from time
to time through search and seizure operations by the department, such entry
operators controls hundreds of bank accounts for depositing cash and hundreds
of companies for routing the entries. Limited resource and infrastructure of
the Registrar of Companies (ROC) perhaps makes it easier for them to incorporate
large number of such paper companies without any difficulty. The process, prima
facie, may appear very simple but it is extremely difficult to expose the whole
chain of money deposited and ‘layers’ through which it is routed back to the
beneficiary.
The
biggest problem is that there is no effective deterrence to curb the activities
of these entry operators. Even conducting search and seizure operations against
them have not really worked as a deterrence and such operations often ended up
in disclosure of ‘unaccounted commission income’ of these entry operators which
definitely could not be the purpose of conducting search and seizure operations
against these operators.
As
per the “Report of the DIT (Investigation), Kolkata - Modus operandi in brief
As
per the “Report of the DIT (Investigation), Kolkata”, the modus operandi was to
make the beneficiary 101 buy some shares of pre-determined penny stock company
controlled by the entry operators 102 at a very low price through exchange
itself or through preferential allotment i.e. through private placement. The
beneficiary holds the shares for one year, the statutory period after which
LTCG received over penny stock was exempt under section 10(38) of the Act till
31st March 2018. In the meantime, operators rig the price of stock and
gradually raise its price many times, often 20 to 25 times. When the prices
reach desired level, the beneficiary who bought the shares at nominal price, is
made to sell it to a dummy paper company of the operator. For this, the report
says unaccounted cash was provided by the beneficiaries which were routed
through a few layers of paper companies by the operator and finally parked with
the dummy paper company also known as the Exit Provider which will buy the
shares.
Role
of Income Tax Department
Income
Tax Department (ITD) is primarily responsible for combating the menace of black
money. For this purpose, it uses the tools of scrutiny assessment as well as
information based investigations for detecting tax evasion and penalizing those
found guilty of tax evasion as per the provisions of the Income Tax Act, 1961 (“the
Act”). In doing so, ITD plays an important role in preventing generation,
accumulation and consumption of unaccounted black money. Investigation Wing of
the ITD often collects information from various sources, carries out
investigations and conveys its findings to the Assessing Officers for them to
examine these findings and take necessary remedial actions.
Suggestive
questionnaire for Assessing Officer to make investigation while dealing with Accommodation
entry issues
Following
suggestive questions are for the Assessing Officer to
make investigation while dealing with accommodation entry issues :
(1) Whether
the two parties were related or known to each other, or mode by which parties
approached each other?
(2) Whether
the transaction was entered into through written documentation to protect
investment?
(3) Whether
the investor was an angel investor?
(4) What
was the quantum of money invested?
(5) How
the party believed the credit-worthiness of the recipient?
(6) What
was the object and purpose of payment/investment?
(7) Whether
the share applicant was in existence and an independent entity?
(8) How
the financial capacity of the share applicant to invest funds was proved?
(9) How
the source of funds from which the high share premium was invested was dealt
with by the assessee?
(10) Why
the investor companies had applied for shares of the assessee company at a high
premium?
(11) In
case the field enquiry conducted by the AO revealed that the investor companies
were found to be non-existent, whether the onus to establish the identity of
the investor companies was not discharged by the assessee?
(12) 12.Whether
the assessee discharged their legal obligation to prove the receipt of share
capital/premium to the satisfaction of the AO?
(13) Whether
the assessee discharged the onus to establish the credit worthiness of the
investor companies?
(14) Did
the assessee do anything more than mere mention of the income tax file number
of an investor to discharge the onus under section 68?
(15) Did
the assessee do anything more than mere filing all the primary evidence in
discharge of their onus to prove the identity of the investee?
Theory
of Human Probability
It
is also important that when we examine the genuineness of the transactions
entered into by the assessee, we must also bear in mind Hon’ble Supreme Court’s
observation, in the case of CIT v. Durga Prasad More (1971) 82 ITR 540 (SC),
to the effect that “Science has not yet invented any instrument to test the
reliability of the evidence placed before a court or tribunal. Therefore, the
courts and Tribunals have to judge the evidence before them by applying the
test of human probabilities”.
The
Hon’ble Supreme Court in CIT v. Durga Prasad More (1971) 82 ITR 540 Hegde
J. speaking for the Supreme Court observed as under: -
“Now
we shall proceed to examine the validity of those grounds that appealed to the
learned judges. It is true that the apparent must be considered real until it
is shown that there are reasons to believe that the apparent is not the real.
In a case of the present kind a party who relies on a recital in a deed has to
establish the truth of those recitals, otherwise it will be very easy to make
self-serving statements in documents either executed or taken by a party and
rely on those recitals. If all that an assessee who wants to evade tax is to
have some recitals made in a document either executed by him or executed in his
favour then the door will be left wide open to evade tax. A little probing was
sufficient in the present case to show that the apparent was not the real. The
taxing authorities were not required to put on blinkers while looking at the
documents produced before them. They were entitled to look into the surrounding
circumstances to find out the reality of the recitals made in those documents.”
Similarly,
in a later decision in the case of Sumati Dayal v. CIT [(1995) 214 ITR 801
(SC), Hon’ble Supreme Court rejected the theory that it is for alleger to
prove that the apparent and not real, and observed as under:
“This, in our opinion, is a
superficial approach to the problem. The matter has to be considered in the
light of human probabilities. ……….Similarly the observation ……….that if it is
alleged that these tickets were obtained through fraudulent means, it is upon
the alleger to prove that it is so, ignores the reality. The transaction about
purchase of winning ticket takes place in secret and direct evidence about such
purchase would be rarely available …..”
Detailed
reasons were recorded by revenue in satisfaction note with respect to
investment which were made by assessee for brief period and were repaid in same
year and that investment was alleged to be an accommodation entry, it could not
be said that reasons recorded by revenue did not satisfy prerequisite
conditions of section 132(1)
Assessee
invested substantial amount of money in form of loan in company, ‘G'. ‘G’
repaid loan along with interest on different dates starting from 06.10.2016
till 31.03.2017. A search was conducted at premises of assessee and ‘S’ who was
a director of borrower company and assessee was asked to submit details of his
assets. Detailed satisfaction note showed multiple entries in account books of ‘S’
and others and manner of ‘S’ who was either in Siliguri (North Bengal) or in
Goa contacting assessee in Ahmedabad for a loan of Rs. 10 crores did not appear
to be a normal transaction. It was noted that satisfaction note was recorded in
terms of ‘S’ whose jurisdictional Assessing Officer was in West Bengal and it
was cobweb of accounts of such assessee which were required to be unravelled
thus, it was not unreasonable for revenue to apprehend that assessee would not
respond to summons before Assessing Officer in State of West Bengal. Detailed
reasons were recorded in said satisfaction note which included that investment
was made by assessee for brief period in ‘G’ which was repaid in same year and
that investment was merely an accomodationentry. Sufficiency or inadequacy of
reasons to believe recorded could not be gone into while considering validity
of an act of authorization to conduct search and seizure, belief recorded alone
was justiciable. Thus, clauses (a), (b) and (c) of sub-section (1) of section
132 were satisfied and High Court was not justified in setting aside
authorisation of search. [In favour of revenue] (Related Assessment year : 2017-18)
– [Principal Director of Income-tax (Investigation) v. Laljibhai Kanjibhai
Mandalia (2022) 446 ITR 18 : 288 Taxman 361 : 140 taxmann.com 282 (SC)]
Fraud vitiates everything; Denies Section 10(38)
exemption, holds share transaction void ab initio
Pune ITAT
dismisses Assessee’s appeal, denies the exemption claimed under Section 10(38)
and confirms the addition under Section 68 by applying the settled legal
principle “fraud vitiates everything”; Observes that even principles of natural
justice have no application and holds such transaction as void ab initio; ITAT
holds that the share transaction to be nothing but sham, make believe and
colourful device adopted with excellent paper work with the intention of
bringing the undisclosed income into books of account; Assessee-Individual,
deriving income from the execution of contracts etc, for Assessment year
2014-15, sold shares of SRK Industries Ltd. and claimed the sale proceeds under
Section 10(38) as exemption of capital gains; Revenue denied Assessee’s claim
and held that the transactions of purchase and sale of the said shares to be a
bogus transaction and that the Assessee is a beneficiary of accommodation
entries provided by Kolkata-based entry provider, on the basis of report by the
Investigation Wing of the Income Tax Department and SEBI; Thus, Revenue made
addition of sale proceeds of the shares under section 68; CIT(A) confirmed
Revenue’s action invoking the doctrine of test of human probability, against
which Assessee preferred the present appeal; ITAT notes that a statement of the
Kolkata-based entry provider was recorded during a search and seizure operation
on his premises, wherein he admitted to have provided the accommodation entries
in respect of scrips of SRK Limited; Observes that Assessee, despite the
adequate opportunity afforded by Revenue, failed to rebut the findings of the
Revenue that the transaction of sale of the said share is a bogus transaction;
Relies on Calcutta High Court ruling in Swati Bajaj, wherein the similar
addition was affirmed by holding that Revenue had cogently brought out the
factual scenario to establish machinations of fraudulent, manipulative and
deceptive dealings and how the stock exchanges system was misused to generate
bogus LTCG; Relies on Supreme Court ruling in Friends Trading Co., where in the
context of availment of alleged forged DEPB under the Customs Act, it was held
that the exemption benefit availed on such forged DEPB are void ab initio;
Observes that Assessee deliberately withheld the information from the Revenue
and CIT(A) which is within exclusive knowledge of the Assessee to establish the
genuineness of transactions of purchase of shares of that company; Remarks that
it is nothing but a fraud played by the Assessee against the quasi-judicial
authorities, i.e. Assessing Officer and the CIT(A), who are employed for
execution of the provisions of the Act. [In favour of revenue] (Related Assessment
year : 2014-15) – [Abhishek Ashok Lohade v. ITO, Nasik [TS-906-ITAT-2022(PUN)]
– Date of Judgement ; 22.11.2022 (ITAT Pune)]
Upholds Section 148A(d) order passed over accommodation entry of Rs. 50 Lac pursuant to a second show cause notice (SCN) issued in continuation of first SCN on the same transaction
Delhi High Court upholds Section
148A(d) order passed over accommodation entry of Rs.50 Lac pursuant to a second
show cause notice (SCN) issued in continuation of first SCN on the same
transaction, issued after Supreme Court ruling in Ashish Agrawal;
Assessee-Individual was subjected to reassessment proceedings for Assessment
year 2013-14 under the old regime by notice dated 19.04.2021 which was quashed
by the coordinate bench ruling in Mon Mohan Kohli; Pursuant to Supreme Court
ruling in Ashish Agrawal, Assessee was issued SCN dated 17.05.2022
alleging that the Assessee entered into financial transactions i.e. cash
deposit of Rs. 50 Lacs and immediately withdrew it in cash from ATM; Assessee
responded to the SCN through reply dated 24.05.2022 stating that she had not
carried-out any financial transactions relating to deposit of cash in her
current account and that she did not even possess a debit card to withdraw the
cash; Assessee was issued another SCN on 23.06.2022 explaining the chain of
transaction that led to an allegation of accommodation entry in Assessee’s
name; Assessee furnished another reply dt. Jun 28, 2022 stating that the SCN
lacked information as to the date of receipt of the alleged sum or material
relied upon to substantiate allegation; Revenue passed the order under Section
148A(d) on Jul 22, 2022 and issued the notice under Section 148; Assessee
challenged Section 148A(d) order as time barred stating that the last date for
passing the order was 30.06.2022 since the reply to SCN was furnished on 24.05.2022
and the procedure adopted is violation of SC ruling in Ashish Agarwal; Assessee
also submitted that allegation in the SCN dated 23.06.2022 were materially
different from the allegation in the SCN dated 17.05.2022 and the allegation
pertaining to credit of Rs. 50 Lacs is not an ‘asset’ within the meaning of
Section 149(1)(b); Revenue highlighted that the bank statement furnished by the
Assessee contained the transaction between the Assessee and the accommodation
entry provider against which Assessee had not offered any explanation in the
reply; Revenue also submitted that bank deposit would amount to an ‘asset’
under Section 149(1)(b); Assessee submitted that out of multiple entries in the
bank account, a specific entry was not identified in the SCN; High observes
that Section 148A(d) order identifies the transaction specifically which was
subject matter of SCNs and rejects Assessee’s submission that the Revenue was
precluded from providing the information set out in the notice dated 23.06.2022;
High Court observes that the second SCN gave specific details of the
transaction which was subject matter of the first SCN while noting Revenue’s
submission that the underlying information was on record even at the time of
issuing the very first SCN dated 19.04.2021; Thus, upholds the order under
Section 148A(d) in the absence of any explanation offered by the Assessee and
also rejects the submission that the Assessee was not given ample opportunity
to furnish a reply while observing that the Assessee elected not to reply; High
Court finds no infirmity in the order without expressing any opinion on merits.
[In favour of revenue] (Related Assessment year : 2013-14) – [Saroj Chandna v.
ITO – Date of
Judgement : 30.08.2022 (Del.)]
Assessee-trust received donation from donors who initially submitted confirmation of donation, however during investigation by CBI confessed that they had not given any such donations; since genuineness of donors could not be established, donations were to be treated as bogus and additions were to be made under section 68
Assessee
was an educational trust. Assessing Officer received information from DDIT
(Investigation), based on a report of Central Bureau of Investigation (CBI). Report
disclosed that chairman of assessee-trust had made huge cash deposits in
accounts of assessee with intent to evade tax - Assessing Officer on basis of
aforesaid information reopened assessment and made additions under section 68
on account of unexplained receipts. Assessee contended that evidences were
provided for confirmation of donations along with relevant bank statements to
prove genuineness, creditworthiness and identity of donors. It was noted that
donors which initially during original assessment submitted confirmation of
donation, confessed that they had not given any such donations during
investigation by CBI. Also while making enquiries, Assessing Officer received
documents from CBI which revealed that assessee-trust had received certain sum
from one MG who was involved in providing accomodationentries. Since Assessing
Officer had specific information about cash deposits, supported by statement of
witnesses, there were reason to believe that income of assessee had escaped
assessment and, thus, justifying reopening of assessment under section 147. Since
genuineness of donors could not be established, donations were to be treated as
bogus, and additions made under section 68 were justified. [In favour of
revenue] Assessment years 2006-07 and 2007-08 - [Brijbasi Education and
Welfare Society (2021) 431 ITR 126 : 278 Taxman 246 : 125 taxmann.com 95 (Del.)]
Assessee
had received certain amount in cash in her bank account, since assessee had not
given any evidence to prove that this was not her turnover, Assessing Officer
was justified in treating entire deposits as assessee’s turnover and assuming
net profit thereupon at rate of 5 per cent
An
information was received that during year assessee had deposited certain amount
in cash in her bank account but no return of income was filed by assessee. Therefore,
Assessing Officer issued a reopening notice against assessee. He further passed
an assessment order under section 143(3) read with section 147 treating entire
deposits in her account as turnover belonging to assessee and assuming net
profit thereupon at rate of 5 per cent. Assessee contended that bank account
was misused for purposes of accommodation entries for which she had also
received commission and she was just a housewife and wife of a labourer who
never carried on any business, thus, by no stretch of mind her misused bank
account receipts could be reckoned as her turnover. It was noted that credit
was in bank account of assessee and it was onus of assessee to prove correct
nature of credits - She had not given any evidence to prove that this was not
her turnover. Affidavit filed by her was not supported by any evidence and was
self-serving - So far as net profit rate of 5 per cent was concerned, same was reasonable.
On facts, impugned addition made by Assessing Officer was justified. [In favour
of revenue] (Related Assessment year : 2010-11) – [Smt. Uma Mandal v. ITO,
Jaipur (2021)
191 ITD 212 : 128 taxmann.com 369 (ITAT Jaipur)]
Overturns
Calcutta High Court ruling, upholds order cancelling Trust’s exemption over
bogus donation, accommodation entries
Supreme
Court overturns Calcutta High Court ruling, upholds ITAT’s order cancelling
registration of Trust under section 12AA and 80G for receiving bogus donations
and facilitating accommodation entries, finds error on High Court’s part in
deciding the appeal; Assessee-Trust was registered under section 12AA and was
also approved under section 80G; In a survey conducted on another entity, it
was observed that Assessee was not carrying out its activities in accordance
with its objects, and thus, was served with a SCN with a questionnaire in
response to which the Managing Trustee of Assessee admitted to have received
non-genuine donations, and admitted that most donations were in the nature of
accommodation entries received to inflate the amount of reserves and facilitate
procurement of loans from Banks; CIT(E) cancelled Assessee’s registration for
exemption and held it to be acting in violation of its objects and engaged in
money laundering activities; ITAT upheld the order of CIT(E)cancelling the
registration against which High Court admitted two substantial questions of
law: (i) on validity of cancellation of registration and (ii) on evidentiary or
probative value of a statement recorded during survey; High Court held that
Revenue was unable to establish a case justifying cancellation of registration
and complicity of the Assessee in any illegal, immoral or irregular activity of
the donors, and thus allowed the appeal in favour of the Assessee and directed
the Revenue to restore the registration without delving into the second
question; Supreme Court observes that the answers given to the questionnaire by
the Managing Trustee showed the extent of misuse of the exemption status
enjoyed by the Trust; Supreme Court further observes that as evident from the
answers given donations were received by way of cheques out of which,
substantial money was ploughed back or returned to the donors in cash; Supreme Court
further remarks that the High Court completely erred in entertaining the appeal
under Section 260A and did not even attempt to deal with the answers to the
questionnaire; Supreme Court holds that the Trust was misusing its status uunder
section 12AA and upheld cancellation of its registration by the Revenue. [In
favour of revenue] - [CIT (Exemptions), Kolkata v. Batanagar Education And
Research Trust [TS-614-SC-2021] – Date of Judgement : 02.08.2021 (SC)]
Rejects
Vedanta’s full/true disclosure defence; Upholds re-assessment initiation for ‘accommodation
entry’ probe; Imposes
cost of Rs. 1 lakh on assessee
Delhi
High Court dismisses Vedanta's (assessee, as successor of Sterlite Industries (P)
Ltd. [SIPL]) writ challenging reopening initiation for Assessment year 2012-13
(beyond 4 years), imposes cost of Rs. 1 lakh on assessee for ‘unjustifiably pressing the petition
beyond a point’; Based on the investigation report, it was revealed that one
party [Moral Alloys] with whom SIPL had dealings, was involved in providing
accommodation entry, accordingly, Assessing Officer had held that SIPL's sale
transaction with Moral Alloys to the tune of Rs. 90 cr. during subject Assessment
year was not genuine and thereby assessee’s [alleged ultimate beneficiary]
income had escaped assessment; Rejects assessee's contention that the Assessing
Officer had acted on the basis of borrowed wisdom contained in the
Investigation Report and had not applied his mind independently, observes that
the Assessing Officer had conducted ‘elaborate’ extensive analysis evidencing
the business model of Moral Alloys which was merely to rotate funds through a
process of layering; High Court opines
that, The mere fact that SIPL has accounted for all the receipts from Moral in
its books of accounts, and has also offered the same to tax, can never be a
defence when a serious allegation - of the transactions undertaken by SIPL with
Moral not being genuine, has been raised.”, cites Supreme Court ruling in NRA
Iron; Rejects assessee’s stand that there was no failure on its part to
disclose fully and truly all material facts,
remarks that the, fundamental premise is now shaken, since Moral has
been found to be a completely tainted entity embroiled in very large scale
dubious transactions of providing accommodation entries.....If the transactions
undertaken by SIPL with Moral are indeed not genuine, as now reasonably
believed by the Assessing Officer, it would not be
correct to say that SIPL had disclosed fully and truly all the material facts
for its assessment for the relevant assessment year.”; Relying on co-ordinate
bench's recent decision in RDS Project Ltd., High Court
imposes cost and states that, Despite the aforesaid being a gross case
.learned counsel .continued to press the matter at the expense of judicial
time, which could have been better utilised to deal with other pending cases.” –
[In favour of revenue] (Related Assessment year : 2012-13) - [Vedanta Ltd. v.
ACIT [TS-826-HC-2019(DEL)] – Date of Judgement : 20.12.2019 (Del.)]
Assessing
Officer issued reassessment notice and disallowed deduction under section 10AA
on basis of statements recorded under section 132(4) wherein it was established
that assessee was beneficiary of accommodation entries from two concerns by
obtaining bogus purchase bills and, further, assessee also failed to prove
genuineness of such purchases, impugned disallowance was justified
Assessee
was dealing in manufacturing of diamonds. It claimed deduction under section
10AA as regards export made by assessee’s SEZ unit which was allowed during
original assessment. Later, Assessing Officer issued reassessment notice under
section 148 being of view that assessee was beneficiary of accommodation
entries from two concerns by obtaining bogus purchase bill amounting to Rs.
2.09 crores and made disallowance of 25 per cent of total purchase. On appeal,
Tribunal upheld aforesaid disallowance. Assessee contended that reassessment
proceedings had been initiated merely on change of opinion as all primary
facts, books of account, bills were already known to Assessing Officer. It was
found that statements were recorded by Assessing Officer under section 132(4)
during search of premises of said concerns wherein it was established that said
concerns were indulged in providing accommodation entries for bogus purchases
and sales and, further, assessee failed to prove genuineness and verification
of such transactions. Since Assessing Officer had called upon assessee to prove
genuineness of transaction on basis of statement recorded under section 132(4)
and assessee failed to do so, therefore, deduction under section 10AA was
rightly disallowed. [In favour of revenue] (Related Assessment year : 2007-08)
- [Goenka
Jewellers v. CIT, Jaipur (2019) 417 ITR 686 : (2018) 100
taxmann.com 517 (Raj)]
Upholds
reassessment, disallows purchases considering Sales-tax Department information
about assessee’s Hawala transactions
Chirag
Rajendra Shah(assessee) is engaged in the business as a reseller and trader in
iron and steel under a proprietorship concern. During the Assessment year
2009-10 Assessing Officer received information from
DGIT(Inv.)/ Mumbai and Sales Tax Department that the assessee was beneficiary
of hawala accommodation entries from entry providers by way of bogus purchase.
The accommodation entry provider has deposed and admitted before the
Maharashtra Sales Tax Authority vide statement/ affidavit that they were
engaged in providing bogus accommodation entries wherein bogus sale bills were
issued without delivery of goods, in consideration for commission. Assessee was
stated to be one of the beneficiaries of these bogus entries of sale of
material from hawala entry operators in favour of the assessee wherein the
assessee made alleged bogus purchases through these bogus bills issued by
hawala entry providers in favour of the assessee. Assessing Officer observed
that the parties issued accommodation bills without actual sale and delivery of
goods and therefore the case was re-opened. Assessing Officer issued notice under
section 133(6) to 5 parties which were returned back with remarks 'not
known/left/unclaimed and address incomplete'. Further under section 131 Assessing
Officer issued summons to the assessee to produce the parties, books of
accounts etc. Assessee submitted that he had already filed the details of the
purchase parties and the sales details, copies of vouchers and expenses made
towards transportation and octroi. Assessing Officer rejected assessee's
explanation on the ground that assessee had not produced a single party,
further contended that the confirmations filed were self-made ones without any
supporting evidences like copy of PAN card, Driving license or passport so that
the signature of alleged hawala parties could be verified. Assessing Officer relied upon the deposition
made by the Principal Officer of the alleged concerns before the Sales Tax
Department wherein all of them had admitted that they were not doing any
genuine business but were indulged in providing accommodation entries to people
who needed their services. Thus, Assessing Officer held that assessee had
purchased the goods at cheaper cost rom hawala operators to avoid payment of
sale tax, excise duty and disallowance under section 40A(3). Assessing Officer
treated the aggregate purchases as unexplained expenditure under section 69C.
On appeal CIT(A) confirmed Assessing Officer’s order. Aggrieved, assessee filed
an appeal before Mumbai ITAT.
Before
ITAT, assessee contended that the original return of income remained
unprocessed and an order under section 147 should not have been passed. Assessee
further argued that no independent inquiry was conducted by Assessing Officer
and had taken contrary stand than what was recorded in the reasons for
reopening.
ITAT
observed that tangible and cogent incriminating material was received by the Assessing
Officer which clearly showed that the assessee was beneficiary of bogus
purchase entries from bogus entry providers which formed the reason to believe
by the Assessing Officer that income has escaped assessment. ITAT thus remarked
that, The information so received by the Assessing Officer has live link with
reason to believe that income has escaped assessment. On these incriminating
tangible material information, assessment was reopened”. ITAT held that there
has to be prima facie belief based on some tangible and material information
about escapement of income and the same is not required to be proved to the
guilt. In view of the above, ITAT relied on Supreme Court ruling in Rajesh
Jhaveri Stock Brokers (P) Ltd. [TS-24-SC-2007-O]
ITAT
took note of assessee’s contention that the reopening was done on bogus
purchase whereas while completing the assessment, purchases were treated as
genuine. ITAT stated that credible and cogent information was received by the Assessing
Officer that assessee was found to have taken accommodation entry/bogus
purchase bills during the concerned assessment year from different parties.
ITAT noted that in such factual scenario, Assessing Officer had made the
necessary enquiry. ITAT observed that notice to all the parties were returned
unserved and assessee was not able to provide any confirmation from any of the
party. ITAT also observed that assessee was not able to produce any of the
parties. ITAT noted that the necessary evidence for transportation of goods
have not been provided by the assessee. ITAT stated that, mere preparation of
documents for purchases cannot controvert overwhelming evidence that the
provider of these bills are bogus and non-existent and there is no cogent
evidence of transportation of goods. Thus, ITAT remarked that, purchase bills
from these non-existent the/bogus parties cannot be taken as cogent evidence of
purchases, in light of the overwhelming evidence the revenue authorities cannot
put upon blinkers and accept these purchases as genuine.” In view of the above
ITAT relied on Supreme Court rulings in Sumati Dayal [TS-5013-SC-1995-O] and
Durga Prasad More [TS-19-SC-1971-O].
ITAT
noted that in the given case contention that when the suppliers are
non-existent, bogus should be ignored and only the documents being produced
should be considered. ITAT thus remarked that, This proposition is totally
unsustainable in light of above apex court decisions.” ITAT thus ruled in
favour of Revenue.
Separately,
on merits, with respect to Revenue's contention that when purchase bills have
been found to be bogus 100% disallowance was required, ITAT relied on Gujarat
HC ruling in Simit P. Sheth [TS-24-ITAT-2013(GUJARAT)-O] and held that a
disallowance of 12.5% of the bogus purchase would meet the end of justice. [In
favour of revenue] (Related Assessment years : 2009-10 to 2011-12) – [Chirag
Shah v. ITO [TS-183-ITAT-2018(Mum)] – Date of Judgement : 03.04.2018 (ITAT
Mumbai)]
ITAT explains how accommodation
entries are routed through shell companies as share capital to evade taxes
Assessee has received share
application money from five companies of Rs. 10 lakhs each towards issue of
10000 shares of face value of Rs. 10 each at a premium of Rs. 90 per share to
each of the company. Assessing
officer noted that the authorized capital of the assessee company has increased
from Rs. 5 lakhs to Rs. 20 lakhs and in pursuance thereof 50,000 shares of Rs.
10 which were allotted at the premium of Rs. 90 per share to the five
companies.
Before the ld Assessing Officer the assessee submitted a confirmation, copy of the income tax return, copy of share application form, copy of bank statement, copy of PAN and copy of memorandum of articles and association. The ld Assessing Officer issued notice under section 133(6) and calling for the bank statement from the five parties vide order sheet entry dated 14.11.2008. The ld Assessing Officer further issued notices to the banks of the five companies to provide their bank statement. The bank statement provided by the assessee showed that before the issue of cheques to the assessee company there were transfer entries in the bank account of those company, however, when the bank statements are received from the banks by the Assessing Officer it was found that instead of cheques or transfer entries in their bank account there was deposit of cash. In the 133(6) reply filed by the parties also similar forged bank accounts were submitted therefore, apparently the issue was that bank accounts of the depositors as per the banker showed that cash was deposited in their bank accounts prior to issue of cheques whereas the assessee and the depositors showed that there were clearing or transfer entries prior to the issue of the cheque. The ld CIT(A) has dealt with the whole issue confirming the addition under section 68 of the Act
ITAT
noted that whole exercise carried out by the assessee is simply a devise to
introduce unaccounted money through various shell companies in the form of
share capital at a premium. The manner of issue of the shares through these
companies, the manner of providing confirmation on the letter pad, the manner
of maintaining the annual accounts and the manner of submitting the bank
accounts on the letter pad or on a computerized print out to give it a
semblance of originality to defraud the revenue, proves much more than what is
under challenge before us. It shows the whole picture how the accommodation
entries are routed through shell companies as share capital to evade the taxes.
The whole façade created by assessee shows the real purpose of introducing the
unaccounted money of the assessee without payment of taxes. [In favour of revenue]
(Related Assessment year : 2006-07) – [Shaan Construction (P) Ltd v. ITO - Date
of Judgement : 28.03.2018 (ITAT Delhi)]
Company’s
actual business had commenced only after petitioner joined company as
additional director and during his tenure, there were substantial accommodation
entries giving rise to huge tax demand, uplifting of corporate veil to hold
petitioner liable for said demand was justified
Investigation
revealed that company was set up as public limited company, but immediately
after incorporation and commencement of business it had partaken character of a
private limited company as public had not been invited to subscribe share
capital of company. Authority specifically found that company HBL was formed
only to provide accommodation entries in form of bogus share capital and share
premium only after induction of petitioner as director and substantial cash
flow and substantial increase in capital and certificate of commencement of
business was also obtained by company only after petitioner joined company. Further,
during his tenure as director, petitioner held 98.33 per cent shareholding and
after his resignation, substratum of company eroded and it was left with huge
liabilities. Company was a defacto private limited company and uplifting of
corporate veil to hold petitioner liable for demand against company was
justified. [In favour of revenue] - [Ajay Surendra Patel v. DCIT (2017) 394 ITR 321 : 293 CTR 249 : 78
taxmann.com 339 (Guj.)]
Purchases
made by assessee from a properietory concern were bogus and entries were in
nature of accommodation entries, merely because assessee had disclosed such
entries in return filed and also showed such purchases in books of accounts
would hardly be sufficient to advance arguments of full and true disclosure by
assessee
There
were serious infirmities noticed in transactions of a properietary concern whom
assessee paid a huge sum of Rs. 4.48 crores by way of purchases. Substantial
amounts were received by that concern from various sources in bank accounts
which were withdrawan in cash shortly after receipt - Summons issued by
department were not responded. Even entity was not found existing at given
address. Proprietor of concern could not be served since he was not found at
address supplied - Whether since impugned purchases of assessee from said
concern were bogus and sales and entries were in nature of accommodation entries,
merely because assessee had disclosed such entries in return filed and also
showed such purchases in books of account would hardly be sufficient to advance
arguments of full and true disclosure. Therefore, Assessing Officer was
justified in issuing reassessment notice under section 148 against assessee. [In
favour of revenue] (Related Assessment year : 2009-10) – [Gujarat Ambuja
Exports Ltd. v. DCIT (2017) 250 Taxman 482 : 86 taxmann.com 69 (Guj.)]
Offering capital gains cannot make transactions
with accommodation entry provider genuine
Aassessee-company
was subject to scrutiny assessment and re-assessment proceedings for Assessment
year 2004-05. A survey operation was carried out (dated 20.11.2007) on the
business premises of one Sh. S. K. Gupta (chartered accountant) wherein it was
found that he was engaged in the business of providing accommodation entries to
various persons by running number of paper companies where his family members
or acquaintances were the directors and major shareholders. It was also found
that the detailed accounts of such accommodation entry was recorded in tally”
software wherein details of cash received and issuance of checks with the
dates, check numbers, name of issuing entities etc., were mentioned. As a
result of this, a search was carried on Bhushan steel group, wherein documents
belonging to the assessee-company were found and seized. Further, it was found
that assessee was one of those companies controlled by S. K. Gupta, from where
he used to provide the accommodation entries and also it was found that an
amount of Rs. 2.03 crores was recorded during Assessment year 2004-05 in
assessee's ledger maintained in tally. Pursuant to these facts, assessee was
served with a notice dated 23.11.2010, under section 153(3)(C). Thereafter,
during the assessment proceedings, assessee took stand that impugned
transactions were regular in nature of purchase and sale of the shares. Assessing
Officer rejected assessee's contention and in absence of evidences about the
identity, creditworthiness and genuineness of those transactions, Assessing
Officer made an addition of Rs. 2.10 crores to the total income as an
unexplained income. CIT(A) rejected assessee's all contentions on the
jurisdictional issue of the provisions of Section 153A and 153C, however he
deleted Assessing Officer’s addition on the ground that capital gains offered
to tax on the sale was already charged to tax in the original assessments and
held that cross-examination was not afforded to the assessee. Aggrieved,
Revenue filed an appeal before Delhi ITAT.
ITAT observed that the assessee didn't deny entering into the transaction with Mr. S. K. Gupta, or all those entities, which were named as accommodation entry providers. ITAT further observed that assessee did not produce contract notes of sales and purchases of such securities which were claimed to be purchased and sold through Mr. S. K. Gupta and other companies controlled by him. ITAT also noted that assessee produced neither any documentary evidence to show genuinity nor any loan agreement entered into between the parties in respect of loan or financial transaction that were entered into with S. K. Gupta, or other companies controlled by him. ITAT noted that the assessee was named as one of the beneficiary of the transactions of accommodation entries provided by S. K. Gupta, which was undisputedly confessed by him and confirmed by both the lower authorities.
In respect of CIT(A) order, ITAT opined that when the sale/ purchase transaction of those shares were bogus or were merely accommodation entries, naturally the assessee would offer them as a sale-purchase transaction offering capital gain amount thereon. However, it was for the first appellate authority who was the highest authority under the Income Tax Act to decide the dispute of the assessee, decided this issue in such a blindfolded manner that he accepted such as shallow argument of the assessee. ITAT further opined that even transaction of purchase and sale of shares might also be part of accommodation entries, irrespective of the fact that profit or loss resulting therefrom was offered by the assessee as a capital gains. Naturally, an accommodation entry provider and the beneficiary would make an effort to sail through the investigating eyes of revenue by offering the result of this transaction under the head capital gain. ITAT stated that it was for the officers of the revenue to look into the real nature of the transactions and not to brush aside the fact that these were not normal transactions, but highly abnormal transactions, as accommodation entry providers were involved in such transactions.
ITAT further stated that the Ld. CIT (A) was also swayed by the fact mentioned by the assessee before him that all the transactions were entered by him through account payee cheques or banking channel. ITAT noted that We are also surprised that despite there was an allegation of accommodation entry provider providing those entries to the assessee, the Ld. CIT (A) believed them to be genuine transactions. The accommodation entries itself shows that the cheques are to be provided obviously through banking channel for unaccounted income of the beneficiaries.” ITAT further added that It is also very naïve to believe for the Ld. first appellate authority that if the transactions entered through banking channel, they should be accepted by the revenue as genuine. We are not aware of any such authority, which has stated so in case of such a blatant case of obtaining benefit of accommodation entries through unaccounted income.” ITAT elaborated that transaction through banking channel and transaction in cash did not have material difference except that when the entries were passed through banking channel, it ought to be complied with KYC norms. ITAT also opined that Use of banking channel makes an entry neither genuine nor ingenuine”.
Thus, ITAT appreciating Assessing Officer’s action held that Ld. CIT (A) grossly erred in holding that Assessing Officer did not offer cross-examination of the entry provider. ITAT further opined that as the assessee failed to provide the basic documents about the nature of the transactions and identity and creditworthiness of those parties regarding purchase and sale of shares, the assessee did not get right to ask for the cross-examination. ITAT noted that even if for a while it was assumed that there was no statement of Mr. S. K. Gupta, the onus was on the assessee to substantiate entries recorded in its books of accounts with credible evidences. It is not the case of the assessee that he provided the complete details and Assessing Officer did not make any effort in proving those details as false. Thus, ITAT mentioned that it is incorrect for the Ld. CIT appeal to say that Assessing Officer has obtained certain information through private enquiries and which have not been confronted to the assessee.”
ITAT observed that assessee was aware of impugned accommodation entries and the evidences placed were so conclusive that they ought not to be overlooked on technical and flimsy issue, which CIT(A) did. In respect of CIT(A)’s reliance on entries routed through banking channel and stating it as necessarily genuine in nature, ITAT opined that We are sorry to say such a statement”. Thus, ITAT reversed CIT(A)'s order and confirmed the addition made by Assessing Officer as unexplained income of the assessee obtained from accommodation entry provider Sh. S. K. Gupta. Thus, ITAT delivered the case in Revenue’s favour. [In favour of revenue] (Related Assessment year : 2004-05) – [Esha Securities (P) Ltd. v. DCIT [TS-402-ITAT-2017(DEL)] – Date of Judgement : 13.09.2017 (ITAT Delhi)]
High Court Sets-aside ITAT order; rejects application of ‘peak credit’ principle in respect of unexplained source of deposit and corresponding outgo
Assessee,
a Chartered Accountant filed his return of income for the Assessment year
1995-96. Assessing Officer noted that the
assessee was holding two current accounts in the Union Bank of India, Karol
Bagh, wherein sufficient cash and cheque deposits were made during the relevant
period. It was also noted by Assessing Officer that assessee had floated one
company Prem Chand Plantation Private Limited and purchased two other companies
Anuradha Pharmaceuticals (P) Ltd. and Sai Fisheries (P) Ltd. AO also observed
that the said three companies and other two companies viz., Zamindar Plantation
(P) Ltd. and Kisan Plantation (P) Ltd. were all sold to one James Group. Assessing
Officer issued notice u/s 148 in response to which assessee informed that the
return filed by him should be treated as return filed in response to notice under
section 148. Assessing Officer noted that assessee was not in a position to
prove the source of deposits made in his bank accounts. AO observed that the
cheques issued by assessee from his bank account were deposited in different
bank accounts and these banks were further requested to provide the account
opening forms of these concerned persons/beneficiaries to whom cheques were
issued by the Assessee. AO issued summons to beneficiaries but almost all the
beneficiaries were not found at the address given in their account opening
forms. As regards the credit entries, wherever the assessee was able to show
cheque issuance was to the same person the benefit of the principle of 'peak
credit' was given to him by the Assessing Officer. However where the sources of
deposit and cheque issuance remain unexplained and could not be squared off the
same was added to the returned income. It was also observed by Assessing
Officer from assessee's books that cheque worth Rs 90 lakhs were received from
three companies Anuradha Pharmaceuticals, Sai Fisheries and Premchand
Plantations. The unexplained peak credit of the cheques deposited and the
unexplained cash deposits were also added to the total income of the assessee.
On appeal, CIT(A) dismissed assessee's appeal. Further on appeal, ITAT held
that the method of working out the addition adopted by the Assessing
Officer and sustained by the CIT (A) wherein the cash entries and cheque
entries have been treated differently is absolutely illogical and irrational
and cannot be upheld. Further ITAT also disapproved Assessing Officer’s
method of working out the peak credit separately for the cheques issued by the
three companies. ITAT also observed that when assessee had himself deposited
the unaccounted money in these accounts and issued cheques then the additions
could not be made twice once on the basis of cash deposits and again on the
basis of cheque transactions. Aggrieved, Revenue filed an appeal before Delhi High
Court.
Before High Court, Revenue held ITAT’s approach as
erroneous as ITAT had failed to appreciate that assessee had not provided an
explanation for all the cheque deposits or even the cash deposits and also the
corresponding cheques issued from his account. Revenue also contended that
benefit of peak credit can be given only when square off of the deposits made
against the cheques issued is possible and not when a source of deposit and the
corresponding outgo remains unexplained.
Before High Court, assessee contended that once
Revenue had accepted that the assessee was an accommodation entry provider
there was no justification in working out the peak credit separately for the
cash and the cheque transactions. Assessee held that all the cheque and cash
credits in his own accounts should be consolidated and adjusted against all the
outgo entries either by cash or cheque. The peak credit, thus, worked out
should alone be taxed as that alone was the Assessee’s income.
High Court stated that there have been numerous cases
which involve treatment of 'accommodation entries' High Court explained that an
accommodation entry provider accepts cash from an assessee and arranges to have
a cheque issued from his own account or some other account, usually of 'paper'
or fake entities, to make it appear to be a loan or an investment in share
capital. High Court held that where the assessee was unable to explain the
source of such credit in his account the credit entry was to be treated as
unexplained and the income is treated under section 68.
High Court stated that where the assessee discharges
the initial onus of establishing the identity and creditworthiness of the
credit provider and the genuineness of the transaction, the onus shifts to the
revenue to show the contrary. Further High Court held that the assessee's case
was different in nature as he was not denying he is an accommodation entry
provider. High Court also observed that assessee made no bones of the fact that
he either owned or floated ‘paper companies’ only for the purpose of being an
accommodation entry provider. Further High Court also stated that assessee was
not being able to explain the source of all the deposits or the ultimate
destination of all the outgo from his accounts.
High Court stated that the concept of peak credit
meant squaring up of the deposits in the account with the corresponding
payments out of the account to the same person. High Court relied on Allahabad High
Court ruling in Bhaiyalal Shyam Bihari wherein it was held that benefit of peak
can be given only when the assessee owns up all the cash credits in the books
of accounts. High Court stated that in the aforesaid case it was also held that
as the amount of cash credits stood in the names of different persons which the
assessee had all along been claiming to be genuine deposits,
withdrawals/payments to different persons during the
previous years, the assessee was, therefore, not
entitled to claim the benefit of peak credit. High Court also relied on
Allahabad High Court ruling in Vijay Agricultural Industries wherein it was
held that where an assessee was unable to explain the sources of deposits and
the corresponding payments then he would not get the benefit of 'peak credit'.
High Court stated that legal position in respect of
an accommodation entry provider seeking the benefit of 'peak credit' appears to
have been totally overlooked by the ITAT in the present case. High Court
further stated that, if assessee wanted to avail the benefit of the 'peak
credit' had to make a clean breast of all the facts within his knowledge
concerning the credit entries in the accounts. High Court held that, assessee
should explain with sufficient detail the source of all the deposits as well as
the corresponding destination of all payments. High Court also held that
assessee should be able to show that money has been transferred through banking
channels from the bank account of creditors to those of the assessee, the
identity of the creditors and that the money paid from the accounts of the
assessee has returned to the bank accounts of the creditors. Thus High Court
remarked that The Assessee has to discharge the primary onus of disclosure in
this regard.”
Thus High Court held that, in the given case Assessing
Officer insisted that the additions made by him to the returned income of the
Assessee should be sustained. High Court observed that, peak credit worked out
by the assessee was on the basis that the principle of peak credit would apply,
despite failure on part of the assessee to explain each of the sources of the
deposits and the corresponding destination of the payment without squaring them
off. High Court concluded that the same was not permissible in law as affirmed
by Allahabad High Court in aforementioned cases.
High Court remarked
that, the ITAT went merely on the basis of accountancy, overlooking the settled
legal position that peak credit is not applicable where deposits remain
unexplained under Section 68 of the Act” High Court thus ruled in favour of
Revenue. - [CIT v. D.K.Garg [TS-334-HC-2017(DEL)] – Date of Judgement :
04.08.2017 (Del.)]
Creditworthiness and
genuineness of Share money depends also on nature of relationship between
parties, object, terms and quantum of investment, types of investor,
creditworthiness of recipient, etc. - Inquiries to bring on record and establish that the
other parties had given accommodation entries and the money, i.e., the share
application money was assessee’s own undisclosed income
Creditworthiness
or genuineness of transaction depends on whether two parties are related or
known to each, manner or mode by which parties approached each other, whether
transaction was entered into through written documentation to protect
investment, whether investor professes and was an angel investor, quantum of
money, creditworthiness of recipient, object and purpose for which
payment/investment was made, etc. Certificate of incorporation of company,
payment by banking channel, etc. cannot in all cases tantamount to satisfactory
discharge of onus. Assessee was a private limited company and had received from
other companies substantial amount of share application money of Rs. 63.80
lakhs and Rs. 75.60 lakhs in two consecutive years. Other than share
application forms, no other agreement between assessee-company and third
companies had been placed on record - Persons behind these companies were not
produced by assessee. On other hand, assessee-company adopted non-cooperative
attitude before Assessing Officer once they came to know about directed enquiry
and investigation being made - Whether evasive and transient approach before
Assessing Officer was limpid and perspicuous and, therefore, addition made in
respect of impugned amount was to be upheld. [In favour of revenue] (Related Assessment
years : 2002-03 and 2003-04) – [CIT v. N.R. Portfolio (P) Ltd. (2014) 264
CTR 258 : 222 Taxman 157 : 42 taxmann.com 339 (Del.)]
Amount
received by assessee from accommodation entry providers in garb of share
application money, was to be added to its taxable income under section 68;
held that in view of the
link between the entry providers and incriminating evidence, mere filing of PAN
number, acknowledgement of income tax returns of the entry provider, bank
account statements etc. was not sufficient to discharge the onus.
For
relevant assessment year, assessee filed its return declaring loss. Said return
was processed under section 143(1). Subsequently, Assessing Officer received
information from Investigation Wing that assessee had obtained accommodation
entries in garb of share application monies. In order to examine genuineness
and creditworthiness of companies which gave entries to assessee, Assessing
Officer issued summons to two persons namely, ‘M’ and ‘R’ who did not appear
before him. Subsequently, assessee filed a letter with Assessing Officer along
with affidavits of ‘R’ and 'M' in which both of them had stated that
transactions with assessee were genuine and earlier statements recorded from
them by investigation wing were given under pressure - Assessing Officer did
not accept those affidavits and made certain addition to assessee’s income under
section 68. Tribunal, however, taking a view that there was no dispute about
identity of shareholders namely ‘M’ and ‘R’, deleted addition made by Assessing
Officer. On revenue’s appeal, it was noted that both ‘M’ and ‘R’ had admitted
before Additional Commissioner (Investigation) that they were acting as
accommodation entry providers. They had also given a list of 22 companies in
which they were operating accounts. It was also apparent that out of 22
companies whose names figured in information given by them to investigation
wing, 15 companies had provided so-called ‘share subscription monies’ to
assessee. On facts, there was specific involvement of assessee-company in modus
operandi followed by ‘M’ and ‘R’. Therefore, impugned order passed by Tribunal
deleting addition was to be set aside. [In favour of revenue] (Related Assessment year : 2000-01)
– [CIT v. NovaPromoters
& Finlease (P) Ltd.(2012) 342 ITR 169 : 252 CTR 187 : 206 Taxman 207 : (2012)
18 taxmann.com 217 (Del.)]
Failure
of assessee to disclose at time of assessment that it had received share
capital from bogus companies providing accommodation entries, was sufficient to
initiate reassessment
The
assessee company filed a return of income which was accepted under section
143(1). The Assessing Officer issued a notice under section 148 after a period
of four years from end of the relevant assessment year seeking to reopen the
assessment on ground that a statement was recorded from one ‘M’ under section
131 in which he admitted before the investigating authorities that he was
carrying on the business of providing accommodation entries for commission
through bogus companies in which he was a director and the assessee had
received share capital from some of those companies. The assessee's objections
to initiation of reassessment proceedings were rejected. On writ:
On
a careful consideration of matter it is found that the assessment was properly
re-opened. The assessee company received share capital of Rs. 67,40,000 during
the previous year relevant to the assessment year 2004-05. The share capital
was received from several companies.
The
return filed by the assessee was not scrutinized but was accepted under section
143(1). The reasons recorded for reopening the assessment show that they were
recorded on the basis of material gathered by the Investigation Wing of the
Department and forwarded to the Assessing Officer. The statement of ‘M’ before
the Investigation Wing refers to the fact that he was a Director in six
companies. Out of these six companies the assessee received share capital from
three companies during the year under consideration. ‘M’ has also stated that
these companies do not carry on any real business but carry on only adjustment
transactions and that those companies did not have any employee and were not
maintaining any books of account. Earlier, he has narrated the modus operandi
followed by him in carrying on the business of giving accommodation entries for
a commission. The statement also refers to the bank accounts particulars. He
has admitted in the statement that he took 25 paise commission for giving the
accommodation entries. The statement of ‘M’ and the material gathered by the
Investigation Wing in relation to the parties who gave accommodation entries
were before the Assessing Officer when he recorded reasons for re-opening the
assessment and this is clear from the first paragraph of the reasons recorded.
The
above facts show that the reasons recorded by the Assessing Officer were not a
pretence. The reasons were germane to the prima facie belief reached by the
Assessing Officer that income chargeable to tax has escaped assessment by
reason of the failure of the assessee to furnish full and true particulars at
the time of original assessment. It may be true that the assessee received the
share capital through account payee cheques. It may also be true that the
receipt of share application monies was otherwise supported by the necessary
documents. There may not be any dispute about the identity of the companies
which subscribed to the share capital of the assessee. However, the material
that was present before the Assessing Officer, on the basis of which he
recorded reasons and re-opened the assessment, throw considerable doubt on the
veracity, correctness, completeness and truth of the particulars furnished by
the assessee at the time of the original assessment. This is particularly so,
having regard to the statement of 'M' in which he admitted to having carried on
the business of providing accommodation entries through companies in which he
was a director. The assessee has received share capital from some of these
companies. It is well settled that at the time of issuing notice under section
148, the Assessing Officer is only required to reach a tentative or prima facie
belief regarding escapement of income and that requirement is satisfied in the
instant case. [Para 9]
The
argument advanced on behalf of assessee that the name of the assessee is not
specifically mentioned in the statement of ‘M’ and, therefore, the material
gathered by the Investigation Wing and which was available to the Assessing
Officer when he recorded reasons for re-opening the assessment did not have any
nexus with the formation of his belief that income chargeable to tax had
escaped assessment cannot be accepted. The required nexus is furnished by the
reference to the names of at least three companies in which ‘M’ was a director,
through which, inter alia, he was admittedly carrying on the business of
providing accommodation entries for commission. These companies had subscribed
for the shares issued by the assessee. Thus not only was the required nexus
provided, but there was also material before the Assessing Officer to show that
the assessee company had not furnished all particulars necessary for its
assessment fully and truly. Accordingly this argument is rejected.
In
view of the foregoing, it is opined that the notice issued by the Assessing
Officer under section 148 was valid and well within jurisdiction. He had reason
to believe that income chargeable to tax had escaped assessment because of the
failure of the assessee company to furnish fully and truly all material
particulars necessary for its assessment. There is no merit in the writ
petition which is hereby dismissed. – [Money
Growth Investment & Consultants (P) Ltd. v. ITO (2012) 207 Taxman 191 : 21
taxmann.com 438 (Del.)]
Initiation
of reassessment proceedings on basis of information received from Investigation
wing that assessee had received certain amount from a person working as on accommodation
entry provider, was to be upheld
Assessee
filed its return of income which was processed under section 143(1). Subsequently,
Assessing Officer issued a notice under section 148 seeking to reopen
assessment. In reasons recorded, Assessing Officer mentioned that he had
received information from Investigation Wing of department that assessee had
received certain amount by way of a cheque from ‘S’ Ltd, working as an
accommodation entry provider. Since assessee was not in a position to deny that
material relied upon by Assessing Officer at time of recording reasons for
reopening assessment did not contain entry linking ‘S’ Ltd. with assessee,
issue of notice under section 148 on prima facie belief that income chargeable
to tax had escaped assessment must be upheld as valid. [In favour of revenue] (Related
Assessment year : 2004-05) – [Rajat
Export Import India (P) Ltd. v. ITO (2012) 341 ITR 135 : 252 CTR 307 : 206 Taxman 50 : 18
taxmann.com 311 (Del.)]
