MSK REAL ESTATES PVT LTD vs. DEPUTY COMMISIONER OF INCOME TAX, CENTRAL CIRCLE 1

The petitioner has challenged a notice dated 28.03.2017 issued by the respondent-Assessing Officer to reopen the petitioner's assessment for the assessment year 2010-11. 2. Petitioner is a private limited company. For the assessment year 2009-10, the petitioner had filed no return of income. Assessing Officer recorded reasons on 28.03.2017 to form a belief that income chargeable to tax has escaped assessment and thereafter issued the impugned notice. The reasons read as under: “ As per data available in Income Tax Department's system, it was observed that the assessee has not filed its return of income for the previous year relevant to A.Y. 2010-11. 2. A search operation u/s 132 of the IT Act was carried out in the case of Madhav Group of cases, Vadodara at the business premises of Madhav Infra Projects Limited at Madhav House, Subhanpura, Vadodara on 09.11.2016 to 11.11.2016. During the search proceedings, some incriminating documents were found and seized.

1 A laptop of Shri Amish Bhagwat was found. The hard disc of the laptop was removed and seized and inventorised as Annexure A-26. Further a master image of the laptop hard disk was made and seized alongwith a working copy and inventorised as Annexure A-25. While analyzing the working copy of the same, a PDF file was found. The name of the file was “List of Allottee.pdf” dated 22.10.2011.

2 This file contains allotment details of 100000 share of the company-MSK Real Estates Pvt. Ltd., the assessee.

On further verification, it was found out that the assessee company alloted 100000 shares on 30.04.2009. The face value of shares was Rs. 10 and they were alloted at a premium of Rs. 90 per share. Thus, total share capital raised through this issue was Rs. 1 crores. These shares were allotted to following Kolkata based companies. The pdf file was printed and scanned copy of the same is reproduced hereunder:- MSK Real Estates Private Limited 101, Gayatri Appartment, B Towers, 74 Alkapuri Society, Vadodara 39005 --------------------------------------------------------------------------- Table A Name of the Company MSK Real Estates Private Limited Date of Allotment 30.04.2009 Type of Share allotted (enquity or preference) Equity Nominal amount per share (in Rs.) 10 Premium amount per share (in Rs.) 90 Total number of allottees Brief particulars in respect of terms and condition voting right etc. Voting right are Pari passu with the existing equity shares Table B (List of allottees, applicable in case of allotment of shares payable in cash) S r. N o Name and occupation of allottee Address of the allottee Nationality of the allottee No of share allotted Total amount paid (includng premium) (in Rs.) Total amount paid on calls (including premium out standing (in Rs.) 1 Echolac Cinimay Pvt. Ltd. 6, Hanspukur Lane R No 106 P S Burra Bazar, Kolkata Indian 30000 30,00,000 Nil 2 Galore Suppliers Pvt. Ltd 2 Digamber Jaintemple Road Kolkata Indian 10000 10,00,000 Nil 3 MSV Fiscal Services P Ltd 2, D J Temple Road, 1st Floor Room No. 28 PS Burrabazar, Kolkata Indian 25000 25,00,000 Nil 4 Oleander 2, D J Indian 15000 15,00,000 Nil Manufactures & Credit P Ltd Temple Road, 1st Floor Room No. 28 PS Burrabazar, Kolkata 5 Slow and Sound Electronics Pvt Ltd 2, D J Temple Road, 1st Floor Room No. 28 PS Burrabazar, Kolkata Indian 20000 20,00,000 Nil For MSK Real Estate Private Limited Amit Ashok Khurana illegible Director Sign

2 During the course of search on Madhav Group, the inquiries have also been conducted at Kolkata by the Investigating Wing with respect to the companies which have given loans/invested through share application money to various concerns of Madhav Group including the assessee company.

3 As per reply received from the office of the DDIT (Inv.) Unit 4(2), Kolkata dated 10.11.2016, it is revealed that all these companies were paper/shell companies having no actual business activity and involved in providing accommodation entries in the form of share capital, share premium, unsecured loans etc. as admitted in their statement by the main controller/dummy directors of these companies. The directors in these companies are the persons of no means and are working as paid employees of one master controller. In the case of above companies, the main controller was Shri Beni Prasad Lahoti and Shri Hari Prasad Rathi. The statement of Shri Beni Prasad Lahoti has been recorded by the Investigating Wing of Kolkata taken in which he has accepted that the companies are not doing any genuine business and only provide accommodation entries. Further Sh Jay Prakash Roy, director of Echolac Vinimay P Ltd and Galore Suppliers P Ltd and Sh Jogendra Pradhan, director of MSV Fiscal Services P Ltd Oleander Manufactures Credit P Ltd and Slow & Sound Electronics P Ltd have accepted in their letters addressed to the DDIT (Inv) Unit II(3) Kolkata that they are dummy directors of the companies and receiving remuneration of Rs. 1000/- to Rs. 2000/- p m for this purpose. The Dy. Director or Income Tax (Inv) Unit 4(2) Kolkata's has furnished the inquiry report dated 10.11.2016 in this regard.

1 During the course of search at the residence of Shri Ashok Khurana at 1, Vikram Society, Gotri Road, Vadodara, state of Shri Ashok Khurana was recorded u/s. 132(4) of the Income Tax Act, 1964. In the state in Q.No 44 to 47 he was asked about the unsecured loans from Kolkatta based entities and the genuineness of these loans in the case of Madhav Power P Ltd. The list of these entities includes the names of the companies mentioned in para 4 above from which the assessee has also shown receipts of share application money. This statement is relevant for the bogus share capital raised as well because the same set of Kolkata based companies are involved.

2 It was seen from the reply of Shri Ashok Khurana that he was unable to comment on the genuineness of these loans. This statement also applies to the bogus share capital raised by the assessee in the names of the same set of Kolkata based companies. Further, during the course of operation of Prohibitory Order put up at the residence of Shri Ashok Khurana on 05.01.2017, again the statement of Shri Ashok Khurana was taken u/s. 132(4) of the Income Tax Act, 1961. Shri Ashok Khurana was confronted with the report of the Kolkata Investigation Wing and particularly of DDIT (Inv) Unit 4(2) Kolkata dated 10.11.2016 along with the statements of Dummy Directors unsecured loans from Kolkata based entities. However, he has not submitted any clarification regarding this till date. Therefore, the share application money of Rs. 1 crore received from the Kolkata based non genuine shell companies are unexplained for the previous year relevant to A.Y 2010-11. 6. In view of the facts discussed above, I have reason to believe that income of Rs. 1 crore chargeable to tax has escaped assessment within the meaning of section 147 of the Income Tax Act.

The notice u/s. 148 of the Act is issued after taking prior approval of the Pr. Commissioner of Income Tax, (Central) Surat as per the provisions of section 151(1) of the I.T Act.”

The petitioner raised objections to the notice of reopening. Though these objections are quite elaborate, learned counsel for the petitioner had relied on only one objection which we may record. As per the assessee, the entire share capital and share application money was received by the company during the financial year 2008-09 relevant to assessment year 2009-10 and that therefore, the reopening of assessment of the assessment year 2010-2011 was impermissible. This is the sole ground on which, the petition is argued.

The Assessing Officer, while disposing of the objections by an order dated 20.11.2017, met with this objection of the assessee and rejected by making following observations: “3.1.2 Department's view. The contention of the assessee is not acceptable because actually, the assessee company had alloted shares on 30.04.2009 i.e. during F.Y. 2009-10 relevant to A.Y. 2010-11 to the bogus Kolkata based companies mentioned at para 2 above. The allotment of share is prima facie the matter of concern not the receipt of share application money. The issue is very crystal clear that the assessee has alloted the share to bogus companies. Moreover, the subscribers of shares become the real owner of the share after the shares are alloted to them and not at the time when they make the payment. In general principle an entity when applies to subscribe the share, has to pay for the price of the share in advance i.e. prior to allotment of share. In case, the person is not alloted with the share, in advance i.e. prior to allotment of share. In case, the person is not alloted with the share, the money has to be returned back. The receipt of share application money has to be accounted for by the issuing company after the shares are alloted to the subscribers and not at the time of receiving the cheques. Sometimes, the shares are oversubsribed, in that case, the balance amount or total amount are returned to the subscribers depending upon the shares alloted to them. Therefore, the receipt of share application money cannot become the income of the assessee company until and unless it allots the shares to the subscribers. This whole facts could not have been unearthed had the search not been conducted in the case of the assessee. Further, the assessee claimed that it had received share application money of Rs. 1,00,00,000/- during 26.03.2009 to 31.03.2009 i.e. F.Y. 2008-09 relevant to A.Y. 2009-10. The assessee had also furnished the copy of the bank account for the relevant period, the details of which are as under:- Posting Value date Descrip REF/ Withdraw Credits Balance date tion CHQ No. als 301548 26.03. 2009 26.03.2009 By CLG 898025 0 3000000 3301548 26.03. 2009 26.03.2009 By CLG 872941 0 1300000 4601548 27.03. 2009 27.03.2009 By CLG 872944 0 700000 5301548 28.03. 2009 28.03.2009 SCS 43901 4000000 0 1301548 28.03. 2009 28.03.2009 Revers al 43901 -4000000 0 5301548 30.03. 2009 30.03.2009 BY LCG 834477 0 2500000 7801548 30.03. 2009 30.03.2009 RTGS Trf 43901 4000000 0 3801548 30.03. 2009 30.03.2009 Generat e 43902 1000000 0 2801548 31.03. 2009 02.04.2009 By CLG 196363 0 1000000 3801548 31.03. 2009 02.04.2009 By CLG 98334 0 1500000 5301548 From the above statement, it is evident that out of the total share application money of Rs. 1,00,00,000/-, Rs. 75,00,000/- has been credited in the account from 26.03.2009 to 30.03.209 (i.e. F.Y. 2008-09) and Rs. 25,00,000/- has been credited on 02.04.2009 (F.Y. 2009-10). Therefore the assessee's claim is not correct because the assessee is considering the date of posting of cheque whereas, the date of clearing of cheque i.e. date on which the amount is credited to the assesse's account is considered as the date of receipt. In case of dishounour of cheque the credit would have not taken place. It is seen from the bank statement that the balance of the assessee's account on 31.03.2009 was Rs. 28,01,548/-. The balance has increased to Rs. 55,01,548/- after credit of Rs. 25,00,000/- on 02.04.2017. Therefore, the assessee has erroneously claimed Rs. 25,00,000/- in its books of account during F.Y. 2008-09 even though the same has been credited to its bank account during F.Y. 2009-10. Therefore, without prejudice to the facts mentioned at 3.1.2 above the assessee had wrongly reflected in its balance sheet that it had received the share application money of Rs. 1,00,00,000/- during F.Y. 2008-09 relevant to A.Y. 2009-10.”

From the record, it emerges that the assessee had not filed return for the relevant assessment year. Further, the reasons cited by the Assessing Officer for issuing the notice of reopening are quite serious. In such reasons, he had pointed out that the material collected by the department during search operation in case of Madhav Group of cases which led to further information that the assessee had alloted 1 lac shares to different investor companies by charging Rs. 90/- by way of premium over and above the nominal value of Rs. 10/- per share. The Investigating Wing of the department had collected material to suggest that these were shell companies engaged in providing accommodation entries having dummy directors. Statement of the director of the assessee-company was also recorded. He could not provide genuineness of these transactions. He would also confronted with the report of the Investigation Wing of the department.

As the reason stand therefore, reopening of the assessment would be ordinarily permissible. Counsel for the petitioner, however, strongly urged that whatever be the facts, no taxing event having been occurred during the period relevant to the assessment year 2010-11, impugned notice should be quashed. Elaborating this ground, he contended that the entire share application and share premium money was received by the assessee on or before 31.03.2009. No amount having been received after 01.04.2009, no taxing event fell within the period relevant to the assessment year 2010-11. This ground, the Assessing Officer repealed citing two fold reasons. According to him, mere receipt of the share application money was not enough. Unless shares are alloted, such amount would remain with the company and cannot be appropriated. In case of over subscription of shares, it may happen that the amount may have to be returned. In short, the transaction would be completed only upon allotment of shares. The second ground was that, in any case, part of the amount of Rs. 1 crore was actually received by the assessee company on 02.04.2009. He pointed out that two cheques of Rs. 10 lacs and 15 lacs respectively were deposited with the bank on 31.03.2009 and encashed on 02.04.2009. According to him, therefore, the company received the money actually on 02.04.2009 and not earlier.

Learned counsel for the department criticized this approach of the Assessing Officer arguing that under section 68 of the Income Tax Act, 1961, the assessee's undisclosed cash credit can be brought to tax. The factum of allotment of shares in such a situation has no bearing. In the context of the Assessing Officer's second ground, counsel relied on the decisions of had not filed any return for the said assessment year and; (2) as per the reasons recorded by the Assessing Officer, there is every case for permitting assessment of the assessee for the said year. As per the reasons recorded, the assessee had received bogus share premium money from shell companies who were indulging in providing bogus accommodation of the entries. There were series of transactions of this nature. The question that, when precisely the taxing event occurred would have to be kept open to be decided at the first instance by the Assessing Officer during the course of assessment. In the present case, at the very threshold, it is neither necessary nor are we inclined to decide this issue finally. We are conscious that the reasons recorded by the Assessing Officer can be challenged on the ground of their validity. If therefore there is a clear conclusion possible that such reasons lacked validity, it would always be open for the Court to strike down the notice based on such reasons. However, at the stage when the notice for reopening is under challenge, if it is not possible without further detailed inquiry to arrive at a final conclusion, the Court would be well advised in keeping such a question open and permitting further proceedings in connection with the notice of reopening.

Under the circumstances, subject to above observations, the petition is dismissed. Notice is discharged. Needless to add, we have not expressed any final opinion on the petitioner's principal contention for challenging the notice of reopening. Since the other issues cited by the Assessing Officer in the reasons recorded had not even come up for discussion before us, we had no occasion to comment on any of them. The assessment would be carried out independently of the observations made in this order. (AKIL KURESHI, J) (B.N. KARIA, J) JYOTI V. JANI