KHATU SHYAM PROCESSORS PVT. LTD. vs. DY. COMMISSIONER OF INCOME TAX CIRCLE 1(1)(2)

Information of accommodation entries received from investigation wing, Kolkata : The DDIT [Inv.] Unit 3 (1) – Kolkata vide his letter dated 27.03.2017 has provided a list of 396 paper/accommodation provider companies. In the said list some of the paper company has provided accommodation entries to the assessee during the year, which is discussed in next para. On perusal of assessment orders/list supplied by the ADIT [Invt.], Kolkata, it is found that the assessee company has received following accommodation entries in form of Share Capital & Share Premium during the year from the Kolkata based company : Sr. No. Name & Postal Address of the Company Total Investment in Share Capital/Premium 1 Abhiruchi Vision Pvt. Limited, 4, Ganesh Chandra Avenue, 1st Floor, Room No. 1, Kolkata 11,40,000=00 2 Dreamz Vanijya [P] Limited, 4, Ganesh Chandra Avenue, 1st Floor, Room No. 1, Kolkata 9,90,000=00 3 Gouri Merchandise [P] Ltd., 6, NG Basak Road, Block-1, Fase Flat No. L-3, Kolkata 9,99,000=00 4 Shambu Agency [P] Limited, 6, NG Basak Road, Block L, Fase 2, Float No. LE, Kolkata 4,95,000=00 5 Ganesh Vincom Private Limited, 6, N.G Basak Road, Block-L, Phase L1, Flat No. 1, Kolkata 15,00,000=00 TOTAL Rs.. 51,15,000=00 These companies are Kolkata based paper companies which are not having any business activity and the sole purpose of creating these companies is to provide accommodation entries to beneficiary parties. Hence, source of above investments are unexplained, as these companies have no creditworthiness to make such huge investments with the assessee-company.

After verifying the above facts from the assessment records, the Inspector of this office was directed to make discreet inquiries in respect of the assessee company to inquire whether the assessee company is indulged in receiving accommodation entires from the paper companies or not. The Inspector made local inquires in the nearby area where the said company is working. He reported that it used to take accommodation entires of the share capital/share premium etc., in various years from the various Kolkata based paper companies to convert its black money into white. Hence, report of Inspector and information received from the Investigation Wing, Kolkata were co-related to each other. Consequently, above investment are not genuine. From the above discussion, it is proved that the assessee did not disclose fully and truly material facts to the Department which is necessary assessment. In the light of above discussion, it is clear that the assessee has concealed income of Rs. 51,15,000/= during the year. Therefore, I have reason to believe that the assessee has concealed income to the extent of Rs. 51,15,000/= which is an escaped assessment within the meaning of section 147 of the Income Tax, 1961. Hence, I am satisfied that it is a fit case for issuing notice under Section 148.” The petitioner raised objections to the notice of reopening under a letter dated 18th December 2017. Such objections were however rejected by the Assessing Officer by an Order dated 19th December 2017 whereby the present petition has been filed. Counsel for the petitioner raised the following contentions in support of the petition : [i] The reasons are based on alleged bogus investments made by the so-called shell companies of Kolkata. All these investments were examined by the Assessing Officer during the original assessment. Any reopening on the same ground would be hit by the principle of change of opinion. [ii] Impugned notice has been issued beyond the period of four years from the end of relevant assessment year, in absence of any failure on the part of the assessee to disclose truly and fully, all material facts necessary for reopening would not be permissible. [iii] Assessing Officer has proceeded merely on the report of the Investigating Wing, Kolkata without independent application of mind. Thus, the Assessing Officer has acted on the borrowed satisfaction. [iv] Drawing our attention to the last portion of the reasons recorded, counsel for the petitioner argued that the Assessing Officer has taken into account impermissible and extraneous material. The Assessing Officer claims to have carried out discreet inquiry, however, the precise mode of inquiry is not revealed. In any case, reopening of the assessment cannot be sustained on the basis of some information gathered by the Assessing Officer which may not be reliable or dependable. On the other hand, learned counsel for the Revenue opposing the petition contended that the Assessing Officer has recorded proper reasons. On the basis of material supplied to him, he had formed a belief that income chargeable to tax has escaped assessment. This is not a case where he acted mechanically. In any case, the further material on which the Assessing Officer has placed reliance are clearly severable and would not vitiate the notice of reopening. A perusal of the reasons recorded show that the same come into two parts. First portion refers to information provided to the Assessing Officer by the Investigation Wing of Kolkata and the processing of such information by the Assessing Officer. This portion shows that the Investigating Wing had, under a letter dated 27th March 2017, provided list of as many as 396 companies which were mere paper companies indulging in providing accommodation entries. The Assessing Officer found that some of the companies out of the said list have provided accommodation entires to the assessee during the year under consideration. He recorded that on perusal of the assessment record and the list of the companies supplied by the Investigation Wing, it was found that the assessee company had received accommodation entires in the form of share capital and share premium from five different companies amounting Rs. 51,15,000/=. He recorded that these Kolkata based companies were paper companies and were not having any business activities. The sole purpose of creating these companies were to provide accommodation entires to the beneficiary parties. It was on the basis of such material, he concluded that the source of investment in the assessee company were unexplained, as investing companies have no creditworthiness to make such investment. Three things immediately emerge from the reasons recorded by the Assessing Officer viz., [i] that the issue whether these investments were genuine or not, and whether investing companies had wherewithal to make investment or not is the central question presently, which was not an issue during the original assessment proceeding. [ii] the question of true and full disclosure and the scrutinized issue in fact in the present case closely overlap and [iii] the present is not a case where the Assessing Officer has acted mechanically without any mental input on his part or acted on borrowed satisfaction. What was provided to him was a list of 396 companies by the Investigating Wing pointing out that these were mere shell companies, their creatison was for the purpose of providing accommodation entires. The Assessing Officer on perusal of the assessment record and list supplied by the Investigating Wing co-related the different material on record and prima facie came to the conclusion that the investment of Rs. 51.15 lakhs made by five of these companies in the form of share-capital or share premium of the assessee company was not genuine. The last aspect has been examined by this Court on numerous occasions. We may refer to one such judgment of the Court in the case of Principal Commissioner of Income-tax, Rajkot-3 v. Gokul Ceramics, reported in [2016] 241 Taxman 1 [Gujarat] wherein the Court had made the following observations :- “9. It can thus be seen that the entire material collected by the DGCEI during the search, which included incriminating documents and other such relevant materials, was alongwith report and show-cause notice placed at the disposal of the Assessing Officer. These materials prima facie suggested suppression of sale consideration of the tiles manufactured by the assessee to evade excise duty. On the basis of such material, the Assessing Officer also formed a belief that income chargeable to tax had also escaped assessment. When thus the Assessing officer had such material available with him which he perused, considered, applied his mind and recorded the finding of belief that income chargeable to tax had escaped assessment, the re- opening could not and should not have been declared as invalid, on the ground that he proceeded on the show-cause authorities found that the assessee was systematically under- voicing the value of Manganese as compared with the prevailing market price. The Income Tax Officer on coming to know about the proceedings before the Customs Collector in this respect issued notice for reopening of the assessment. In the reasons that the Assessing Officer relied on the facts as found by the Customs Authorities that the assessee had under-voiced goods during export. Under such circumstances, upholding the validity of the notice for reopening, the Supreme Court held and observed as under: So far as the first condition is concerned, the Income Tax Officer, in his recorded reasons, has relied upon the fact as found by the Customs Authorities that the appellant had under invoiced the goods it exported. It is not doubt correct that the said finding may not be binding upon the income tax authorities but it can be a valid reason to believe that the chargeable income has been under assessed. The final outcome of the proceedings is not relevant. What is relevant is the existence of reasons to make the Income Tax Officer believe that there has been under assessment of the assessee's income for a observed as under :

Ms. Gauri Rastogi, the learned counsel appearing for Upholding the validity of re-opening of assessment, the Supreme Court held and observed as under: a writ petition. It was observed as under : 23. The present factual canvas has to be scrutinized on the touchstone of the aforesaid enunciation of law. It is worth noting that the learned counsel for the petitioner has submitted with immense vehemence that the petitioner had entered into correspondence to have the documents but the assessing officer treated them as objections and made a communication. However, on a scrutiny of the order, it is perceivable that the authority has passed the order dealing with the objections in a very careful and studied manner. He has taken note of the fact that transactions involving Rs.27 lakhs mentioned in the table in Annexure P-2 constitute fresh information in respect of the assessee as a beneficiary of bogus accommodation entries provided to it and represents the undisclosed income. The assessing officer has referred to the subsequent information and adverted to the concept of true and full disclosure of facts. It is also noticeable that there was specific information received from the office of the DIT (INV-V) as regards the transactions Income Tax, reported in [2008] 302 ITR 275 (Mad) upheld the notice for reopening which was based on information from enforcement directorate showing possible inflation of purchases made by the assessee.” This discussion still leave open, the assessee’s last contention regarding the attempt made by Assessing Officer to verify these facts through discreet inquiries. In the last portion of the reasons recorded by the Assessing Officer, he has stated that after verifying the facts, as recorded above, the Inspector was directed to make discreet inquires in respect of the assessee company to inquire whether the company was indulged in receiving accommodation entries from the paper companies or not. He further recorded that Inspector having made local inquires in the nearby area where the company is working, recorded that the company used to take accommodation entires from various Kolkata based paper companies. The Assessing Officer, therefore, recorded that, “..hence the report of the Inspector and information received from the Investigation Wing, Kolkata are co-related to each other.” To us, this appears to be usual attempt on the part of the Assessing Officer to make “discreet inquires” in order to ascertain whether the company was indulging in such illegal activities. The manner or method of such discreet inquiry is not revealed and therefore, we are not clear as to how exactly inquiry was made. However, the Assessing Officer seems to be suggesting that the Inspector deputed by him on the basis of unrecorded statements appears to have made such a report. Whether on the basis of unrecorded or even on the basis of statements of unrelated persons which may have been recorded, we have doubt about the efficacy thereof. Proper information at the command of the Assessing Officer can come only through reliable sources. Statements of those who ought to know may be one such source. At any rate, the Assessing Officer cannot bank on unrecorded statements or statements from the sources which can at best be described as relying on rumours or gossips. Had this been the foundational reason we would have been prompted to quash the notice. However, this clearly is separate and severable part of the reasons and at the best can be seen as an over enthusiastic approach on the part of the Assessing officer to buttress an already arrived at conclusion that income chargeable to tax has escaped assessment on the basis of information on record. In the result, petition is dismissed. Notice discharged. [Akil Kureshi, J.] [B.N Karia, J.] Prakash