M/s Peakwood Reality Pvt. Ltd. vs Assistant Commissioner Of Income Tax Central Circle-II

“Search action w/s 132(1) (A) of the I.T. Act was conducted on 21.07.2016 on M/s M3M Group of cases. Return declaring Loss of Rs. 1,276/- was filed on 28.09.2015 for the A.Y. 2015-16. The assessee has received during the year under consideration amounts from the following companies:-

S. No.	Name of the company	Amount
1.	M/s Focus Realcon(P) Ltd.	Rs. 1,03,93,2014/-
2.	M/s Starlite Builders(P) Ltd.	Rs. 15,48,53,490/-
3.	M/s Sunrise Propbuild Pvt Ltd.	Rs. 28,18,15,270/-
	TOTAL	Rs. 44,70,61,964/-

The directors of the above mentioned companies have on statement accepted that these companies have no real business but are engaged in providing accommodation entries in lieu of Commission. Further this company does not have fixed assets und employee strength. This company being entry operator was also established ws 147 r.w.s. 143(3) for the Assessment Year 2011-12.

Income tax return of the assessee for the year under consideration was examined. It is noted that the above mentioned liability is shown under the head loans or share premium and is mentioned under other long term liabilities.

The DDIT Unit-I (Inv.) Gurgaon has in the appraisal report proposal for M3M group of cases (D.O.S.-21.07.2016) mentioned that these companies have been used as conduit companies for transfer of funds amongst M3M group companies.

In view of the above, I have reasons to believe that the income of the assessee has escaped assessment for the assessment year 2015-16 to the tune of Rs.44,70,61,964/-. I, therefore, propose to assess such escaped income and also any other income chargeable to tax which has escaped assessment within the meaning of section 147 read with section 148 of the Income Tax Act, 1961."

5.

Grounds of appeal Nos. 1 to 7 raised by the assessee are with respect to the re-opening of the assessment wherein the Grounds of Appeal Nos. 4 to 4.3 are with respect to re-opening of assessment based on the borrowed satisfaction.

6.

Before us, Ld.AR submits that the case of the assessee was re-opened solely on the basis of the information received from the Investigation Wing, Gurgaon that a search was carried out in the case of M3M Group of cases and Directors of the companies from whom the assessee has received loan have accepted that these companies are having no real estate business and are engaged in the business of providing accommodation entries. Accordingly, the AO solely on the basis of Appraisal Report of M3M Group of cases, has recorded the satisfaction of escapement of income without carrying out any independent enquiry or investigation before reaching to such satisfaction. Ld.AR submits that despite all repeated requests, AO has never provided the copy of material referred in the reasons recorded stated to have been received from the Investigation Wing, Gurgaon based on which satisfaction was recorded that the loans taken by the assessee are mere accommodation entries. Ld.AR submits that the AO has applied no mind before reaching to the conclusion to the some income had escaped assessment and he placed reliance on the following judgements of Hon'ble High Court and Tribunal:-

(i)

Hon'ble Delhi ITAT in the case of (group company) M/s Marigold Merchandise Private Limited vs. ACTI (ITA No. 1256/Del/2025).

(ii)

Hon'ble Delhi ITAT in the case of (group company) M/s Sunrise Propbuild Pvt. Ltd. vs. ACIT (ITA No. 1257-1258/Del/2025).

(iii)

Hon'ble Delhi High court in the case of PCTT vs. M/s Meenakshi Overseas (395 ITR 677).

(iv)

Hon'ble Delhi High Court in the case of PCIT vs. RMG Polyvinyl (I) Ltd. (83 taxmann.com 348) Hon'ble Delhi High court in the case of PCIT vs. K.R. Pulp and Papers Ltd. (175 taxmann.com 278)

7.

With respect to other Grounds of appeal taken on merits, Ld.AR submits that assessee has received advances from M/s Focus Realcon Pvt. Ltd. & M/s. Starlite Builders Pvt. Ltd. in terms of the MOU entered into between the parties dated 27.03.2014 as per which both the companies have provided advances for the purchase of lands on their behalf. It was submitted by Ld.AR that in the case of M/s. Starlite Builders Pvt. Ltd., the said amount was returned in subsequent year which is evident from the copy of the confirmation submitted before the AO placed at page 47 of the Paper Book. Ld. AR submits that in subsequent assessment year more funds of Rs. 12.00 crores were received from M/s. Starlite Builders Pvt. Ltd. however, the same were never doubted by the AO. Ld. AR submits that the assessee has filed the confirmation of the parties and since the transaction was carried out through banking channel and the advances were received for the purchase of land in terms of MOU executed between the parties, no addition should be made u/s 68of the Act. Ld.AR submitted that nature of advances received has duly been described in the MOU and the said amounts were refunded and the assessee has also filed the financial statement of both the companies where having sufficient funds therefore, it cannot be said that these funds are mere accommodation entries.

8.

Ld.AR further relied upon the order of AO of one Shri Mukesh Kumar Agarwal and Shri Pradeep Dey whose statements were relied upon by the AO, were appointed as Directors in both the companies on 12.11.2020 and retired in Sept. 2011 and in the year under appeal, when the funds were received they were not the Detectors in both the companies therefore, their statements cannot be relied upon for making additions in the hands of assessee company as such statements had no evidentiary value in the case of assessee where the funds have been received in FY 2013-14. Ld. AR thus prayed for the deletion of additions made.

9.

On the other hand, Ld.CIT DR vehemently supported the orders of the lower authorities and submits that Investigation Wing report has clearly suggested that M3M Group doing circulation rotation of the funds and M/s. Focus Realcon Pvt. Ltd. and M/s. Starlite Builders Pvt. Ltd. were the conduit through which funds were rotated by M3M Group. It is further submitted that Directors of both the companies have admitted that these companies were engaged in the business of providing accommodation entries and were dummy companies. Therefore, Ld.CIT DR submits that the order of the lower authorities deserves to be sustained.

10.

Heard the contentions of both the parties at length and perused the material available on record. Before moving further, the provision of section 147 needs to be considered:

147.

“If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year)."

11.

As could be seen that under section 147 of the Act, AO has reason to believe that income has escaped assessment for initiating the reassessment proceedings u/s 147 of the Act. It is well established that before initiating the reassessment proceedings, AO should apply his mind and must record the satisfaction of escapement of income. In the instant case, as could be seen from the perusal of the reasons recorded, as reproduced at pages 2-3 of the reassessment order that the AO has recorded his satisfaction solely on the basis of the information received from DDIT Unit-I (Inv.) and the statements of the directors without their being any independent application of mind. The Ao has not conducted any fresh enquiry before recording the reasons to believe of escapement of any income and thus such satisfaction is purely borrowed satisfaction. Further the material so received was never confronted to the assessee. Therefore, the assumption of jurisdiction u/s 147 of the Act is bad in law.

12.

The Hon'ble Delhi High court in the case of Pr. CIT vs. RMG Polyvinyl (P) Ltd. reported in 83 taxmann.com 348 has held as under:

"...where information was received from investigation wing that the assessee was beneficiary of accommodation entries but no further inquiry was undertaken by Assessing Officer, said information could not be said to be tangible material per se and, thus, reassessment on said basis was not justified.

13.

Further, in the assessment order, para 4.4 onwards, the AO has reproduced the report of investigation wing received by him explaining the modus operandi of one of the entities of M3M group M/s Misty Meadow Pvt. Ltd. for transfer of funds. However, there is no relation whatsoever of the assessee company or the other two companies from whom funds were received with Misty Meadow Pvt. Ltd., thus making reference of such modus operandi couldn't establish that the appellant was part of this rotation of funds. The AO has not conducted any independent inquiry to correlate the information in his possession with the transactions of the appellant. The AO failed to establish the nexus between the tangible material available and the reason to believe that income has escaped the assessment. Even the statements of the persons involved in the modus operandi recorded on which the AO has relied upon, the AO couldn't bring on record co-relation with the income escaped in the hands of the appellant and if the name of appellant was explicitly surfaced from the statements. Further, the appellant requested AO to provide copy of report received from Investigation Wing on which the AO has relied upon. The AO didn't provide the underlying material relied upon to the appellant. It is a settled law that in the absence of tangible material and without conducting any independent inquiry, reasons recorded on the basis of borrowed satisfaction, the reasons recorded and the assessment proceedings reopened thereon are invalid.

“... there is no close nexus” or live link between tangible material and the reason to believe that income has escaped assessment. The information received from the Investigating Unit of the revenue cannot be the sole basis for forming a belief that income of the assessee has escaped assessment. Having received information from the Investigating Wing, it was incumbent upon the Assessing Officer to take further steps, make further enquiries and garner further material and if such material indicate that the income of the assessee has escaped assessment and then form a belief that the income of the assessee has escaped assessment. [Para 25]

Clearly, in this case, the Assessing Officer has not acquired any material to form such belief. There is not even a line of reason which may justify the formation of the belief. Consequently, reopening of assessment for the assessment year in question by the Assessing Officer does not satisfy the requirement of law in terms of sections 147 and 148.” [Para 26].”

“Section 68, read with sections 147 and 148, of the Income-tax Act, 1961 - Cash credits (Loan)- Assessment year 2019-20 - Pursuant to a search conducted at ‘Oneworld group entities’, it was noted that assessee was a beneficiary of an accommodation entry provided in form of bogus loans - It was alleged by revenue that bogus accommodation entry was provided by AFL Ltd. - It was also noted that AFL was one of several entities controlled by an accommodation entry provider i.e., one, ‘R’ - Further based on statement of ‘R’ revenue zeroed down on AFL, which, supposedly, lent money to assessee - In said back drop Assessing Officer issued notice under section 148 and initiated reassessment proceedings against assessee - It was noted from record that foundation for triggering reassessment proceedings qua assessee was statement of ‘R’ and said statement, by itself, did not lend any clarity as to whether Assessing Officer had underlying material available with him for reaching a conclusion that income chargeable to tax qua assessee had escaped assessment.”

“The statement, by itself, does not lend any clarity as to whether the Assessing Officer had underlying material available with him for reaching a conclusion that income chargeable to tax qua the petitioner had escaped assessment. [Para 15.1]”

“...Thus, the crucial link between the information made available to the Assessing Officer and the formation of belief is absent. The reasons must be self-evident, they must speak for themselves. The tangible material which forms the basis for the belief that income has escaped assessment must be evident from a reading of the reasons. The entire material need not be set out. However, something therein which is critical to the formation of the belief must be referred to. Otherwise the link goes missing. [Para 23]

The reopening of assessment under section 147 is a potent power not to be lightly exercised. It certainly cannot be invoked casually or mechanically. The heart of the provision is the formation of belief by the Assessing Officer that income has escaped assessment. The reasons so recorded have to be based on some tangible material and that should be evident from reading the reasons. It cannot be supplied subsequently either during the proceedings when objections to the reopening are considered or even during the assessment proceedings that follow. This is the bare minimum mandatory requirement of the first part of section 147 (1). [Para 24]

The first part of section 147(1) of the Act requires the Assessing Officer to have “reasons to believe” that any income chargeable to tax has escaped assessment. It is thus formation of reason to believe that is subject-matter of examination. The Assessing Officer being a quasi judicial authority is expected to arrive at a subjective satisfaction independently on an objective criteria. While the report of the Investigation Wing might constitute the material on the basis of which he forms the reasons to believe, the process of arriving at such satisfaction cannot be a mere repetition of the report of investigation. The recording of reasons to believe and not reasons to suspect is the pre-condition to the assumption of jurisdiction under section 147 The reasons to believe must demonstrate link between the tangible material and the formation of the belief or the reason to believe that income has escaped assessment [Para 26]

In the present case, as already noticed, the reasons to believe contain not the reasons but the conclusions of the Assessing Officer one after the other and there was no independent application of mind by the Assessing Officer to the tangible material which forms the basis of the reasons to believe that income has escaped assessment. The conclusions of the Assessing Officer are at best a reproduction of the conclusion in the investigation report. Indeed it is a 'borrowed satisfaction'. The reasons fail to demonstrate the link between tangible material and the formation of the reason to believe that income had escaped assessment." [Para 36]"

> “Where appellant showed unsecured loans received during relevant assessment year and AO made addition on ground that appellant failed to discharge onus of liability as laid down under section 68, since amount of loan received by appellant was returned to loan party during year itself and all transactions were carried out through banking channels, impugned addition was to be deleted.”

12.

"From the record, we find that Sh. Pradip Dey was a Director in M/s Grand Realcon Pvt. Ltd. for the period from 06.11.2010 to 09.12.2011 and the statement was recorded on 30.03.2015 before the year under consideration whereas the monies received by the assessee were on 15.03.2016. Sh. Pradeep Dey was not a Director nor in any way associated with the company either of the recording of the statement or at the time of receipt of advance by the assessee company. Thus, the reliance placed by the Assessing Officer on the statement of Sh. Pradeep Dey is misconceived. Further, the statements recorded in the absence of the assessee which has been utilized for the purpose of assessment but the assessee was not provided any opportunity of cross examining of Sh. Pradeep Dey. The noncompliance to the notices issued u/s 133(6) cannot be considered as the sole criteria to make addition in the case of the assessee. The Assessing Officer should bring this fact to the notice of the assessee and direct /provide an opportunity to the assessee to produce the parties. No field enquiries have been conducted by the Assessing Officer as per the record before us. The allegation that meager income of the lender party cannot be a ground to reject the genuineness and creditworthiness of the transaction. There was no evidence or lead to prove the allegation made by the Assessing Officer that the money received has been originated from the coffers of the assessee. The M/s Grand Realcon Pvt. Ltd. had Rs.74 Cr. of long term borrowings in the form of unquoted CCDs to provide advances to the assessee. The assessee has also furnished copy of confirmation of accounts and the AO has not made any enquiries nor questioned the genuity of the confirmations filed. While the confirmations filed or on record, the allegation of the AO that the notices issued u/s 133(6) have not been complied and hence the amount be treated u/s 68 is not an acceptable proposition.

13.

Keeping in view, the facts and arguments taken, we hold that the assessee has substantiated its claim before the AO by producing all the relevant documents viz. copy of ledger account of M/s Grand Realcon Pvt. Ltd., copy of the bank statement reflecting money received from M/s Grand Realcon Pvt. Ltd., copy of confirmation of account, copy of income tax returns of M/s Grand Realcon Pvt. Ltd. and M/s Grand Realcon Pvt. Ltd.'s bank statement and financial statements of M/s Grand Realcon Pvt. Ltd., we affirm the decision of the ld. CIT(A) holding that appellant has duly discharged its onus but the AO has failed to conduct specific enquiries and come out with findings that the underlined transactions is sham transaction."

"The power to levy assessment on the basis of best judgment is not an arbitrary power; it is an assessment on the basis of best judgment. In other words, that assessment must be based on some relevant material. It is not a power that can be exercised under the sweet will and pleasure of the concerned authorities. The scope of that power has been explained over and over again by this Court. The Agricultural Income-tax Tribunal gave no reasons in its order for affirming the decision of the Asstt. Collector. It appears to have been of the view that once the assessing authorities reject the material placed before them as being unreliable those authorities can proceed to levy whatever tax they may levy. It failed to bear in mind the scope of the power of the assessing authorities to levy assessment on the basis of best judgment. Therefore, the Tribunal was clearly in error in confirming the decision of the Asstt. Collector. Hence, the High Court was justified in interfering with the order of the Tribunal."

"The sole basis for the Revenue to doubt their creditworthiness was the low income as reflected in their return of income. It was observed by the ITAT that the Assessing Officer had not undertaken any investigation of the veracity of the documents submitted by the assessee, the departmental appeal was dismissed by the Hon'ble High court."

"Section 68 of the Income-tax Act, 1961 – Cash credits (Share capital money) – Assessment years 2012-13 to 2017-18 – Assessee-company received share capital and share premium money from several investors – Assessing Officer made addition in respect of same on account of unaccounted income under section 68 on basis of recorded statement of managing director of assessee-company – Whether since assessee placed sufficient documentary evidence to establish that money which assessee had paid to investors was routed back to it in form of share capital/share premium and identity, creditworthiness and genuineness of investors was proved, there was no justification to make addition under section 68 – Held, yes [Paras 11.4, 11.5 and 14.4] [In favour of assessee]."