Read Judgment: DEPUTY COMMISSIONER OF INCOME TAX vs. M/s M R SHAH LOGISTICS PVT LTD

Pankaj Bajpai

New Delhi, March 29, 2022: Finding that the AO, after recounting the background history of M R Shah Logistics (Assessee) and background of M.R. Logistics (chairman of assessee company), shifted the burden on assessee to say that the share application money received by it was not its unaccounted income, the Supreme Court has held that sequitur to a declaration under the IDS cannot lead to immunity (from taxation) in the hands of a non-declarant. 

Simply because re-opening of assessment was not based on company chairman’s declaration under IDS, the fact that such an entity owned up and paid tax and penalty on amounts which it claimed, were invested by it as share applicant, cannot by any rule or principle inure to assessee’s advantage, observed a Division Bench of Justice Uday Umesh Lalit and Justice S. Ravindra Bhat. 

Going by the background of the case, pursuant to a search proceeding conducted at the office premises of one Shirish Chandrakant Shah, wherein several materials were seized. On analysis of such documents, the revenue was of opinion that Shirish Chandrakant Shah was providing accommodation entries, through various companies controlled and managed by him, and that the assessee was one of the beneficiaries of the business (of accommodation entries provided by Shirish Shah) through bogus companies. This was based on the fact that many companies which invested amounts towards share capital on high premiums in the assessee’s company were also controlled and managed by Shirish Shah. The AO was of opinion that the assessee was also a beneficiary of the accommodation entries provided by Shirish Shah. During the course of previous searches in the case of Shirish Chandrakant Shah, an accommodation entry provider in Mumbai, it was observed that huge amounts of unaccounted moneys of promoters/directors were introduced in closely held companies of the assessee’s group. 

The reasons to believe also stated that the chairman of M.R. Shah Group was asked about the application money received by the assessee. In the course of the statement, he disclosed that M/s. Garg Logistics Pvt. Ltd. had declared Rs. 6.36 crores as undisclosed cash utilized for investment in the share capital of the assessee, M.R. Shah Logistics Pvt. Ltd. through various companies. The assessee company’s chairman voluntarily disclosed the statements made by Garg Logistics about the declaration by Garg Logistics P Ltd, under the Income Declaration Scheme (IDS). 

The reasons supplied by the AO further noted that he had completed the assessment in the case of Pradeep Birewar group and that a search took place in respect of that group along with various individuals who had obtained accommodation entries of long-term capital gains (LTCG) in the shares of Ganesh Spinners Ltd. from Shirish Chandrakant Shah. It was found that Pradeep Birewar was an Ahmedabad based accommodation entry provider engaged in facilitating one-time accommodation entries to various clients. The “reasons to believe” further noted that the materials seized, including the books of Shirish Chandrakant Shah contained date wise details of cash receipts and accommodation entries paid. On a consideration of all those materials, it was found that cash credit of Rs. 70.01 crores were received by Shirish Chandrakant Shah. 

The matter reached High Court, which was of the opinion that the AO had no information to conclude that the disclosure by Garg Logistics was not from funds of that declarant but was in fact the unaccounted income of the assessee. Hence, present appeal. 

After considering the submissions, the Supreme Court noted that the basis for a valid re-opening of assessment should be availability of tangible material, which can lead the AO to scrutinize the returns for the previous assessment year in question, to determine, whether a notice u/s 147 is called for. 

As a matter of fact, M/s Garg Logistics filed its IDS application with a different Commissionerate which did not share information with the AO in the present case; he did not also call for any such information. Pravin Chandra Agrawal, the chairman of the assessee (M.R. Shah group) was queried with regard to the capital raised with high premium during a search, and post search inquiry. He submitted details of the IDS declaration by Garg Logistics Pvt Ltd to say that the amounts received toward share applications were genuine transactions. Clearly, in the present case, the High Court went wrong in holding that the department had shared confidential IDS information of Garg Logistics Pvt Ltd”, added the Court. 

Speaking for the Bench, Justice Bhat found that the record reveals that Garg Logistics Pvt. Ltd had not invested Rs. 6,36,00,000/- in the assessee company during the relevant period and the details of income declaration by Garg Logistics under the IDS scheme was submitted by Pravin. P. Agrawal (the assessee’s chairman) in support of its claim of genuineness of receipt of share capital. 

However, as noticed earlier, the basis for reopening the assessment in this case was the information from the material seized during search in cases of Shrish Chandrakant Shah and correlation with return of income of the assessee, and there was no scrutiny assessment done at the original assessment stage, added the Bench. 

Justice Bhat found that another aspect which should not be lost sight of is that the information or “tangible material” which the assessing officer comes by enabling re-opening of an assessment, means that the entire assessment (for the concerned year) is at large; the revenue would then get to examine the returns for the previous year, on a clean slate – as it were. 

Therefore, to hold as the High Court did, in this case, that since the assessee may have a reasonable explanation, is not a ground for quashing a notice under Section 147, and as long as there is objective tangible material (in the form of documents, relevant to the issue) the sufficiency of that material cannot dictate the validity of the notice, added the Bench. 

The Bench talked about the scope and effect of the Income Declaration Scheme (IDS), introduced by Chapter IX of the Finance Act, 2016. The objective of its provisions was to enable an assessee to declare her (or his) suppressed undisclosed income or properties acquired through such income. It is based on voluntary disclosure of untaxed income and the assessees acknowledging income tax liability. This disclosure is through a declaration (Section 183) to the Principal Commissioner of Income Tax within a time period, and deposit the prescribed amount towards income tax and other stipulated amounts, including penalty. Section 192 grants limited immunity to declarants, noted the Court.

The Apex Court noted that disclosure under IDS is through a declaration (Section 183) to the Principal Commissioner of Income Tax within a time period, and deposit the prescribed amount towards income tax and other stipulated amounts, including penalty, and as noticed previously the declarant was Garg Logistic Pvt Ltd and not the assessee. 

Facially, Section 192 affords immunity to the declarant: “…nothing contained in any declaration made under section 183 shall be admissible in evidence against the declarant for the purpose of any proceeding relating to imposition of penalty…” Therefore, the protection given, is to the declarant, and for a limited purpose”, added the Court. 

However, the Top Court observed that the High Court proceeded on the footing that such protection would bar the revenue from scrutinizing the assessee’s return, absolutely, and quite apart from the fact that the re-opening of assessment was not based on Garg Logistic’s declaration, the fact that such an entity owned up and paid tax and penalty on amounts which it claimed, were invested by it as share applicant, (though the share applicants were other companies and entities) to the assessee in the present case, cannot by any rule or principle inure to the assessee’s advantage. 

The Apex Court therefore concluded that the High Court fell into error, in holding that the sequitur to a declaration under the IDS can lead to immunity (from taxation) in the hands of a non-declarant.

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