Real Estate Company Not a Shell Entity Merely Due to Low Turnover and Profits

Demas Developers Private Limited Vs ITO (ITAT Delhi)

Reassessment Quashed Because AO Relied Solely on Investigation Wing Report; Reopening Invalid Because Reasons Were Based on Borrowed Satisfaction; Shell Company Allegation Rejected Because Assessee Owned Substantial Land Assets.

The case concerned reassessment proceedings initiated against a real estate development company for Assessment Year 2012-13. The company, incorporated on 06.07.2010, was engaged in real estate development, including ownership, development, and maintenance of real estate. The relevant year was only its second year of operations.

The reassessment was triggered after information was received from the Investigation Wing alleging that the company had received and transferred substantial funds and was functioning as a paper or shell company engaged in providing accommodation entries. The Investigation Wing noted that the company had negligible turnover and profits, significant unsecured loans, and substantial bank transactions. Based on this information, the Assessing Officer (AO) concluded that the company had no genuine business activity, treated it as a shell entity, and formed a belief that income of ₹73.38 crore had escaped assessment. A notice under Section 148 was issued on 31.03.2019.

During reassessment proceedings, the AO ultimately made additions of ₹108 crore under Section 68 on the ground that the assessee failed to establish the creditworthiness of lenders from whom unsecured loans had been received.

On appeal, the Commissioner (Appeals) rejected the allegation that the company was a shell or accommodation entry provider. The appellate authority observed that the company possessed substantial tangible assets in the form of land worth approximately ₹66.91 crore acquired for real estate development activities. Land acquisition was supported by registry documents and other records. The Commissioner accepted the explanation that the company was in the initial stage of a real estate project and that real estate development involves a significant gestation period before operational revenue is generated. Therefore, the absence of substantial turnover or profits during the early years could not justify classifying the company as a shell entity.

Before the Tribunal, the assessee raised an additional legal ground challenging the validity of the reassessment. It argued that the reassessment was based solely on information supplied by the Investigation Wing and that the AO had not undertaken any independent verification before reopening the assessment.

The Tribunal admitted the additional ground, holding that it involved a pure question of law arising from admitted facts. After examining the recorded reasons for reopening, the Tribunal found that the AO had substantially relied on the Investigation Wing’s conclusions without independently examining the company’s actual business activities, land holdings, or the nature of its real estate operations. The Tribunal noted that the company had acquired substantial land and had incurred expenditure related to real estate development, facts that were not properly examined while forming the belief of escapement of income.

The Tribunal further observed that although the AO had alleged bogus expenditure and accommodation entries, such allegations were not independently investigated during assessment proceedings. It held that the AO’s satisfaction was based on borrowed conclusions from the Investigation Wing rather than an independent application of mind. Since the very foundation of the belief that the assessee was merely an accommodation entry provider was found unsustainable, the reassessment proceedings could not be sustained.

Accordingly, the Tribunal upheld the assessee’s challenge to the reopening, held that the assumption of jurisdiction under Section 147 was invalid, and quashed the reassessment order.

FULL TEXT OF THE ORDER OF ITAT DELHI

These cross appeals are preferred by the assessee and revenue against the order dated 31.03.2024 of the Ld. National Faceless Appeal Centre (NFAC) Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in DIN & Order No.: ITBA/NFAC/S/250/2023-24/[1063796665(1) arising out of the order dated 29.12.2019 u/s 147 r.w.s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by the ITO, Ward 7(1) for AY: 2012-13.

2. At the time of hearing ld. Counsel for the assessee has mentioned about additional ground being raised vide application dated 1^st January, and drawn our attention to revised ground of appeal at revised Form 36 filed wherein assessee has raised following additional ground:

“2.(a) That having regard to the facts and circumstances of the case, reassessment proceedings based on borrowed opinion of the Investigation Wing without any independent verification done by the Ld. AO is in bad in law, thus, making the entire reassessment proceedings void.”

3. The relevant facts are that Demas Developers Pvt. Ltd., (“the Assessee”) is a company engaged in the business of real estate development including owning, development and maintenance of real estate. The company was incorporated on 06.07.2010. Accordingly, the subject assessment year i.e. AY 2012-13 (FY 2011-12) is the second year of the company operating in its gestation or incubation period. A real estate business generally has a longer gestational period for purchasing lands, making negotiations with the prospective buyers, obtaining necessary statutory approvals before starting with the project of real estate development.

4. The DDIT(Inv.), New Delhi vide letter dated 25.03.2019 passed certain information about one, M/s Janardhan Infrastructure Pt Ltd, that it has received debits as well as credits from various companies including the Assessee company. Since the Assessee company had negligible turnover and profit it was alleged to be a paper company engaged in the business of providing accommodation entries. Further, it also alleged that many times cash was withdrawn as per the bank statement. The investigation report also alleged that the statement was obtained from one of the directors i.e. Mr. Tulsi Dass Arora who denied any knowledge or involvement in this company. The investigation report concluded that since the Assessee company has been used for layering of funds, information is passed to the jurisdictional AO for assessing commission income @ 2% of the total credits i.e. Rs.73.38 Cr.

5. Basis the above information, the Ld.AO observed that since the Assessee has minimum profits for AY 2011-12 and AY 2012-13 and has reported unsecured loans, it is established that no business activities were carried out and the Assessee is a shell company. Accordingly, it was observed that total credits of Rs.73.38 Cr is sham and bogus and Rs.73.38 Cr is income escaping assessment.

6. Accordingly, notice u/s 148 of the Act was issued on 31.03.2019 i.e. on the last day of the limitation period. Vide order dated 28.12.2019 passed u/s 147 r.w.s 143(3) of the Act, it was held that Assessee has failed to prove the creditworthiness of the unsecured loan received from related parties u/s 68 of the Act. Thus, addition of Rs.108 Cr was made in respect of 10 out of 11 related parties on the basis that they had shown meagre income.

7. Aggrieved with the above order, the Assessee preferred an appeal before the Ld.CIT(A) wherein the additions were partially deleted. Regarding the Assessee company being a shell company or an accommodation entry provider, the CIT(A) clearly held in favour of the Assessee. Relevant extract as follows:

7.6….”I am of the considered opinion that the appellant company is not a dummy/paper/shell concern merely created for the purpose of layering of unaccounted money in any accommodation entry network unlike as indicated in the report of the Investigation Wing, New Delhi which has been relied upon by the AO in the impugned assessment order. The appellant is rather found to be a genuine entity holding considerable tangible assets in the form of land as reflected in its Balance Sheet and purchased for real estate development activities of the ‘ERA Group’. The factum of acquisition of the land is also satisfactorily evidenced from the concerned land registry documents produced by the appellant and the MCA master data reflecting loans given by the banks against security of the land mortgage.

7.7 The main reason given by the investigation wing authorities and the AO in labelling the appellant company as a shell company was absence of any significant business receipts or any operational profits in its P& L A/c for the AY 2011-12 & 2012-13. In this regard, the explanation of the appellant that it was incorporated during the FY 2010-11 only, as a subsidiary of the flagship company of the Era group, Era Infra Engineering Ltd., along with many other companies of the Era group, mainly for the purpose of acquiring land for further development in the course of real estate business of the Era group in view of the ceiling limits imposed upto which agricultural land can be acquired by one entity and that being the initial year of business operation, it started by purchasing the lands during the FYs 10-11 & 11-12 under consideration as the first step in the real estate development business and hence there were no ‘business turnover’ or operational profits yet, is found to be convincing given the fact that the appellant did actually purchase substantial land at total cost of 66.91 crores as on 31.03.2012. In the real estate development business there is considerable gestational period involved for acquisition & development of land and further construction thereon after completing several legal & procedural formalities and statutory & administrative approvals before operational revenues in the form of sale of the developed properties can start pouring in. Thus, the appellant company having tangible assets in the form of land worth 66.91 crores duly registered in its name cannot be termed as a paper/shell company merely due to absence of operational revenues or net profits and receipt of substantial loans/advances, Hence, the AO’s findings to the contrary arrived at in the impugned assessment order are found to be unsustainable”

8. However, the Ld.CITA(A) despite noting that the reasons recorded for reopening assessment were unsustainable, went to analyse the case on merits for the addition made of unsecured loans and allowed partial relief to the Assessee. Accordingly, both the sides are in appeal before this Tribunal.

9. After considering the facts and circumstances we are of the considered view that additional ground raised in regard to validity of reassessment proceedings u/s 147 of the Act being challenged on the basis that reassessment was based on borrowed opinion of the investigation wing and without any independent verification done by the assessing officer being a pure question of law which can be decided on the basis of admitted facts the ground is admitted.

10. Ld. DR has opposed this ground primarily on the basis that the reasons to be recorded cannot be encyclopedic and reasons should prima facie discloses material facts which have been duly narrated in the reasons and assessing officer specifically mentions of the analysis of the return of the assessee and the information received from Investigation wing to conclude that the impugned receipts were outcome of sham and bogus transaction which were used for only layering/routing funds.

10. In order to decide this ground we consider it appropriate to reproduce the reasons itself:

Recording of reasons for re-opening the case of M/s Demas Developers Pvt. Ltd. for A.. 2012-13, PAN: AADCD53600.

1. Background

The assessee company M/s Demas Developers Pvt. Ltd. filed its return of income for AY. 2012-13 on 28.09.2012 declaring total income of Rs.1562. As per information available on ITS the case was not selected for scrutiny for the relevant assessment year. As per data downloaded from MCA portal the assessee company was incorporated on 06.07.2010 the company status (for e-filing) is displayed as Active.

2. Information received from Investigation Wing

The DDIT(Inv.), Unit-7(2), New Delhi, vide his letter F. No. DDIT(Inv.) /U-7(2)/2018-19/S/Jan./581 dated 25.03.2019 has passed on an information, the relevant portion related to the assessee company namely M/s Demas Developers Pvt. Ltd. is as under:-

“…2. Credible information was received in this office related to m/s Jardhan Infrastructure Pvt. Ltd. regarding high value RTS credits are followed by immediate debits to various accounts during AY 2012-13.

3.1 The bank account statement of the subject company was obtained and it was noticed that there are high value credits from the following entities:

• • Rajat Steels
  • Rajat Alloys
  • Dore Realtors
  • Demas Developers
  • Nuray Realtech

3.2 The debits from this account included transfer to the following entities among others:

• • Dore Realtors
  • Demas Developers
  • Ampulla Developers
  • Nuray Realtech
  • Febrrus
  • Rajat Steels

4. To understand the nature of transactions of the subject company summons was issued to its director Sh. Subhash Singh. The summons returned back unserved with the remarks “No such person”. Further, when Inspector visited the given address, it was fathered that he used to live at the given address few years back and was involved in some low paying job, From the E-filing database, it was gathered that Sh. Subhash Singh never filed ITR. The Inspector then visited the address of the company but could not find the company there. The ITR profile of Janardhan Infrastructure Pvt. Ltd. was analyzed which is a follows:

Thus, for the years mentioned above, the company had no signifi ant business and it was beyond any logic to receive such huge amounts in its bank accoun t.

4.1 To understand the nature of transactions of the subject company with the entities mentioned in para 2 and 2.1, bank statements and/or KYC of these entities were obtained and duly analyzed. Dore Realtors, Demas Developers and Nuray Realtech have the same address and the same directors. On physical verification of the address given on the KYC form, none of the companies was found operational from there. Subsequently, summonses were issued and statement of Sh. Tulsi Dass Arora, who was a Director in these three companies, was recorded on oath w/s 131(1 A). In his statement, Sh. Tulsi Dass Arora stated that he acted as director in many companies on-the directions of chairman of Era Group Sh. Hem Singh Bharana. He further stated that he never knew anything about these companies including their business, if any. Further, the ITR Profiles of these companies were analyzed which is as follows:

5.Further, summonses were issued to M/s Rajat Alloys Pvt. Ltd. and M/s Rajat Steels are the paper companies created with the purpose of creating layers for claiming bogus expenditure and p oviding accommodation entries.

5.1 Rajat Alloys Pvt Ltd.: In its reply dated 31.07.2014, Rajat Alloys Pvt. Ltd. stated that during the year, it has paid Rs. 20.75 Crore as Advance towards p urchases but due to certain disputes the amount was received back. It further submitted a ledger account of Janardhan Infrastructure Pvt. Ltd. in its books for the period 01.94.2011 to 31.03.2012 in which it showed to have received Rs. 20.75 Crores from 20.03.2012 to 28.03.2012 in its Axis Bank account no. 912020009968547. However, on perusal of the Bank statement for this account for the mentioned period, it was noticed that the corresponding transactions were missing. Subsequently, summons were issued for personal deposition of Sh. Ramesh Chand Goel. No one appeared in compliance to the summons but an email dated 18.03.2019 was received in which it was stated that Sh. Ramesh Chand Goel is confined to judicial custody since 12.10.2015. The LTR profile of Rajat Alloys Pvt. Ltd. is as follows:

5.2 Rajat Steels: Rajai Steels is the proprietary concern of M/s Ramesh Chand Goel (HUF). In its reply to the summons dated 31.07.2014, it gave no explanation with respect to the transactions with M’s Janardhan Infrastructure Pvt: Ltd. Subsequently, summons were issued for personal deposition of Sh. Ramesh Chand Goel, Director. No one appeared in compliance to the summons but an email dated 18.03.2039 was received in which it was stated that Sh. Ramesh Chand Goel is confined to judicial custody since 12.10.2015. The IR profile of Rajat Steel is as follows:

6. In view of the above, it may be concluded that M/s Rajat Alloys Pt. Ltd. and M/s Rajat Steels have unexplained expenditure or unexplained investments with M/s Janardhan Infrastructure Pt.Ltd. This information may be passed on to the jurisdictional A for necessary remedial action including considering reopening of case of M/s Rajat Alloys Pvt. Ltd. and M/s Rajat Steels w/s 147/148 of the Income Tax Act, 3 961.

Table 6.1 (in Rs. Crores)

6.1 Further, since the accounts of following entities have been used for layering the movement of funds, information may be passed on to the jurisdictional As of the following companies with respect to the commission income earned @2% of the total credits for providing accommodation entries:

• • Janardhan Infrastructure Pvt. Ltd. (total credits Rs. 91.9 crores)
  • Dore Realtors (total credits Rs. 120.16 crores)
  • Demas Developers (total credits Rs. 73.38 crores)
  • NurayRealtech (total credits Rs. 136.77 crores)
  • Ampulla Developers (total credits Rs. 23.24 crores)
  • Frebruus (total credits Rs. 45.9 crores)

3. Analysis of ITR, information received from Investigation Wing

As stated above, the assessee company filed its return of income for A.Y. 2012-13 on 28.09.2012 declaring total income of Rs.1562/-. As per information available on ITR the Directors of the Company are Bharat Bhushan Yadav And Tulsi Dass Arora. On going through the financial the previous year 2011-12 relevant to A.Y. 2012-13, following observations were found:-

It is observed that meager sales/gross turnover at Rs.2,65,500/- & 10,623/- for the assessment year 2011-12 & 2012-13 respectively have been declared by the assessee company and huge unsecured loans in both the years have been reported. It clearly established that no business activities were actually done by the assessee company except routing/creating layers for claiming bogus expenditure and providing accommodation entries.

4. Reasons for formation of belief

In the light of above discussion, it is apparent that the assessee company M/s Demas Developers Pvt. Ltd. is an entry providing company as it opt the same modus operandi like the other shell/paper companies used for providing accommodation entries of various nature. Hence, the total credit receipts during the year under consideration amounting to Rs. 73.38 crores are sham/bogus transactions, which were used for only layering/routing the funds. Therefore, I have reasons to believe that the income to the tune of Rs.73.38 cores under the garb of bogus/sham transactions have escaped assessment as defined by Section 147 of the Act for Assessment Year 2012-13. The income chargeable to tax has escaped assessment for this year by the reasons of the failure on the part of the assessee to disclose fully and truly all material facts. Therefore, it is a fit case for the issuance of notice u/s 148 of the Act for the financial year 2011-12 relevant to A.Y. 2012-13. Approval may please be granted to issue notice u/s 148 rw. provisions of section 149(1)(b) of the Income Tax Act, 1961 for assessment year 2012-13. In this case, A.Y. 2012-13 pertains to period beyond four years but before the expiry of six years from the date of issue of notice. As the case pertains to period beyond four years from the end of relevant assessment year at the time of issue of notice, necessary sanction has to be obtained from Pr. Chief Commissioner of Income Tax or Pr. Commissioner of Income Tax, in view of the amended provisions of section 151 w.e.f. 01.06.2015. It is, therefore, requested to accord approval for issuance of notice u/s 148 of the I.T. Act as per sub­section (I) of section 151 of the I.T. Act, 1961.”

12. Now as we go through the reasons the content of which have been reproduced by above we find that the investigation wing report given some sort of conclusive findings that assessee company has been used for layering the movement of funds and therefore commission income on the total credits should be considered. However, if assessing officer had actually examined the facts of the case of the assessee then assessing officer would have examined the issue that assessee is a real estate development company and had purchased substantial land during the year under consideration and it deposited money with director Town and Country Planning, Haryana which was reflected in the financial statement. It was the second year of inception of the assessee company. The assessing officer picked up this amount of Rs.73.38 crores from the Investigation wing report and ended up making addition of Rs.108 crores. Assessing Officer had mentioned of assessee claiming bogus expenditure but no such fact was examined or adjudicated against the assessee during the assessment proceedings. The non application of mind and arriving at satisfaction only on the basis of investigation wing report had led assessing officer to conclude that assessee is a paper/shell company but ld. CIT(A) has also appreciated on the basis of the facts and circumstances of the real estate development business of assessee that there may be absence of operational expenses or net profit yet the assessee cannot be termed as paper/shell company. Once the whole foundation of the assessing officer to doubt the existence of assessee company as a mere accommodation entry provider is not found sustainable, the so called reasons to form belief are left to be merely drawing inferences from the investigation wing report.

13. Thus, we are inclined to sustain the additional ground and consequently the assumption of jurisdiction gets vitiated. Accordingly, the appeal is allowed and the impugned assessment order is quashed.

Order pronounced in the open court on 20.05.2026