Hamlet Vs ITO (ITAT Bangalore)
ITAT Bangalore held that the provisions of section 68 of the Income Tax Act cannot be applied in relation to the sales receipt of preference shares shown by the assessee in its books of accounts as sales receipt has already been shown in the books of accounts as income/loss at the time of sale only.
Facts- Assessee is a firm doing its business of real estate and infrastructure development. For the year under consideration, it filed its return of income on 30.07.2012 declaring short term capital loss of Rs.1,75,000/-. The return was taken up for scrutiny and was processed u/s. 143(1) vide intimation dated 15.02.2013. Later on assessee received notice u/s. 148 of the act dated 30.03.2019 intimating assessee regarding the reopening of the assessment year under consideration.
AO made additions in the hands of the assessee at Rs. 7 crores by disallowing the short term capital loss. CIT(A) upheld the action of AO. Being aggrieved, the present appeal is filed.
Conclusion- Held that the provisions of section 68 of the Act can be attracted where there is a credit found in the books of accounts and the assessee failed to offer any explanation or the offer made by the assessee is not satisfactory in the opinion of the assessing officer. The assessee has explained to the authorities below that the impugned amount represents the sale of 7 lakhs shares out of 40 lakh shares for Rs.7 crores, which cannot be disputed by authorities below without bringing contrary evidence on record Thus, in our considered view, the impugned amount cannot be treated as unexplained cash credit under section 68 of the Act merely on the ground of suspicion.
Held that the provisions of section 68 of the Act cannot be applied in relation to the sales receipt of preference shares shown by the assessee in its books of accounts. It is because the sales receipt has already been shown in the books of accounts as income/loss at the time of sale only.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal arises out of the order dated 27.12.2022 passed by the NFAC, Delhi for A.Y. 2012-13 on following grounds of appeal:
“1. The learned Commissioner of Income tax (Appeals) has erred in passing the appellate order in the manner passed. The appellate order as passed is bad in law and is liable to be quashed.
2. In any case, the learned Commissioner of Income tax (Appeals) has erred in confirming the assessment order passed by the learned Assessing Officer. On the facts and circumstances of the case, the learned Commissioner of Income tax (Appeals) should have quashed, the order passed by Assessing Officer or atleast should have deleted the additions made by the Assessing Officer.
3. The learned Commissioner of Income tax (Appeals) has also erred in confirming the reopening of assessment by learned Assessing Officer. The conditions precedent for issue of notice U/s. 148 of I.T. Act, 1961 having not been satisfied, the reopening of assessment was bad in law and hence the learned Commissioner of Income tax (Appeals) should have instead of confirming the assessment order, quashed the reopening of
4. In any case, the passing of the order without complying with the legal and statutory requirements of reassessment proceeding also makes the order bad in law and liable to be quashed.
5. In any case, non disposal of objections filed through speaking order makes the assessment bad in law and such order is liable to be quashed.
6. In any case and without prejudice, the assessment order passed in the absence of material/information/report and the opportunity of cross examination of the persons whose statements were relied upon becomes bad in law, passed against the gross violation of principles of natural justice and such impugned order is liable to be quashed.
7. In any case and without further prejudice, the Assessing Officer has erred in treating the transaction of sale of shares as not genuine and of accommodative in nature and adding the sale consideration of 7,00,00,000/- to the returned income of the appellant. The addition being wrong on the facts of the case and law applicable is to be deleted.
8. In any case and without further prejudice, the Assessing Officer has erred in not allowing the carry forward of short term capital loss of Rs. 1,75,000/- arising on sale of shares. The disallowance being wrong on the facts of the case and in law applicable is to be deleted.
9.1 The learned Commissioner of Income tax (Appeals) has also erred in upholding the addition on merits. The addition as made being bad in law and on facts should have been actually deleted by learned Commissioner of Income tax (Appeals).
9.2 The learned Commissioner of Income tax (Appeals) has erred in concluding that :
a) The transactions done by appellant are against human probabilities.
b) The transaction is sham.
c) The transaction is to turn undisclosed income to disclosed income in connivance with entry providers.
d) The transaction in shares was done by the appellant with the sham companies with unknown credentials.
e) The appellant has failed to prove that transaction is genuine.
f) The appellant has failed to discharge the burden of proof.
g) The transaction is entered into for purpose of evading tax.
h) There is no economic or financial justification for transaction in shares.
i) The purchasing companies have no wherewithal to purchase the shares.
j) That there are thousands of companies on the address given by the purchasers.
k) The purchasing companies have responded to notice u/s. 133(6) in tappal/manually instead of replying by mail.
All the above conclusions/finding in the appellate order are erroneous, not based on evidence or documents but are made totally on conjectures and surmises and hence are to be totally disregarded.
10. The learned Commissioner of Income tax has also erred in holding that the provisions of section 68 of I.T. Act, 1961 are applicable on the present case. On the facts and circumstances of the case and law applicable, the provisions of section 68 are not applicable and the addition made U/s. 68 of I.T. Act, 1961 as confirmed by Commissioner of Income tax (Appeals) is to be deleted.
11. The Appellant denies the liability to pay interest u/s 234B of the Act. The interest having been levied erroneously is to be deleted.
12. In view of the above and other grounds to be adduced at the time of hearing it is requested that the impugned orders be quashed or at least addition of sale consideration be deleted and the loss as returned be allowed to be carried forward and interest levied thereon be deleted.”
2. Brief facts of the case are as under:
2.1 Assessee is a firm doing its business of real estate and infrastructure development. For the year under consideration, it filed its return of income on 30.07.2012 declaring short term capital loss of Rs.1,75,000/-. The return was taken up for scrutiny and was processed u/s. 143(1) vide intimation dated 15.02.2013. Later on assessee received notice u/s. 148 of the act dated 30.03.2019 intimating assessee regarding the reopening of the assessment year under consideration. Assessee asked for the reasons recorded which were issued on 29.11.2019 which is as under:
2.2 In response to the reasons recorded, assessee vide letter dated 25.12.2019, wherein the objections to the proceedings were raised which also forms part of the assessment order reproduced in para 3 that reads as under:
“1. The assessee also would like to submit the following further objections to the proceedings.
i) The notice u/s 148 is not valid and not in accordance with the laws as the reasons recorded for reopening assessment is without verifying the facts and circumstances of the case.
ii) The notice is sent only on the premise that M/s. Newedge Realtors Pvt. Ltd. is a shell company and all transactions of that company, without any exceptions, are accommodation entries in the form of bogus share capital/share premium without verifying the nature of the transactions.
iii) The proceedings u/s 147 are initiated without studying and ascertaining the value of shares of M/s. Kemwell Biopharma Pvt. Ltd., a reputed company with a turnover of over Rs. 100 crores and profit before tax of Rs. 16 crores. The share valuation certificate of Kemwell Biopharma Pvt Ltd is attached herewith.
iv) The notice sent u/s 148 is merely on suspicion and not after verifying/scrutinising and not placing any incriminating records to show that the transactions are accommodation entries. No cross examination opportunity of the person on whose purported statement the enquiry has been caused has been provided.
v) The reasons to believe that income escaped assessment is not in accordance with the settled position of law.”
2.3 The Ld.AO based on the above objections raised by the assessee considered the issue that forming part of the reasons recorded and made an addition in the hands of the assessee at 7 crores by disallowing the short term capital loss. Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
2.4 The in the primary ground raised by the assessee was regarding non-disposal of the objections filed by the assessee thereby making the assessment bad in law. The Ld.CIT(A) considered this legal issue by observing as under:
“6.8 i) The appellant has contended that the AO did not dispose off the objections filed through a speaking order which makes the assessment bad in law.
As per the appellant it filed objections to the “reasons recorded” vide letter dated 25.12.2019 which was submitted on 27.12.2019. The subject of the said letter is “Reasons for reopening / AY2012-13 /The Hamlet / PAN…/Reference: Letter … dated 29.11.2019”. The heading of the said letter does not clearly spell out that this letter is regarding “Objections filed to the reopening of assessment”.
ii) The AO has discussed this letter in para 6.3 of the assessment order stating that “The assessee in response to furnishing of reasons for reopening the assessment stated as under:-
i) The shares sold of M/S. Kemwell Biopharma Pvt. Ltd. [KBPL] was of a reputed pharmaceuticals manufacturing company. The said company had a turnover of Rs.100 Crore during the FY 2011-12 and profit before tax of Rs.16 Crore. Therefore, the shares sold were not of any defunct company;
ii) The assessee f was in need of funds for repayment of unsecured loans taken and the partners decided to raise the funds by disposing off part of its investment in shares, The preference shares were sold in the normal course through banking channel;
iii) The assessee had no information or was aware that M/s. New Edge Realtors Pvt. Ltd. is a shell company engaged in providing accommodation entries in the form of bogus share capital/share premium which were used for routing funds through web of banking transactions;
iv) The shares being of a reputed pharma company running good profits and paying dividends to preference shareholders. Hence, there were no reasons for it for taking any accommodation entries from any persons. The preference shares were sold at arm’s length at fair value and received the proceeds through banking channels. Therefore by any stretch of imagination the transaction cannot be termed as accommodation entries.
v) Re-opened the assessment on investigation report without verifying the facts and scrutinizing the available details, on borrowed satisfaction without bringing any incriminating materials on record.
vi) Forming of belief and application of mind by the AO
The AO too has not stated that these are “Objections filed by appellant to the reasons recorded for reopening the assessment”.
iii) Thereafter the AO has rebutted this response of appellant to furnishing of reasons for reopening the assessment from para 6.4 to 8 of the said order. Thus, the contentions raised by appellant have been rebutted by the AO through a speaking order which forms a part of assessment order itself.
In view of the above facts the above contention raised by appellant vide GOA No. 2.3 cannot be upheld.
6.9 In view of the facts and respectfully following the judgments outlined in paras 6.3 to 6.8 of this order it is hereby held that reopening of assessment by the AO u/s 147 and assessment made by the AO u/s 147 of the Act is valid and it satisfies the requirement of the law that prior to reopening of the assessment the AO has to apply his mind to the tangible material available and conclude that he has the reason to believe that income has escaped assessment. Copy of reason recorded were duly provided by AO. Thus, the reopening of assessment u/s 147 of the Act in the present case is fully justified. Thus, all the mandatory preconditions before reopening of assessment u/s 147 of the Act were duly complied and met with by the AO. Thus, the notice issued by AO u/s. 148 of Act is held to be a valid notice. The Grounds of Appeal No. 2.1 to 2.3 are dismissed.”
2.5 The Ld.CIT(A) thus dismissed the legal issue raised by the assessee. On merits of the case, the CIT(A) relied on the decisions of Hon’ble Delhi High Court in case of NDR Promoters Ltd. reported in 410 ITR 379 and by applying the test of human probability as laid down by Hon’ble Supreme Court in case of Sumati Dayal reported in 214 ITR 801 and Durga Prasad reported in 82 ITR 540 upheld the action of the Ld.AO by observing as under:
“7.12 I find that the entire amount of the so called receipt on sale of shares has been treated correctly as unexplained credit u/s 68 of the Act, as it has all the ingredients of attracting the rigours of the said section. Section 68 of the Act provides that where any sum is found credited in the books of the appellant maintained for any previous year and the appellant offers no explanation about the nature and source thereof or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income tax as income of the appellant of that year. In the present case, the appellant’s explanation that the said receipt is on account of investment in shares, whereby shares of unknown company have been transacted with by appellant has been totally rejected by the AO. The appellant has not at all been able to adduce cogent evidences in this regard. There is no economic or financial justification for transaction in these shares. There is no economic or financial basis that a share of little known company would transacted in by appellant.
7.13 Considering the aforesaid facts and the various decisions as cited above, it is clear that the assessee has manipulated the share transaction within a short span of time in collusion with the brokers in order to earn STCL. Further from the above facts and surrounding circumstances, human conduct, preponderance of probabilities etc. I find that the AO has clearly established that the impugned transaction is not made for an investment i.e. the motive is not to derive income but to convert unaccounted income to accounted income that too by an arrangement and it is a manipulated transaction in collusion with the brokers to paint creditworthiness to the transaction and claim This is in accordance with the ratio laid by the Hon’ble Apex Court in Sumati Dayal Vs Commissioner Of Income-Tax, 214 ITR 801 (SC), that ” the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities.
7.14 The action of AO in making additions u/s 68 of the Act of Rs.7,00,00,000/- and disallowing the claim of STCL of Rs.1,75,000/- is fully justified in view of the following facts-
a) Appellant has never traded in shares. In the trading of shares of M/s. Kemwell Biopharma Pvt. Ltd. (M/s. KBPL), the Appellant converted unaccounted income to accounted income.
b) Net worth of this company is negligible as per the financials.
c) Transactions undertaken are not bonafide. Shares of M/s. Kemwell Biopharma P. Ltd. (M/s. KBPL) are devoid of any commercial value. Transactions are premeditated and structural ones.
d) Appellant failed to discharge the onus cast on him to prove the genuineness of these share transactions and same is linked to market factors and commercial principles.
e) These artificially structured transactions were entered into with sole purpose of evading tax.
f) Artificial STCL are created.
g) It is a preconceived scheme to procure bogus STCL in share transactions of scrip of M/s. Kemwell Biopharma P. Ltd. (M/s. KBPL) which is not supported by market factors.
h) Net worth of this company is negligible but its share price is artificially rigged.
i) Operator, Brokers and Exit providers made an arrangement of routing cash to obtain bogus STCL.
j) I agree with the finding of AO that these transactions are not genuine due to following reasons:-
1. There is no evidence of operational activity to prove the financial strength of the purchase of shares
2. Online verification of financials of the purchasing companies shows that they don’t have the wherewithal to purchase the shares by paying such huge consideration.
3. The evidentiary value of payment through RTGS cannot make a non genuine transaction a genuine one
4. Even if its argued that the creditors are holding companies / Non banking financial companies, there is no evidence that they have in turn received finances from credit worthy companies.
5. On verification of the Bank account statement it is noticed that there is a regular pattern of Deposits by way of cheques / RTGS to the accounts of the above 3 companies followed by payments to parties including the assessee.
6. During scrutiny proceedings it was submitted that the assessee purchased back the preference shares from the 3 companies after 2 years ;
7. As per PAN Database, the mail ids given for M/s. Newedge Realtors Pvt Ltd., and M/s. Rootstar Builders Pvt Ltd., is MBBANKA©COM. Banka family is found to be accommodation entry provider.
8. On verification from Google it is noticed that in the address of each of the purchasing companies there are thousands of companies with the same address, No genuine and worthwhile company will co-habit with with thousands of other companies.
9. The 3 companies could have replied by mail by the appointed date of 13.12.2019 but preferred to send their replies through messenger to this office, after the assessee had become aware of the inquiry.
7.15 In view of the above mentioned facts, the material brought on record by the AO, and the decision of CIT vs Durga Prasad More (1971) 82 ITR 540 and the case of Sumati Dayal vs. CIT (supra) 214 ITR 801 (SC), the test of human probabilities needs to be applied and true nature of the transaction has to be ascertained in light of the surrounding circumstances. Considering the facts and circumstances of the case, I find that the appellant has indulged in dubious share transaction meant to account for the undisclosed income in the garb of In view thereof addition of Rs.7,00,00,000/- made by the AO u/s 68 of the I.T. Act are hereby upheld. The action of AO in disallowance the STCL claimed of Rs.(-)1,75,000/- is upheld.
7.16 Appellant has contended that AO did not produce the witnesses whose statements were recorded and used against the Appellant. The contention of the Appellant is not acceptable in view of following judgments:-
i. The Hon’ble ITAT, Mumbai in the case of GTC Industries Ltd. vs ACIT, ITAT, Mumbai, [1998] 65 ITD 380 (BOM) held that “Where statements of witnesses were only secondary and of subordinate material used to buttress main matter connected with amount of additions, it had to be held that there was no denial of principles of natural justice if witnesses were not allowed to be cross-examined by assessee”.
7.17 In view of the above facts and discussion and respectfully following the judgments outlined above, the Grounds of Appeal No. 3 to 6 are dismissed.”
Aggrieved by the order of the Ld.AO, the assessee preferred appeal before this Tribunal.
3. The Ld.AR submitted that Ground nos. 1 and 2 are general in nature and therefore do not require any adjudication.
3.1 Ground nos. 3 – 6 are raised by assessee challenging the reopening of the assessment. The preliminary issue raised in Ground no. 5 is that the objections raised by assessee were not dealt with by way of a speaking order, thereby making the assessment bad in law.
3.2 The Ld.AR submitted that, the addition made in the assessment order is in respect of sale consideration received by assessee on sale of preference shares amounting to Rs.7 crores which was treated as unexplained cash credits u/s.68 of the act. The Ld.AR submitted that, the assessing officer in the reasons recorded is referring to a company by name M/s. Newedge Realtors Pvt. Ltd. to whom assessee sold 3 lakhs shares of M/s. Kemwell Biopharma Pvt. Ltd. for an amount of Rs 3 crores approximately. It is further recorded in the reasons for reopening that, the DDIT, Investigation Wing informed the Ld.AO regarding M/s. Newedge Realtors Pvt. Ltd. to be a shell company and engaged in providing accommodation entries in the form of bogus share capital/bogus share premium, which was used for routing funds through web of bank transactions. The Ld.AR submitted that, based on a borrowed satisfaction, the Ld.AO also doubted the sale of shares by assessee that another two companies by the name M/s. Swift Residency Pvt. Ltd. and M/s. Rootstart Builders Pvt. Ltd. for Rs. 3 crores and Rs. 1 crore respectively.
3.3 It is submitted by the Ld.AR that there is no material on record for doubting the transactions between assessee and these companies and therefore the Ld.AO did not have any power to reopen the assessment merely for verification of capital loss earned by the assessee. He submitted that the powers vested with the Ld.AO cannot be exercised casually to verify any transaction and that the Ld.AO has to make independent assessment by verifying the available information, examine documentary evidences and then record reasons as to the basis of which he formed an opinion that the income has escaped
3.4 The Ld.AR submitted that no such reasons has been recorded in respect of the above two transactions and therefore the assessing officer cannot assume the power to reopen the assessment. The AR thus submitted that all these points have not been dealt with by the Ld.AO which forms part of the objections raised.
3.5 The next issue that is raised by assessee in Ground no. 6 is regarding non-granting of opportunity to cross examine the persons whose statements were relied on and therefore the assessment order was passed is bad in law.
3.6 The Ld.AR submitted that during the assessment proceedings, summons were issued by the Ld.AO u/s. 131 of the act to the three parties who had purchased shares from the assessee requiring them to furnish details of shares purchased of M/s. Kemwell Biopharma Pvt. Ltd., basis of valuation of shares at the time of purchase of shares, whether the purchase was registered with the stock exchange and copy of the demat account, progress account. It is submitted by the Ld.AR that the three purchasers of shares submitted their responses on 19.01.2019 manually in the tapal section and summary of the submissions by M/s. Swift Residency Pvt. Ltd., M/s. Rootstar Builders Pvt. Ltd. and M/s. Newedge Realtors Pvt. Ltd. has been summarised by the Ld.AO in para 6.8 of the assessment order. For the sake of convenience, the same is reproduced as under:
“6.8 The 3 purchasers of the shares submitted their response on 19-1-2019 through a messenger and filed it manually in the tappal section. The summary of the submissions by M/s. Swift Residency Pvt. Ltd. M/s. Rootstar Builders Pvt. Ltd. & M/s. Newedge Realtors Pvt. Ltd. are sumarised as under :
(i) Its authorized signatory, Director, has expressed inability to attend personally & hence details sent by post. He submitted that
(ii) they were approached by M/s. The Hamlet for sale of shares of M/s. Kemwell Biopharma Pvt. Ltd.
(iii) they invested surplus funds in purchase of the above shares;
(iv) the payments were through RTGS;
(v) they had not obtained valuation report since it is redeemable preference shares which fetches tax free dividends & realizes face value on sale;
(vi) Sale not registered with Stock Exchange since they are not listed there;
(vii) Purchased shares directly from M/s. The Hamlet and received sale bill. The shares were in physical form as it was not in dematerialized form;
The signatories enclosed copy of sale bill issued by M/s. The Hamlet Bank account statement reflecting the payment for the transaction.”
3.7 The Ld.AR submitted that the assessee does not know regarding the three companies or any one of the companies to be a part of Banka family and that the buyers are entry providers. He submitted that to this extent, cross examination has been denied to the assessee and therefore the entire assessment is bad in law.
In support of the contentions raised by the Ld.AR relied on following decisions.
Non disposal of objections filed by way of a separate speaking order makes the assessment bad in law:
