Brief of the Case
Delhi High Court held In the case of Principle CIT vs. Matchless Glass Services Pvt. Ltd. that the fact that a common address is shared by several companies may not be a sole ground to doubt the identity or the creditworthiness of the companies; however in the given circumstances there may be several factors, which viewed cumulatively, to doubt the veracity of the Assessee’s claims. In the given case, various factors i.e. the address is that of a Janta flat which is normally used as residence ; the said address is also stated to be residential address of several individuals, who are ostensibly not related to each other; large payments have been made in cash; shares are stated to have been subscribed at a premium even though the Assessee company has no track record and has not made any investment in traded securities yet it has attracted large subscriptions to its share capital, required to be considered for ascertaining whether the Assessee has established the creditworthiness of the persons as well as to the genuineness of the transactions. Matter remanded back to ITAT for fresh consideration.
Facts of the Case
The above proceedings emanate from the search and seizure operations under Section 132, which commenced on 14th October, 2008 in respect of “SVP Group of companies”. The Assessee was one of companies on whom a search and seizure operation was carried cut in connection with the issues of providing share capital contribution to the SVP Group of concerns. Along with the Assessee company 19 other such companies were covered U/s 153A. Based on the materials seized from the premises of SVP Group of companies with regard to the investment in shares mainly in cash, action u/s 153C was also initiated in respect of the 12 companies.
On 31st December, 2010, the AO passed assessment orders in respect of each of the AYs in question. The AO noted that search operations were conducted at the premises declared by the Assessee to be its registered office, however, no books of accounts or any other documents relating to the Assessee were found at the said premises. The address of the registered office of the company was that of a ‘Janta Flat’, which was used for residential purposes. It was also noted that in addition to the Assessee Company, there were six other companies that were declared to be located at the same address that had subscribed to the share capital of the core operational companies of the SVP Group.
The AO, thus, concluded that all receipts reflected by the Assessee were unexplained credits taxable under the provisions of Section 68. However, the AO deleted the investments made in share capital of SVP Group as the same were taxed as unexplained credits in the hands of the investee companies of the SVP Group. The AO held that the Assessee was not cooperative and had failed to provide the requisite details, hence, made additions under section 68. Insofar as AY 2003-04 and AY 2004-05 are concerned, no funds were received by the Assessee, nonetheless, the AO made ad hoc additions “to protect the revenue leakage”.
Contention of the Assessee
The ld counsel of the assessee submitted that the assessments for the AYs 2003-04, 2004-05 and 2006-07 had already been finalized and, therefore, had abated on the date of the search. Since, admittedly, no incriminating material had been unearthed during the search, no additions could have been made by the AO. He argued that the ITAT had accepted the above contention in the case of Pranjul Overseas (P) Ltd. and as the Revenue had agreed before the ITAT that the facts and issues involved were identical to those involved in Pranjul Overseas (P) Ltd., the findings of the ITAT in the case of Pranjul Overseas (P) Ltd. would also apply in the case of the Assessee.
On merits, he further submitted that the credit in the books of the Assessee had been duly explained and was supported by affidavits of persons from whom the money have been received. He submitted that no defect in the affidavits had been pointed out and no reasons have been provided as to why the evidence provided by the Assessee was not accepted. He submitted that none of the affidavits had been challenged and further, no investigation or enquiries had been conducted with regard to the genuineness of the receipts. He submitted that the Assessee on its behalf had discharged its onus of not only providing confirmation from the persons from whom funds had been received but had also in addition provided evidence that such persons were assessed under the Act by providing their Permanent Account Numbers (PAN). He argued that in the circumstances, the identities of the payers and the genuineness of the transaction had been established and the same could not be arbitrarily rejected by the Revenue.
Contention of Revenue
The ld counsel of the revenue supported the observations made by the CIT (A). She submitted that the Assessee was merely a paper company. She emphasized that the office of the Assessee was shown to be located in a Janta Flat and in an on spot examination it was found to be non-existent. She reiterated that the Assessee had been unable to discharge its onus to show the creditworthiness of the investor companies. In the circumstances, she submitted that the additions made by the AO under Section 68 of the Act were justified and the ITAT had erred in holding that the additions under Section 68 were not warranted.
Held by CIT (A)
The CIT (A) considered the remand report of the AO and observed that companies stated to have invested in the Assessee were having similar features: most of the investor companies had two Directors whose stake in the initial capital of the company was very small; that the disclosed address of the directors was the Janta Flat – thus inferring that the said directors belonged to lower middle strata of the society; each director was also a director in several other similar companies; that all companies had made investment in shares of unlisted companies, which were not saleable in the open market and were thus not a “tradable commodity”; and that shares of companies had been purchased at a heavy premium even though the companies were not carrying on any business and existed only on papers. The CIT(A) noted that all companies were inter-related and worked in collusion to reflect them as functional companies.
The CIT(A) concluded that (i) that the Assessee company had no real business activity; (ii) that the Assessee was a conduit engaged in rotating undisclosed income of the beneficiaries from the SVP
Group; and (iii) that the Assessee did not earn any income and was acting only as a conduit. The CIT (A) held that the funds invested through the Assessee were liable to be taxed in the hands of the beneficiaries and, therefore, upheld the decision of the AO in not adding the amounts invested by the Assessee in SVP Group as undisclosed income of the Assessee.
The CIT (A) further deleted the addition made and held that the same were also liable to be taxed in the hands of respective beneficiaries (i.e. persons who were the recipients of the funds brought into the Assessee). In addition to the above, the CIT (A) gave other directions including for launching prosecution under Section 277A read with Section 278B . Insofar as the AY 2003-04 and 2004-05 are concerned, the ad hoc addition of Rs.50,00,000/- made by the AO in respect of each of those years was also deleted.
Held by ITAT
The ITAT recorded that the issues pressed before it related to the merits of the addition made by the AO under Section 68 and both the Revenue and the Assessee agreed that the facts and issues were identical to the appeal in the case of Pranjul Overseas (P) Ltd. and, therefore, there was no necessity to hear the
appeals pertaining to the Assessee separately. In view of the above, the ITAT reproduced its findings arrived at in the case of Pranjul Overseas (P) Ltd. and held that the additions made under Section 68 were not in accordance with law.
Held by High Court
An addition under Section 68 can be made only where the Assessee either offers no explanation for the credit in its books or the explanation offered by it, is unsatisfactory. In cases where the identity of the source of the funds as well as the creditworthiness of the payer is established by the Assessee along with an explanation as to the nature of the transaction leading to the credit entries, the Assessee would have discharged its initial onus and the burden would now shift to the AO to provide reasons for doubting the explanation provided by the Assessee. For the purposes of examining the identity of the payer and the genuineness of the transaction, the Assessee can make such enquiries as are necessary. If on enquires, the AO finds that either the identity of the payer is not established or lacks the means for supporting the transaction or on the basis of some material it is found that the transaction is not genuine or the payer, the AO would have to confront the Assessee with such material and, thereafter, draw an inference as to the merits of the explanation provided by the Assessee.
A perusal of the order passed by the ITAT, insofar as the present Assessee is concerned, indicates that the appeals filed by the Revenue in respect of the Assessee were not taken up for hearing in view of the statement made by the parties that the facts and the issues involved were identical to that in the case of Pranjul Overseas (P) Ltd. Thus, it is apparent that the ITAT did not examine whether the Assessee had established the identity, genuineness of the transaction and the creditworthiness of the persons from whom the Assessee claimed that it had received the funds used by the Assessee for purchasing shares of other companies. The AO also could not examine the explanation of the Assessee during the assessment proceedings since at that stage the Assessee had not provided the necessary evidence to establish the identity of the persons as well as the genuineness of the transactions relating to the credit entries in its books.
We are unable to accept that such affidavits as filed before the CIT (A) could have been accepted to establish the genuineness of the transaction or the creditworthiness of the investors. More so, when the AO had noted that during the search, no office was found to exist at the address and one Bhajarang Bahadur Dubey who was a resident of the said address had also stated that he had not heard of the Assessee Company. The fact that a common address is shared by several companies may not be a ground to doubt the identity or the creditworthiness of the companies; however in the given facts there are several factors, which viewed cumulatively, clearly provide a good reason to doubt the veracity of the Assessee’s claims. The address is that of a Janta flat which is normally used as residence by persons of limited means; the said address is also stated to be residential address of several individuals, who are ostensibly not related to each other; large payments have been made in cash; shares are stated to have been subscribed at a premium even though the Assessee company has no track record and for two years (out of six years in question) did not even have a bank account; and even though the Assessee company has not made significant profits, does not employ any qualified personnel (its expense on salary and wages is insignificant) and has not made any investment in traded securities yet it has attracted large subscriptions to its share capital. These factors are required to be considered for ascertaining whether the
Assessee has established the creditworthiness of the persons who are stated to have made payments to the Assessee as well as to the genuineness of the transactions.
AO needed evidence to establish the hypothesis and without any material to establish the link between the source of funds received by the Assessee company (and such other companies) and the investee companies of SVP Group, it was not permissible for the AO to hold that the Assessee had acted as a conduit. There was no material before the AO which would establish that the funds received by the SVP Group were cash funds generated by the SVP Group and, therefore, the question of deleting any alleged unexplained credit on account of the funds invested with the SVP Group did not arise.
Further it it was for the fact finding authorities to finally examine the evidence on record and determine whether the Assessee could satisfactorily explain the credit entry in its books and could establish the genuineness of the transactions claimed to have been entered into by it. Clearly, the ITAT has not examined the facts relating to the Assessee. The ITAT had simply proceeded on the basis of the facts obtaining in the case of Pranjul Overseas (P) Ltd. on the statement of the parties that the facts of that case were similar to the facts in the case of the Assessee. However, an examination of the documents filed before us, it does not appear that the facts in the case of Pranjul Overseas (P) Ltd. were similar to that as obtaining in the present case. While it appears that in the case of Pranjul Overseas (P) Ltd., the Assessee disputed that any search took place at its registered office, the written submissions filed by the Assessee in this case, does not indicate that any such dispute was raised. Even before us it has not been contended that no search took place at the declared registered office of the Assessee.
In the circumstances, we find it is necessary to remand the matter to the Tribunal to examine the facts relevant to the Assessee for determining whether an addition under Section 68A was sustainable.
Accordingly appeals disposed of.