Case Law Details

Case Name : M/s Orchid Industries Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Appeal Number : ITA No. 1867/Mum/2012
Date of Judgement/Order : 07/02/2014
Related Assessment Year : 2004- 2005
Courts : All ITAT (4348) ITAT Mumbai (1443)

CA Sandeep Kanoi

In the case of Orchid Industries Pvt. Ltd. Vs. DCIT ITAT Mumbai deleted the addition made in respect of Share Capital Subscription received by the Assessee Company from Kolkata based Companies. ITAT has relied on the case of CIT Vs. Lovely Exports Pvt. Ltd. (supra) in which Hon’ble Supreme Court, has held that if the share application money is received by the assessee company from alleged bogus shareholders whose names are given to the AO then the department is free to proceed to reopen their individual assessment in accordance with law but it cannot be regarded as undisclosed income of the assessee company.

Facts of the case- Assessee is a private limited company engaged in the business of manufacturing of embroidery laces. During the assessment proceedings, the AO noted that in the balance sheet as on 31-3-2004, the assessee has received share capital to the tune of Rs.51,50,000/- and Rs.1,21,50,000/- as share premium. The assessee was asked by the AO to produce the complete name, full address of the shareholders, the amount received from them, PAN and Income Tax particulars of the shareholders as well as mode of share capital including premium.

In response, the assessee filed the details vide letter dated 13-11-2006. From the details furnished by the assessee the AO noted that the majority of the shareholders were from Kolkata. Accordingly, a letter dated 15-11-2006 was issued to the ADIT(Investigation Unit) Kolkata to conduct an enquiry with regard to the identity of the creditors, genuineness of the transactions and creditworthiness of the creditors. The ADIT(Inv.) Kolkata submitted enquiry report, wherein it has been stated that for verification of the creditors, summons under Section 131 were issued to the parties. Since there was no compliance of summons and the whereabouts of the parties could not be located as far as five creditors and, therefore, it was observed that the existence of the parties appears to be doubtful. In case of two creditors the summons were duly served and in response the representative of the creditors  were appeared before the ADIT (Investigation), Kolkata, however, it was observed in the report that these companies were only paper company and used by the assessee to bring its unaccounted money back in the form of share capital. Based on the report of the ADIT(Investigation) Kolkata, the AO made an addition of Rs. 95 lakhs as unexplained cash credit under Section 68 of the Act. This addition was made in respect of share application money with premium claimed to have been received from 7 parties, out of total 13 parties.

Held :

The assessee has received share capital and share premium from 13 parties, out of which 7 parties belong to Kolkata. The AO has decided to conduct an enquiry in respect of the 7 parties belong to Kolkata by writing a letter dated 15-11-2006 to ADIT(Inv.) Kolkata. The details of 7 parties from Kolkata are as under :-

SI. No. Name of the Shareholders Share
Capital
(Rs.)
Share
Premium
(Rs.)
 1. M/s Century Commo Trade Pvt. Ltd., 174, Rabindra Sarani, Kolkata-7 150000 1350000
 2. M/s   Fedder Tie     up   Pvt.   Ltd.,         174
Rabindra Sarani, Kolkata-7
100000 900000
3. M/s Nahar Viniyog Pvt. Ltd., 1, Old House Corner, 2nd Floor, Kolkata-7 150000 1350000
 4. M/s Prime Capital Market Ltd. P27, Princess Street, 3rd Floor, Kokata-72 100000 900000
 5. M/s  Sigma    Suppliers   Pvt.   Ltd.  27,
Brabourne Road, Kolkata-1
150000 1350000
6. M/s  Sunshine    Sales    Pvt.   Ltd.,  27,
Brabourne Road, Kolkata-1
100000 900000
 7. M/s   Universal   Multimedia   Ltd.  27,
Brabourne Road, Kolkata-1
150000 1350000

 The ADIT(Inv.) Kolkata sent its report vide letter dated 20-12-2006, which has been reproduced by the AO. The AO by relying upon the report of the ADIT(Inv.) Kolkata has made the addition of share capital and premium amount in respect of these seven parties under Section 68 of the Act. We will analyze partywise report and basis of disallowance as well as the evidences/material produced by the assessee in support of its claim as under :-

(i)       M/s Century Commo Trade Pvt. Ltd. : The summons under Section 131 were issued but there was no response from the said party as per the report of the ADIT(Inv.) Kolkata. Even the Inspector was unable to locate the party. Accordingly, it was observed in the report that the existence of the party appears to be doubtful.

(ii)  M/s Fedder Tie Up Pvt. Ltd. : The report of the ADIT (Inv.) Kolkata is identical in verbatim as in the case of M/s Century Como Trade Pvt. Ltd. Accordingly, the existence of the party was doubted.

(iii) M/s Nahar Viniyog Pvt. Ltd., (iv) M/s Sunshine Sales Pvt. Ltd. & (v) M/s Sigma Suppliers Pvt. Ltd. : The report of the ADIT (Inv.) in respect of these three parties also similar to that of two other as noted above and the existence of these parties were also doubted by the ADIT(Inv.) in its report.

It is pertinent to note that though this report is a good evidence with the AO to doubt the existence of the parties, however, when the assessee has produced all the relevant evidence and material, which is sufficient to prove the existence, identity, creditworthiness of the parties then it was the duty and burden on the AO to disprove the evidence produced by the assessee. We find from the record that in all these five parties, the assessee has produced PAN, Acknowledgement of Income Tax Return filed by these parties, confirmation letter from these parties, whereby it has been confirmed that they have applied for shares of the assessee company and the respective payments were made towards share application. The assessee has also filed the bank account of these parties to show the availability of fund and the payment from the bank account. Apart from this, the assessee has also produced the book of accounts of these parties to show the financial soundness of the parties and sufficient amount of reserve and surplus as well as capital of these companies. Thus, it is clear from the evidence produced by the assessee that the parties were very much in existence as these parties were assessed to income tax. The assessee has produced respective PAN and Income Tax Return along with other details. It is manifest from the evidence produced by the assessee that existence/identity and creditworthiness of the parties cannot be doubted. Thus, it appears that the report of the ADIT(Inv.) Kolkata in respect of these five parties, is contrary to the fact proved by the assessee with tangible and material evidence brought on record. Once the assessee has discharged its burden by producing the relevant evidence, then the onus is shifted on the AO to disprove the evidence produced by the assessee. In the case in hand, the AO has not proved that the evidence produced by the assessee is either bogus or false. The addition has been made by the AO only on the basis of doubt regarding the existence of the parties, which in our view, is absolutely contrary to the facts brought on record by the assessee and it goes uncontroverted as the AO has not brought any contrary record or facts. Further, the assessee has also produced all the relevant evidences and record of allotment of shares to these parties, such as the share application form, allotment letter and the share certificate issued by the assessee to these parties. The similar allotment made by the assessee to other six parties has been accepted by the department and the question has been raised only against these 7 parties, which are from Kolkata.

Now, we turn to analyze the facts in respect of two other parties, namely, M/s Prime Capital Market ltd. and M/s universal Multimedia Ltd.. In its report, the ADIT(Inv.) Kolkata has mentioned that in response to notice the representative of these parties appeared. Copy of bank statement, copy of allotment of shares were produced before the ADIT, however, the ADIT(Inv.) found from the bank statement that before issuing the cheques of the share application money, substantial amounts were deposited in respective of bank accounts through cheques and only on the basis of the fact that the substantial amounts were deposited through cheques prior to issuing the share application money, the ADIT(Inv.) has observed that the assessee has utilized these parties to bring its unaccounted money back in the form of share capital in their books of accounts. It appears that the investigation report of the ADIT(Inv.) is inconclusive and it is only an inference has been made on the basis of the fact that a substantial amount has been deposited in respective bank account through cheques before the share application money was paid to the assessee. The observation of the ADIT(Inv.), in our view, is purely based on an imagination and assumption and not based on the correct and real facts because there is no other enquiry conducted by the ADIT(Inv.) Kolkata to find out as from where these cheques were deposited in the accounts of these two parties. Merely because the cheques were deposited in the respective accounts would not lead to the conclusion that these cheques money was the assessee’s own money routed through these parties until and unless it is found in the enquiry and substantiated with the facts and material. This is but natural that whenever a large payment is to be made, funds are to be arranged and, therefore, if an amount through cheque is deposited in the bank account before making the payment of share application money, in absence of any fact, material or finding, it cannot be said that the said money is assessee’s own money.

We further note that the assessee produced the balance sheet, profit and loss account, income tax return, PAN and confirmation from these parties, which clearly discharge the assessee from its onus to prove its claim. When the assessee has brought on record the relevant evidence including the balance sheet and profit & loss account and return of income of these parties, then in the absence of proving contrary by the AO these material evidence cannot be brushed aside merely on the basis of suspicious. Even otherwise, when the assessee has produced the share application form, allotment letter, share certificate as well as bank account, then the genuineness of the transaction cannot be doubted in the absence of any contrary finding. The evidence produced by the assessee is even otherwise cannot be doubted when the return of income is already by the parties are on the record of the department. Thus, we find that the disallowance of the claim of the assessee and addition made by the AO under Section 68 is purely based on assumption, guess work without substantiated by any evidence or material. This is not a case of bogus shareholders as all these parties are the company, which are in existence and subjected to Income Tax as the assessee has produced the relevant evidence. Therefore, when the assessee has produced all the relevant evidences, and if the department has doubted the source of the share application money, then it is free to take necessary action in respect of these parties. The Hon’ble Supreme Court in the case of CIT Vs. Lovely Exports Pvt. Ltd. (supra), has held that if the share application money is received by the assessee company from alleged bogus shareholders whose names are given to the AO then the department is free to proceed to reopen their individual assessment in accordance with law but it cannot be regarded as undisclosed income of the assessee company. There is nothing on record to show that these transactions of allotment of share is a sham transaction, then the department cannot treat the said share capital money as undisclosed income of the assessee.

In view of the above discussion as well as facts and circumstances of the case, we are of the considered opinion that the addition made by the AO under Section 68 of the Act is not justified and the same is hereby deleted.

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