Addition not sustained in absence of incriminating material during search: ITAT Pune

DCIT Vs Marsh Fincom Pvt. Ltd. (ITAT Pune)

ITAT Pune held that addition in respect of share capital not sustainable as no incriminating material found during course of search regarding non-genuine share capital. Accordingly, addition towards the same deleted.

Facts- Assessee is a private limited company engaged in the business of buying and selling of shares and securities and financing loans. A search and seizure action u/s 132 of IT Act was conducted on 20-08-2014 at the business & residential premises of different members/ associate concern of the Jhaveri Group at Mumbai/ Aurangabad & their directors & business concern. The search warrant was issued u/s 132 of the IT Act in the name of the assessee & its directors namely Mr. Sandeep Jhaveri. A notice u/s 153A of the IT Act was issued on 21.08.2015.

During the course of search proceedings, Rs.17,00,00,000/- was agreed to be offered as additional/ undisclosed income regarding receipts of share application money being non-genuine. However, Rs.10,00,00,000/- was offered to tax for A.Y. 2011-12 and 2012-13 and Rs.3,42,00,000/- was offered to tax for A.Y. 2010-11. It was found by the AO that an amount of Rs.6,62,00,000/- was received towards share application/ premium money during the period under consideration. But out of this amount, only Rs.3,42,00,000/- were offered to tax for the year under consideration being not genuine, and, therefore, the balance amount of Rs.3,20,00,000/- was added by the AO to the income of the assessee on the basis of statement of director of the company recorded u/s 132(4) of the IT Act. AO completed the assessment determining the income at Rs.7,23,95,845/- as against the income returned by the assessee at Rs.4,02,87,010/-.
CIT(A) allowed the appeal of the assessee. Being aggrieved, revenue has preferred the present appeal.

Conclusion- Held that since no incriminating material was found during search regarding non-genuine share capital/share premium, therefore, the addition in respect of such share capital is not sustainable.

Held that the shareholders have furnished their replies and have confirmed having applied for the shares supported by their bank statement, returns of income etc, and since no further investigation is done by the AO to negate the same, the addition is not sustainable.

FULL TEXT OF THE ORDER OF ITAT PUNE

This appeal filed by the Revenue is directed against the order dated 07.09.2023 passed by Ld CIT(A)-12, Pune for the assessment year 2010-11.

2. The Revenue has raised the following grounds of appeal :-

“1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in law and in facts by quashing proceedings u/s. 153A in respect of assessee where the assessee’s case was covered under section 132 of the Act dated 20.08.2014.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the AO has made addition without any incriminating materials found during the search whereas Shri Sandeep Jhaveri one of the directors of the assessee during the course of statement u/s 132(4) dated 22.08.2014 declared undisclosed income of Rs.17 crores in M/s. Mars Fincom Pvt. Ltd. comprising the years A.Y. 2010-11, A.Y. 2011-12 & A.Y. 2012-13.

3. Whether on the facts and in the circumstances of the case and in law, the statement of one of the directors Shri Sandeep Jhaveri may not come in the category of incriminating materials.

4. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding that the addition of Rs.3,20,00,000/- is not sustainable on merit whereas the assessee company has failed to fulfil all the three ingredients as required u/s 68 to explain the sources of cash credits in the books of accounts.

5. Whether on the facts and in the Ld. CIT(A) has erred by relying on the decisions of Honorable Supreme Court in the case of Abhisar Buildwell (P.) Ltd. ignoring the fact that sae is not applicable to the case of assessee.

6. The appellant craves leave to add, alter, modify, delete and amend any of the grounds, as per the circumstances of the case.”

3. The facts of the case, in brief, are that the assessee is a private limited company engaged in the business of buying and selling of shares and securities and financing loans. The assessee company furnished its original return of income on 15.10.2010 declaring total income of Rs.60,87,010/-. A search and seizure action u/s 132 of IT Act was conducted on 20-08-2014 at the business & residential premises of different members/ associate concern of the Jhaveri Group at Mumbai/ Aurangabad & their directors & business concern. The search warrant was issued u/s 132 of the IT Act in the name of the assessee & its directors namely Mr. Sandeep Jhaveri. A notice u/s 153A of the IT Act was issued on 21.08.2015. In response to the above notice, the assessee furnished revised return of income on 30.10.2015 declaring total income at Rs.4,02,87,010/- which includes undisclosed income of Rs.3,42,00,000/-. During the course of search proceedings, the statement of director of the company, Shri Sandeep Jhaveri u/s 132(4) was recorded on 22-08-2014 at his residence wherein Rs.17,00,00,000/- was agreed to be offered as additional/ undisclosed income regarding receipts of share application money being non-genuine. However, out of Rs.17,00,00,000/- agreed in the statement, Rs.10,00,00,000/- was offered to tax for assessment years 2011-12 and 2012-13 and Rs.3,42,00,000/- was offered to tax for assessment year 2010-11 i.e. the period under consideration. It was found by the AO that an amount of Rs.6,62,00,000/- was received towards share application/ premium money during the period under consideration. But out of this amount, only Rs.3,42,00,000/- were offered to tax for the year under consideration being not genuine, and, therefore, the balance amount of Rs.3,20,00,000/- was added by the AO to the income of the assessee on the basis of statement of director of the company recorded u/s 132(4) of the IT Act. The AO completed the assessment u/s 143(3) r.w.s. 153A of the IT Act vide order dated 29.12.2016 determining the income at Rs.7,23,95,845/- as against the income returned by the assessee at Rs.4,02,87,010/-.

4. Being aggrieved with the above assessment order dated 29.12.2016, an appeal was filed before the Ld. CIT(A), who vide impugned order dated 07.09.2023 allowed the appeal of the assessee.

5. Being aggrieved with the above first appeal order, the Revenue is in appeal before this Tribunal.

6. LD DR submitted before us that LD CIT(A), Pune erred in allowing the appeal of the assessee. LD DR argued at length & furnished paperbook in support of his contention & requested to set-aside the order passed by LD CIT(A) & further requested to sustain the additions made by the AO.

7. LD AR submitted before us that the order passed by LD CIT(A), Pune is correct & requested to confirm the same & consequently requested to dismiss the appeal of the Revenue. In addition LD AR also furnished Legal & factual paper books containing copy of written submissions furnished earlier.

8. We have heard LD counsels from both the sides & perused the material available on record. We find that a search was conducted on 20-08-2014 at the premises of the assessee at Bombay as also at the residence of its director of the company Mr. Sandeep Jhaveri at Bombay & also at the premises of Jhaveri Flexo India Pvt. Ltd. The statement of Mr Sandeep Jhaveri director of the assessee company was recorded u/s 132(4) of the IT Act at his residence, wherein due to bad health conditions & to buy peace of mind he admitted Rs.17,00,00,000/- received in last 4-5 years as share capital & share premium amount as not genuine, being received from parties not known to him. He showed his willingness to declare voluntarily an income of Rs.17 crores in Marsh Fincom Pvt. Ltd. The AO found that out of above Rs.17 crore most of the amount was already disclosed in various assessment years but an amount of Rs.3,20,00,000/- which is pertaining to share capital / share premium received from 3 companies during this year was not disclosed & hence he made addition of Rs.3,20,00,000/- to the income of the assessee, which is deleted by LD CIT(A) by giving specific finding for granting relief and are subject matter of present appeal.

9. As regards to the ground no.1, 2, 3 & 5, we find that the LD CIT(A) has quashed the assessment passed u/s 153 A of the IT Act as per the discussion given in para 5.2 of page no.6 to 8 of the impugned order, the relevant discussion is reproduced as under :-

“5.2 I have considered the submissions filed by the appellant. Apart from making oral submissions, the appellant has also filed written submissions. The legal ground relating to framing assessment u/s 153A in absence of seized material found from the appellant. It is the contention of the appellant that in absence of any material found from the appellant during search, the concluded assessment cannot be disturbed. It is the contention of the appellant that in absence of any material found from the appellant during search, the concluded assessment cannot be disturbed. I find merit in the submission made. Admittedly, the seized material referred to in the impugned assessment order nowhere refers to the fact that it was found from the premises of the appellant. The impugned addition is made merely on the basis of the statement made by the director of the appellant u/s 132(4) during the course of search. Even the question put to the appellant during the course of search nowhere refers to any seized material but only an allegation that share capital is received from paper companies. It is a settled law that mere admission is not sufficient to make addition if such admission is retracted. The appellant while filing return of income in response to notice u/s 153A did not disclose part of share capital and premium received as its income which is an implied retraction. The AO has proceeded only u/s 153A, which he can do only if the material is found from the appellant. The assessment pertains to A.Y 2010-11. Return u/s 139(1) was filed prior to search conducted on 20-08- 2014 and notice u/s 153A was issued on 21-08-2015. In such a situation it is clear that on the date of search, the assessment for the year under appeal was not pending. Therefore, the original assessment has not abated. In respect of unabated assessment, the jurisdictional high court in the case of Continental Warehousing Corporation ltd. (374 ITR 645) has held that such unabated assessment can be framed u/s 153A only on the basis of material found from the assessee during search at his premises. He cannot touch any issue other than for which material is found from the assessee during search. The Hon’ble court held that-

“(10) Thus on a plain reading of Section 153A of the Income-tax Act, it becomes clear that on initiation of the proceedings under Section 153A, it is only the assessment/reassessment proceedings that are pending on the date of conducting search under Section 132 or making requisition under Section 132A of the Act stand abated and not the assessments/reassessments already finalised for those assessment years covered under Section 153A of the Act. By a circular No. 8 of 2003 dated 18­9-2003 (See 263 ITR (St) 61 at 107) the CBDT has clarified that on initiation of proceedings under Section 153A, the proceedings pending in appeal, revision or rectification proceedings against finalised assessment/reassessment shall not abate. It is only because, the finalised assessments/reassessments do not abate, the appeal revision or rectification pending against  finalised assessment/reassessments would not abate. Therefore, the argument of the revenue, that on initiation of proceedings under Section 153A, the assessments/reassessments finalised for the assessment years covered under Section 153A of the Income-tax Act stand abated cannot be accepted. Similarly on annulment of assessment made under Section 153A (1) what stands revived is the pending assessment/reassessment proceedings which stood abated as per section 153A(1).

(12) Once it is held that the assessment finalised on 29.12.2000 has attained finality, then the deduction allowed under section 80 HHC of the Income-tax Act as well as the loss computed under the assessment dated 29-12-2000 would attain finality. In such a case, the A.O. while passing the independent assessment order under Section 153A read with Section 143 (3) of the I.T. Act could not have disturbed the assessment/reassessment order which has attained finality, unless the materials gathered in the course of the proceedings under Section 153A of the Income-tax Act establish that the reliefs granted under the finalised assessment/reassessment were contrary to the facts unearthed during the course of 153 A proceedings.

Further Hon’ble Supreme Court in the case of Abhisar Buildwell (P.) Ltd. (149 taxmann.com 399 (SC) ) held as under:

“11. As per the provisions of Section 153A, in case of a search under section 132 or requisition under section 132A, the AO gets the jurisdiction to assess or reassess the ‘total income’ in respect of each assessment year falling within six assessment years. However, it is required to be noted that as per the second proviso to Section 153A, the assessment or re-assessment, if any, relating to any assessment year falling within the period of six assessment years pending on the date of initiation of the search under section 132 or making of requisition under section 132A, as the case may be, shall abate. As per sub-section (2) of Section 153A, if any proceeding initiated or any order of assessment or reassessment made under sub-section (1) has been annulled in appeal or any other legal proceeding, then, notwithstanding anything contained in sub-section (1) or section 153, the assessment or reassessment relating to any assessment year which has abated under the second proviso to sub-section (1), shall stand revived with effect from the date of receipt of the order of such annulment by the Commissioner. Therefore, the intention of the legislation seems to be that in case of search only the pending assessment/reassessment proceedings shall abate and the AO would assume the jurisdiction to assess or reassess the ‘total income’ for the entire six years period/block assessment period. The intention does not seem to be to re-open the completed/unabated assessments, unless any incriminating material is found with respect to concerned assessment year falling within last six years preceding the search. Therefore, on true interpretation of Section 153A of the Act, 1961, in case of a search under section 132 or requisition under section 132A and during the search any incriminating material is found, even in case of unabated/completed assessment, the AO would have the jurisdiction to assess or reassess the ‘total income’ taking into consideration the incriminating material collected during the search and other material which would include income declared in the returns, if any, furnished by the assessee as well as the undisclosed income.”

In view of the binding nature of the Hon’ble Supreme Court and the jurisdictional High court, I hold that since original assessment has not abated on the date of search and no material is found from the premises of the appellant, the AO has exceeded his jurisdiction while framing assessment u/s 153A in making addition merely on the statement of the director, Mr. Jhaveri, recorded during the time of search. I hold that assessment now framed is beyond jurisdiction of the AO and is accordingly required to be set aside. The assessment framed u/s 153A is, therefore, quashed. This ground of appeal, is accordingly allowed.”

10. As regards above finding of LD CIT(A) regarding quashing of assessment passed u/s 153 A of the IT Act & applicability of Supreme Court judgment in the case of Abhisar Buildwell (149 Taxmann.com 399), it can be seen that the addition is in respect of an unabated assessment. The assessment was not pending on the date of search. Disclosure u/s 132(4) is not an incriminating material as held by Hon’ble Delhi High Court in the case of Best Infrastructure Pvt. Ltd. (84 Taxmann.com 287) and that in the case of Harjeev Agarwal (70 Taxmann.com 95). Therefore, even if search is conducted in the case of the assessee as per the warrant of authorization cited by DR, the addition cannot be made dehorse the seized material. Since no incriminating material was found during search regarding non-genuine share capital/share premium, therefore, the addition in respect of such share capital is not sustainable. Thus the finding given by the Ld. CIT(A) in para 5.2 of his order, in our opinion, does not call for any variation & hence the ground no.1, 2, 3 & 5 of appeal raised by Revenue in this regard are dismissed.

11. As regards to the ground no.4, we find that the Ld. CIT(A) has deleted the addition of Rs.3,20,00,000/- by observing as under in para 6.1 & 6.2 of page no 9 to 13 of impugned order :-

“6.1 Vide these grounds of appeal the appellant contended that the AO had erred in making addition of Rs. 3,20,00,000/- under section 68 of the Act in respect of share capital and premium received from three different shareholders on the basis of statement recorded u/s 132(4) of Shri Sandeep B. Jhaveri and requisite criteria for establishing genuineness of the cash credit is placed on record and no contrary evidence has been found by the AO. In support of the ground raised the appellant submitted as under:

“2. The next ground of appeal is making addition of Rs. 3,20,00,000 u/s 68 of the Act in respect of share capital and share premium received during the year.

2.1 The AO in this regard noted that during the course of search, the appellant through its director have admitted the non-genuine nature of share capital received during the year. Though the appellant have admitted the non- genuineness, part of share capital is not offered for taxation unlike offered in respect of certain various share holders and for other assessment years. The AO noted that during search, the director admitted undisclosed income of Rs. 17 crores in respect of share capital. The same was spread as per the years in which same was received. Thus though for year under appeal, an amount of Rs. 6,62,00,000 was received in respect of share capital and share premium, only a sum of Rs. 3,42,00,000 was offered for tax and balance was not offered. When asked to substantiate, the appellant filed all the relevant details including the confirmation, name address, PAN no. Even when the inquiries were made by the AO, all the companies in respect of which no admission was made filed their confirmation. In spite of all these facts, the AO made the addition u/s 68 for the reason that since in original statement, the director has admitted for some of the companies and for all the years and accordingly offered for taxation, the addition is to be made for these entities also.

1. In this regard it is submitted that the admission during the search is not conclusive if it is later retracted and corroborative evidence are found in this regard, the appellant while filing return did not agree that share capital received from following three companies were not

1. Investwell Agents Pvt Ltd. Rs. 75,00,000

2. VC Corporate Advisors Pvt Ltd. 1,30,00,000

3. Innovative Dealrs Pvt. Ltd. Rs. 1,15,00,000

1. Even though the AO referred to the evidences filed, the same is ignored. The evidences filed are also filed herewith. The AO even made direct inquiries with the share applicants. The replies were received, which are also filed herewith. In spite of all these evidences, the addition is made which is contrary to the law settled by various judgments of jurisdictional high courts.

2. The ground for addition that the share premium is not justifiable is not sustainable in law so long as the share applicants have confirmed the transaction. The premium is commanded not because of current profitability only but also looking to the future prospects of the company. Moreover, the market value of investment also leads to higher valuation.

3. The ground that the companies are based in Kolkata is no ground to hold the same to be shell company. There isno evidence for concluding so. Even if address is common, the same cannot be a ground to hold so. When all the documentary evidences suggest that the share capital received is genuine, merely on surmises or conjectures and no evidence to the contrary, addition is not sustainable.

2.6. Even admission for other share applicants or for other years is also no ground to hold that share capital received in respect of which complete evidences are filed are also not genuine. When direct inquiry was made, all the shareholders not only filed confirmation, they filed their return of allotment, memorandum of association, share application forms, contra account in books of accounts, copy of annual accounts showing the investment made, relevant bank statements, share allotment advice as also their source of share application money paid. If all these evidences does not prove genuineness, what else can prove so.

2.7 The jurisdictional high court in various case laws have said that once the appellant discharges its onus, it is for the AO to make further inquiries and prove otherwise.

In view of overwhelming evidences filed, the share capital received during the year may be considered as genuine and addition be deleted.

If any further information or explanation is required please let us know.”

6.2 Even on merits of the addition challenged in the appeal, the order of the AO fails. The challenge is to the addition of Rs.3,20,00,000/- u/s 68 in respect of share capital and share premium received by the appellant from 3 companies as under:

The AO noted that during the course of search, the director of the company admitted undisclosed income of Rs. 17 crores in respect of share capital which was spread over A.Ys. 2010-11 to 2012-13. For the year under appeal, an amount of Rs. 6,62,00,000/- was admitted to have been received whereas only a sum of Rs. 3,42,00,000/- was offered to tax.

During the assessment proceedings, the ADIT issued notices u/s 133(6) to the above mentioned three companies viz. M/s Investwell Agents Pvt. Ltd., M/s VC Corporate Advisors Pvt. Ltd. and M/s Innovative Dealers Pvt. Ltd. These companies confirmed having subscribed to the share capital of the appellant company and in support thereof furnished their accounts, bank statement and confirmation. A copy of the reply furnished to the ADIT was also supplied to the appellant which was filed by the appellant in the paperbook. The AO also made direct inquires from such parties and their replies have been placed on record who have confirmed such amounts. On examination of the paperbook it is seen that the shares acquired by all the 3 companies are appearing in their respective balance sheet under the head Investment/Stock. On a perusal of the same, it transpires that the appellant had discharged its onus in proving the genuineness of share capital received from these 3 companies. Inspite of such evidences being placed by the appellant and the AO recognizing them, he has chosen to remain silent. Moreover, the AO has also not made any efforts to negate such evidences placed by the appellant but has only reiterated his earlier stand that the director had agreed to offer undisclosed income of Rs. 17 crores and has offered only part of the sum. Moreover, during the course of the appellate proceedings, a letter was issued to the appellant seeking further details in respect of these 3 parties. The appellant replied to the same which is placed on record. The appellant has also placed on record the current status of these 3 companies which shows that these companies are having huge net worth and paying huge amount of taxes as well.

I have also considered the decision of the Hon’ble SC in the case of PCIT v/s NRA Iron & Steel Pvt. Ltd. (262 taxman 74). In the said case, the Hon’ble court observed as under,

“As per settled law, the initial onus is on the assessee to establish by cogent evidence the genuineness of the transaction, and creditworthiness of the investors under section 68.

The assessee is expected to establish to the satisfaction of the Assessing Officer:

Proof of identity of the creditors;

Capacity of creditors to advance money; and

Genuineness of transaction

This Court in the land mark case of Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) and, Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and creditworthiness, then the Assessing Officer must conduct an inquiry, and call for more details before invoking section 68. If the assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source.

With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence, that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee’s knowledge. Merely, proving the identity of the investors does not discharge the onus of the assessee, if the capacity or credit-worthiness has not been established.

The Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries. In the instant case, the Assessing Officer made an independent and detailed enquiry, including survey of the so-called investor companies from Mumbai, Kolkata and Guwahati to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the shareholders were either non­existent, or lacked creditworthiness.

The principles which emerge where sums of money are credited as Share Capital/Premium are :

i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus.

ii. The Assessing Officer is duty bound to investigate the creditworthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders.

iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68.”

I find that the ADIT had made inquiries by issuing notices u/s 133(6) dt. 31-10- 2014 whereby all the 3 companies had furnished their replies confirming having acquired the shares. In support thereof they filed their balance sheet, bank statement highlighting the details of amount paid and the share allotment advise received by them. Even during the assessment proceedings, the AO also made independent inquiries by issuing notices u/s 133(6) dt. 30-11-2016. The share applicants furnished their replies and confirmed having applied for the shares supported by their bank statement, returns of income etc. No further investigation was done by the AO to negate the same.

Based on the above discussion, the addition of Rs. 3,20,00,000/- is not sustainable even on merits and deserves to be deleted.”

12. From the above we find that as regards merits of addition of share capital/share premium from three companies, the addition is purely on the basis of statement of the director. The addition is because, Mr. Jhaveri Admitted Rs.17 crores but in returns of income of various years, only a sum of Rs.13.42 Crores was disclosed (including the amount of Rs.3.42 crores during the period under consideration), and since the sum of Rs.3.20 crores (Total share application money received during A. Y. 2010-11 Rs.6,62,00,000 – Rs.3,42,00,000 already disclosed as additional income during A.Y. 2010-11) was also received during the year as share capital / share premium, which is not disclosed, the addition was made by the AO. Ld. CIT(A) noted in para 6.2 of the impugned order that the shareholders have furnished their replies and have confirmed having applied for the shares supported by their bank statement, returns of income etc, and since no further investigation is done by the AO to negate the same, the addition is not sustainable. Attention is drawn to page no.7, 60, and 119 being inquiries made by investigation wing of the Department with respective shareholders and their replies at pages 56, 61 and 120 respectively. As regards further inquiries by the AO himself, the same were duly replied by filing their bank statement, return of income and balance sheet. Attention is also drawn to pages 17, 68 and 130 of the paper book filed by the assessee where the respective shareholders show the amount invested with the assessee company as their investment. These facts are not disputed either by the AO or by Ld. DR. We therefore are of considered opinion that there is no infirmity in the order passed by LD CIT(A) & the same is confirmed by us, consequently the 4th ground of appeal raised by revenue in this regard is also dismissed.

13. In the result, the appeal filed by the Revenue stands dismissed.

Order pronounced in the open Court on 13^th August, 2024.