Case Law Details

Case Name : M/s Kesha Appliances Pvt. Limited Vs. ITO (ITAT Delhi)
Appeal Number : ITA No. 2715/Del/2016
Date of Judgement/Order : 09/03/2018
Related Assessment Year : 2012-13
Courts : All ITAT (5308) ITAT Delhi (1207)

M/s Kesha Appliances Pvt. Limited Vs. ITO (ITAT Delhi)

The addition in the present case was made by the AO for the proceeds of sales of investment which were sold by the assessee to six companies as stated above. As per the AO, the parties to whom shares were sold did not respond to the notices issued under section 133(6) of the Act, therefore, the same was treated as unexplained cash credit under section 68 of the Act. The view taken by the AO was subsequently confirmed by the learned CIT(A).

On perusal of the above discussion and records, we observe that the assessee was holding shares of RRPL as shown in the audited financial statements. These investments undoubtedly were coming from the earlier years therefore, an inference can be drawn that the investment shown by the assessee in RRPL was duly accepted in the earlier years. Now the issue arises whether the impugned sale made by the assessee to the aforesaid six companies represents genuine sales of the investments. In this regard, we observe that the confirmations from all the parties were duly filed by the assessee and accordingly, the AO in its remand report accepted the genuineness of the transaction in respect of four parties.

After perusal of the remand report as discussed above, we are of the view the conditions specified under Section 68 of the Act has been duly satisfied in respect of four companies namely In time Dealers Private Limited, Vedant Commodeal Private Limited, Jackpot Vintrade Private Limited and Newedge Vinimay Private Limited. Now the issue remains to be answered in respect of Sh. Shrishti Developers Private Limited and Snowdrop Tradecom Private Limited which was also added to the total income of the assessee on account of unexplained cash credit due to the fact that these parties did not respond to the notices issued under Section 133(6) of the Act.

The investment in RRPL was sold by the assessee to the aforesaid six companies which has been shown in the Annual Return of RRPL as evident from the copy of the annual return filed by the RRPL to ROC.

The lower authorities have not brought any iota of evidence suggesting that the transactions were not made offline. Thus there is no question of involvement of DP arises in the given facts & circumstances. The transactions for the sale of shares were taken place on 20-7-2011 in off line market whereas the ld. CIT-A held that the shares were listed on the stock exchange. The view of the CIT-A was based on the master data from the ROC website as on 31-3-2015. As there is a time gap between the date of transaction and the information relied by the ld. CIT-A thus the information on the basis which the opinion was formed by the ld. CIT-A cannot be relied. There was no information brought on record by the lower authorities whether the shares were listed in the year when the transaction for the sale of shares was taken place. Moreover the value for the sale of the shares has not been questioned by the lower authorities.

It is undisputed facts that the distinctive nos. for the sale of shares in respect of three companies were not provided by the assessee but the same cannot be basis for treating the same as unexplained cash credit under section 68 of the Act after disregarding the other evidences submitted by the assessee during the course of proceedings before the AO & ld. CIT-A.

We also observe that the assessee has furnished all the necessary details of the aforesaid six companies along with PAN but none of the lower authorities have confirmed the same from the AO having jurisdiction over the six aforesaid companies. Thus the assessee cannot be penalized merely on the ground that the six companies as discussed above failed to reply to the notices issued to them under section 133(6) of the Act.

The assessee has duly explained the source of money received on the sale of shares/ investment and the assessee is not answerable for the source of money in the hands of aforesaid six companies.

It is undisputed fact that the necessary details as the confirmation and contract notes were duly filed by the assessee in respect of the aforesaid parties and no defect of whatsoever was pointed out by the lower authorities.

After considering the facts and totality of the case as discussed above, we are inclined to reverse the order of authorities below hence the ground of appeal of assessee is allowed.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

The assessee has raised the following grounds of appeal:-

1. That the learned CIT(A) has erred in confirming the order of the AO in completing the assessment at the income of Rs. 3,00,00,000/- as against the returned loss of Rs. 43,850/-.

2. That the learned CIT(A) has erred in confirming the dis allowances of 3,00,00,000/- u/s 68 on account of sale of old investment in shares at par in spite of the fact that AO in the remand report has confirmed the fresh confirmation and other documents received by him from four out of the six parties.

3. The ld. CIT(A) has erred in confirming the dis allowance of the revenue expenditure as per profit and loss account amounting to Rs. 43852 in spite of the specific submissions made regarding the nature of the expenditure which are necessary for the company maintenance.

2. The first issue raised by assessee is that the learned CIT(A) erred in confirming the dis allowance of Rs. 3,00,00,000/- under Section 68 of the Act on account of sale of shares.

Briefly stated, the facts are that, the assessee is a private limited company and engaged in the business of manufacturing / assembling, buying, selling, exchanging, converting, importing, altering, exporting or otherwise handling or dealing in vacuum cleaners, washing machines, mixers, juicers etc. The assessee, during the year has sold its investment made in the shares of M/s Regent Realtech Private Limited (formerly known as Hoover International Limited) (for short RRPL) for Rs. 3,00,00,000/- only. The assessee sold its investment in shares in offline market to certain parties as detailed below:-

Sl. No. Name  of the
Purchaser
No.of shares Amount Transaction type Share Certificate number
1 Jackpot  Vin trade
Pvt. Ltd.
5,00,000 50,00,000 Offline 8814070 9314069
2 New edge      Vinimay
Pvt. Ltd.
5,00,000 50,00,000 Offline No Details
3 Shrishti  Developers
Pvt. Ltd.
5,00,000 50,00,000 Offline 7814070- 8314069
4 Snowdrop Trade com Pvt Ltd. 5,00,000 50,00,000 Offline 83104070 8814069
5 In time Dealers Pvt. Ltd 5,00,000 50,00,000/- Offline No Details
6 Vedant Commodeal Pvt. Ltd. 5,00,000 50,00,000/- Offline No Details

3.The AO during the assessment proceedings to verify the genuineness of the transaction for the sale of investments issued a notice dated 28.1.2015 to the assessee for seeking certain clarification. The contents of the notice are reproduced below:-

“7. The assessee company has disclosed substantial investments in M/s Regent Real tech Pvt. Ltd. (Formerly M/s Modi Hoover International Ltd.). Furnish details of such investments and substantiate the opening balances. Give details of financial transactions and documents of ROC, compliances.

9. Furnish copy of shares allotted by M/s Modi Hoover International Ltd. (M/s Regent Real-tech Pvt. Ltd.) along with contract notes of transactions. Substantiate the transactions of purchase with copies of bank account statements of the relevant

10. Furnish details of Depository Participant (D.P) through which transactions of shares has taken place. Furnish complete address and relevant documents”.

4. The assessee, in compliance thereto submitted vide letter dated 4th February, 2015 that the details for the sale of investment of M/s R.R.P.L. has already been furnished along with the contract notes vide letter dated 12th January, 2015.

4.1 As the transaction was made through offline market therefore, there was no involvement of DP in such a transaction.

5. However, the AO observed that no details as required in the notice dated 28.1.2015 was furnished by the assessee therefore, the AO issued notices to all the six parties to whom the investment was sold by the assessee under Section 133(6) of the Act. But there was no compliance from any of the party.

5.1 In case of M/s Snowdrop Trade com Private Limited and Jackpot Vin trade Private Limited, the notices were returned back by the postal authorities as un-served with the remark not known.

6. Accordingly, the AO issued summon under section 131 of the Act to the assessee vide letter dated 19th March, 2015 to justify the sale of investment claimed in the return of income. In compliance thereto Shri Ved Prakash Arya, Director of the company appeared along with Shri Anil Jain, Advocate of the assessee and filed a detailed submissions vide letter dated 24.3.2015. The relevant contents of the letter are extracted below:-

(i) The contract note for sale of investment were duly furnished along-with the PAN of the purchasers companies vide letter dated 12.1.2015.

(ii) A letter confirming the transfer of shares by the assessee to the aforesaid six purchasers was issued by M/s RRPL vide letter dated 27.2.2015.

(iii) the payments from the aforesaid six parties were received through banking channel and the same is reflected in the bank statement of the assessee.

(vi) All the shares were sold in offline market therefore there was no involvement of DP.

(v) The shares were sold to the aforesaid six parties about three years back and presently the assessee is not in contact with those companies. Moreover, the assessee was also not required to know the whereabouts of these companies after the sale of the investments.

(vi) The requirement of the provisions of section 68 has been duly satisfied and the same were duly recorded in the books of accounts.

(vii) The investments were made by the assessee in the earlier years and the same was not challenged by the Revenue.

(viii) The necessary details of the purchasers companies are available on the website of the ROC with the PAN number of these companies except one company namely M/s In time Dealers Private Limited which got amalgamated.

(xi) There is no control of the assessee over the purchaser instant case pertains to the assessment year 2012-13 and at that relevant time the CIN was very much active. However, the assessee is taking necessary steps for the activation of CIN.

(x) The assessee cannot be penalized on account of non appearance / co-operation for the notices issued by the AO to these six companies as discussed aforesaid.

(xi) Similarly, the deactivation of CIN number of the assessee company cannot be a ground for taking the adverse view against the assessee. It is because of the fact that the deactivation of CIN was revealed in the year 2015 but the instant case pertains to the assessment year 2012-13 and at that relevant time the CIN was very much active. However, the assessee is taking necessary steps for the activation of CIN. However, the assessee has been complying with all the provisions of the Income Tax Act therefore no adverse view can be taken against the assessee company.

7. However, the assessee has been complying with all the provisions of the Income Tax Act therefore no adverse view can be taken against the assessee company. However, the AO during the assessment proceedings observed certain facts as detailed under:

(i) The assessee failed to furnish the documentary evidence for the purchase of shares of M/s RRPL therefore, the ownership of the impugned shares is doubtful.

(ii) Notices issued under Section 133(6) to the aforesaid six companies were either not served or no reply was made by

(iii) The contract notes furnished by the assessee contains no information about the details of broker / dealer therefore, the contract notes supplied by the assessee cannot be relied upon.

(iv) The contract note furnished in respect to M/s Newedge vinimay Private Limited, M/s Intime Dealers Private Limited and M/s Vedant Commodeal Private Limited does not contain the distinctive numbers of the shares sold to them. The companies to whom the shares were sold are the companies having no business transaction and therefore these are bogus companies. Thus the AO was of the view that the sale of investment for Rs. 3 crores is representing the assessee  own money routed through these companies.

8. In view of the above, the AO concluded that the conditions specified under Section 68 of the Act have not been satisfied by the assessee. Accordingly, the amount of sale consideration of Rs. 3,00,00,000/- was treated as unexplained income under Section 68 of the Act and added to the total income of the assessee.

9. Aggrieved assessee preferred an appeal to learned CIT(A).

10. The assessee before the learned CIT(A) submitted that the investment in RRPL was held from the last several years. All the notices issued upon the assessee by the AO were duly complied with and the necessary details / supporting documents were furnished to proof the genuineness of the above transaction.

11. The assessee in its balance-sheet as on 31.3.2011 has shown investment of 35,65,868/- equity shares which was reduced to 5,65,868/- shares as on 31.3.2012 making the sale of 30 lacs equity shares of RRPL.

12. All the shares were sold in off line market therefore there was no involvement of the DP. Moreover, the impugned shares were not listed on  any stock exchange thus there was no trading done through stock exchange.

13. The assessee was informed by the AO vide notice dated 19th March, 2015 stating no reply from the aforesaid companies was received in response to the notice issued under Section 133(6) of the Act. Accordingly, the assessee made a reply to the AO vide letter dated 24th March, 2015 but the AO has passed the order on 3 1.3.2015 after making the addition of Rs. 3,00,00,000/- only. Therefore, sufficient opportunity was not given by the AO to produce necessary supporting documents from the companies. However, the assessee now is filing additional documents with the confirmation of all the parties and updated present address of the The assessee also filed the confirmation from RRPL showing the allotment of shares on 23 .4.1997 along-with the annual return filed with ROC.

14. The assessee also submitted that the aforesaid companies have not denied the transaction for the purchase of shares therefore non response of the notices cannot be inferred as these companies were non-existent. There was no defect pointed out by the AO in the documents filed by the The assessee in support of his claim filed the copy of MCA website showing the current status of the company as active along-with PAN number of all the companies. The assessee also submitted that the AO was empowered under the statute to confirm the updated address of the registered office of the aforesaid companies from the ROC but he failed to exercise his power given under law. Moreover, the shares were sold around three years back and the assessee was not having any connection with those companies thereafter.

15. The ld. CIT-A called for the remand report and observed that the RRPL was listed company as per MCA data though the assessee claimed that the shares of RRPL were not listed. The ld. CIT-A also observed that the address in respect of six companies as per MCA data were different with the details provided by the assessee. It was also observed that the payment made by the six companies to the assessee for the purchase of shares was preceded by the credit entries on & around the same date of sale of shares.

16. The assessee in response to the remand report submitted that in case the credit entries reflected in the bank of the six companies then the additions if at all needs to be made then it has be made in the hands of those companies. The assessee in support of his claim relied on the judgment of Hon’ble Supreme Court in the case of Lovely Export Pvt. Ltd. reported in 216 CTR 195.

17. However, the learned CIT(A) after considering the submissions of the assessee and remand report of the AO confirmed the order of the AO by observing as under:-

“I have given my careful consideration to the remand report of the AO and the rejoinder of the appellant. At the outset, as already mentioned herein before, the appellant has traded in the shares of a list company, Regent Realtech Ltd. offline market and that too, at par. It has not been able to prove that these were investments held since a long time. Neither the ITRs for the relevant years nor the returns filed with the ROC, let alone the source of the said investments have been proved in the assessment or remand proceedings. Assuming but not admitting that these investments were held by the appellant, the method of disposal of these investments casts serious doubts as to whether the transactions were genuine or not. The purchaser companies have either not responded, even in the second round of proceedings before the AO and the source of investment in their hands is also not convincing. In this regard, I beg to differ with the view of the AO regarding the creditworthiness of the other three companies. I have perused the balance sheet of Jackpot Vin trade Pvt. Ltd. for the relevant year ending 31.03.2012. First of all the address of this company as per the financials and ITR filed for A. Y. 2012-1 3 is mentioned as “3, Raja Debendra Narayan Deb Lane, 1st Floor, Kolkata – 700 005”, whereas the confirmation before the AO mentions another address which is as per MCA. This company seems to have received share premium of Rs.57,62 crores although the authorized share capital is only Rs. 1.05 lakh. This share premium stand utilized for purposes of making further investment in shares. However, the financials furnished do not give the break-up of the investment in shares amounting to Rs.81.43 crores (up from 23.77 crores in the preceding year). This is a blatant violation of AS-13 issued by ICAI which requires the auditor’s to give a break-up of investments by adhering to the Guidance Note. Coming to the case of Vedant Commodeal Pvt. Ltd., the perusal of the financials for the year and the ITR filed do not inspire any confidence as the total income for the year is Rs. 14,070/- and there is no change in the reserves, surplus or assets and liabilities. This company was authorized to issue share capital of Rs. 68 lakhs but has received premium of Rs. 62.40 crores. In the case of Newedge Vinimay Pvt. Ltd. the authorized share capital stands at Rs.10 crores and the share premium received is Rs.93. 17 crores. Here also the break-up of the current investments have not been furnished in the balance sheet. Even the address furnished in the audited financials and ITR namely “123, 1st Floor, Cotton Stree, Burra Bazar, Kolkata 700007″ is different from the address filed in the confirmation letter before AO dated 10.02.2017 and the address furnished to MCA which is “1, Muktaram Babu Street, 2nd Floor, Kolkata 700007.”

3.5.6 It would be worthwhile to note that three out of the six purchasers (namely Intime Dealers Pvt. Ltd., Jackpot Vintrade and Vedant Commodeal Pvt. Ltd.) are in receipt of funds received from a little known company namely Hamraj Financial Consultants Pvt. Ltd., which has been incorporated only on 03.08.2009. The directors of this company are placed as directors in Sunflower Vintrade Pvt. Ltd., Littlestar Vyapaar Pvt. Ltd., Sunbright Distributors Pvt. Ltd. and Rosemery Agencies Pvt. Ltd. A fourth purchaser company M/s Newedge Vinimay Pvt. Ltd., has sourced the funds of Rs.50 lakhs from Sunflower Vintrade Pvt. Ltd. Further the extracts of the bank statement of the appellant (a/c no.02712020005643) with HDFC Bank Ltd. Kalkaji, New Delhi, shows that the amounts received from the purchaser companies stand transferred to Modi Hoover International Ltd. This shows that the appellant is not the real investor in shares, which were actually owned by Regent Realtech Ltd. All in all the evidences in hand negate the contention of the appellant that the documents furnished before the AO during the assessment and remand proceedings amount the discharge of onus in the part of the appellant u/s 68. Rather, it is found that the documents furnished do not establish even the identity of the purchasers and the source of the credit in the books of the appellant.

3.5.7 It has been judicially established that the primary onus is on the assessee to prove the identity & creditworthiness of the entry and the genuineness of transactions in respect of entries in its books of account. The identity and creditworthiness with regards to share applicants cannot be seen as two separate elements but as two sides of the same coin. The creditworthiness essentially means some financial standing in one’s own right backed by one’s inherent capacity to earn income or the capacity of some profit making apparatus available to one. The absence of the presence of the creditors, coupled with the furnishing of multiple addresses before various statutory authorities, does not facilitate cross verification of identity. The assessee has also failed to produce the directors of the concerned parties, in spite of opportunity granted to produce, along with its books of accounts anu otner relevant documents in support of the transaction. Reliance is placed on the following judicial pronouncements that in the absence of adequate explanations by the assessee who has failed to discharge its onus, the AO is entitled to make the additions:

Kale Khan Mohammad Hanif vs. CIT(1 963) 50 ITR 1 (SC).

CIT vs. Lachhman Dass Oswal (1980) 126 ITR 446 (P&H).

Nanak Chandra Laxman Dass Vs. CIT (1982) 140 ITR 151(All).

R Dalmia vs. CIT (1976) 113 ITR 522 (Del.)

CIT vs. Devi Prasad Vishwanath Prasad (1968) 72 ITR 1 94(SC).

CIT vs. Hero Cycles (P) Ltd. & Others (1997) 228 ITR 463 (SC).

CIT vs. Stepwell Industries Ltd. & Others (1997) 228 ITR 171 (SC).

Sumati Dayal vs. CIT (1995) 214 ITR 801 (SC).

CGT vs. Dr. George Kuru villa (1969) 74 ITR 328 (SC).

CIT vs. Joseph John (1967) 67 ITR 74 (SC).

RB Seth Champa Lai Ram Swarup vs. CIT (1965) 60ITR 493 (SC).

CIT vs. R Venkataswamy Naidu (1956) 29 ITR 529 (SC).

3.6 Reliance is also placed on Delhi High Court decision of CIT vs. Nipun Builders & Developers (P) Ltd. (30 taxman.com 292) wherein Delhi High Court held that assessee has to prove the identity & creditworthiness of the person from whom the money has been taken. It was held a Private Limited Company, which cannot issue shares in same manner in which a Public Limited does, generally has to depend on a person known to its directors or shareholders directly or indirectly to buy its shares. Once the monies are received and shares are issued, it is not as if the share subscriber and the assessee company lose touch with each other and become incommunicado. It is a continuing relationship, and mere furnishing of copies of bank accounts of the subscribers is not sufficient to prove their creditworthiness. There should be some positive evidence to show the nature and sources of share subscriber himself. Failure to produce the principal officers of the subscribing companies before the AO so that they could explain the sources from which the share subscription was made would also have taken care of any difficulty of the assessee in proving the creditworthiness of the subscriber companies. It is to be noted that the present case involves receipt of amounts in the books of accounts by way of sale of so called investments and hence the same principal expounded by the Delhi High Court in the above case would apply. Reliance is also placed upon the case of CIT vs. MAF Academy (P) Ltd. [2014] 42 taxman.com 377(Delhi) wherein it had been held that mere production of incorporation detail, PAN No. or income tax details may not be sufficient when surrounding and attending facts predicate a cover up.

3.6.1 The reliance placed by the AR on the summary dismissal of Department’s SLP in the case of Lovely Exports Pvt. Ltd. by the Supreme Court without laying down any law, is also misplaced as the same is not a declaration of law as envisaged in Article 141 of the Constitution of India. For declaration of law, there should be a speaking order. A decision which is not express and is not formulated on reasons nor on a consideration of the issue cannot be deemed to be a law declared so as to have binding effect under Article 141 of the Constitution of India.

3.6.2 In the case of Divine Leasing & Finance Ltd.(158 Taxman 440), relied upon by the AR, the legal regime regarding the burden of proof in the case of public placement of shares vis-a-vis private placement of shares was discussed by the jurisdictional High Court. In the case of a public issue, the company concerned could not be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers but in the case of private limited company, where the parties are related or known to each other, the burden of proof was much more and therefore it was expected that some credible evidence of the creditworthiness of the investor should be taken on record. Relief was granted to the assessee as it was the case of public placement. This aspect of the shareholder vis a vis private limited company relationship was also discussed in a subsequent decision of the Delhi High Court in Globus Securities & Finance (264 CTR 481) and also in the case of NR Portfolio Pvt. ltd. [IT Appeal Nos. 1018 & 1019 of 2011, dated 22-11-2013] which held merely producing PAN number or assessment particulars did not establish the identity of the person. The actual and true identity of the person or a company was the business undertaken by them. Where the share subscribers did not any genuine business activity and the bank account revealed mere rotation of money, the bank accounts, therefore, did not reflect their creditworthiness or even genuineness of the transaction. The beneficiaries, including the respondent-assessee, did not give any share-dividend or interest to the said entry operators/subscribers. The profit motive normal in case of investment, was entirely absent. When there is surrounding evidence and material manifesting and revealing involvement of the assessee in the “transaction” and the same was not entirely an arm’s length transaction, resort or reliance to the usual doctrine of “source of source” may be counter-productive and contrary to equity and justice and the assessee would be required to prove the unimpeachable creditworthiness of the sha-e subscribers. The High Court held in the case of N.R Portfolio (supra) as under:

“29. In CIT v. Nipun Builders & Developers (P.) Ltd., this principle has been reiterated holding that the assessee and the Assessing Officer have to adopt a reasonable approach and when the initial onus on the assessee would stand discharged depends upon facts and circumstances of each case. In case of private limited companies, generally persons known to directors or shareholders, directly or indirectly, buy or subscribe to shares. Upon receipt of money, the share subscribers do not lose touch and become incommunicado. Call monies, dividends, warrants etc. have to be sent and the relationship is/was a continuing one. In such cases, therefore, the assessee cannot simply furnish details and remain quiet even when summons issued to shareholders under Section 131 return unserved and uncomplied. This approach would be unreasonable as a general proposition as the assessee cannot plead that they had received money, but could do nothing more and it was for the assessing officer to enforce share holders attendance. Some cases might require or justify visit by the Inspector to ascertain whether the shareholders/subscribers were functioning or available at the addresses, but it would be incorrect to state that the assessing officer should get the addresses from Registrar of Companies’ website or search for the addresses of shareholders and communicate with them. Similarly, creditworthiness was not proved by mere issue of a cheque or by furnishing a copy of statement of bank account. Circumstances might require that there should be some evidence of positive nature to show that the said subscribers had made a genuine investment, acted as angel investors, after due diligence or for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the assessee might find it difficult to unimpeachably establish creditworthiness of the shareholders.

30. What we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee’s knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them.”

3.6.3. A distillation of the legal precedents discussed herein above shows that the assessee has to prima facie prove the identity of the creditor/subscriber, the genuineness of the transaction and the creditworthiness or the financial strength and when the assessee is not in a position to prove beyond doubt the creditworthiness, the AO is duty bound to investigate the same and the veracity of the transaction. Since in the present case, the surrounding circumstances do not reflect the identity, genuineness and creditworthiness of the purchaser companies, the addition made by the AO is seen to be justified. Keeping in view the discussion herein before the addition of Rs.3 crores u/s 68 is upheld. Ground no.3 is dismissed.”

18. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. The learned AR before us filed a paper book which is running from pages 1 to 130 and reiterated the submissions made before the learned CIT(A).

19. The learned AR drew our attention at page 21 of the paper book where the confirmation of M/s RRPL for the transfer of shares was placed.

20. The learned AR also submitted that the shares of RRPL was purchased by the assessee on 23.4.1997 and in support of assessee on 23.4.1997 and in support of assessee’s claim filed confirmation which is placed at page 22 of the paper book. The contents of the confirmation is reproduced as under:-

 INVESTMENT CONFIRMATION

“This is to certify and confirm that M/s Kesha Appliances Private Limited was allotted 1,09,80,000 (One Crore Nine Lacs Eighty Thousand Shares) equity shares of Rs. 10 each of Modi Hoover International Limited (now known as Regent Real tech Limited) on 23.04.1997.

The entire subscription amount of 1,09,80,000 equity shares was fully received prior to the allotment of the equity shares and the shares rank paripassu with the other equity shares issued by the Company.

M/s Kesha Appliances was allotted Folio No. 0002194 and the Share Certificates bear the Distinctive Nos. from 2314070 to 1121114069. (both inclusive).

This confirmation is being issued at your request.”

21. The learned AR also filed the contract note and ROC Master data of all the six companies which are placed at pages 26 to 43 of the paper book. The learned AR also filed the financial statements of the assessee beginning from the financial year 31st March, 2006 to 31st March, 2009  which are placed on pages 62 to 88 of the paper book. The learned AR accordingly claimed that the investment made in RRPL was duly disclosed in its financial statements in the earlier years.

22. Similarly, the learned AR drew our attention on Note No. 10 on page 9 of paper book attached to the financial statements as on 31.3.2012 showing the investment made by the assessee in RRPL and sale of the same. The relevant extract of the same is reproduced below:-

Table

23. The learned AR also submitted that the name of the assessee was duly recorded by the RRPL in the list of annual return of shareholders furnished to the ROC as on 31.03.2011, the copies of the annual return filed by the RRPL is placed on pages 112 to 130 of the paper book. The learned AR also submitted that the AO during remand proceedings has accepted the genuineness of the transaction in respect of four companies. The relevant extract of the remand report is placed at pages 56 to 61 of the paper book.

24. On the other hand, the learned DR submitted that the identity of the companies to whom the shares were sold by the assessee was not accepted. Therefore, the same represents the unexplained cash credit of the assessee. The learned DR vehemently supported the orders of the authorities below.

25. We have heard the rival contentions and perused the materials available on record. The addition in the present case was made by the AO for the proceeds of sales of investment which were sold by the assessee to six companies as stated above. As per the AO, the parties to whom shares were sold did not respond to the notices issued under section 133(6) of the Act, therefore, the same was treated as unexplained cash credit under section 68 of the Act. The view taken by the AO was subsequently confirmed by the learned CIT(A).

26. On perusal of the above discussion and records, we observe that the assessee was holding shares of RRPL as shown in the audited financial statements. These investments undoubtedly were coming from the earlier years therefore, an inference can be drawn that the investment shown by the assessee in RRPL was duly accepted in the earlier years. Now the issue arises whether the impugned sale made by the assessee to the aforesaid six companies represents genuine sales of the investments. In this regard, we observe that the confirmations from all the parties were duly filed by the assessee and accordingly, the AO in its remand report accepted the genuineness of the transaction in respect of four parties. The relevant extract of the remand report is reproduced below:-

“Sub:- Examination of additional evidences in the case of M/s Kesha Appl. Pvt.  Ltd. [AABCK8089R] in appeal No. 0164/2015-16 for the AY 2012-13-Reg.

Kindly refer to the subject cited above.

In this regard, kindly refer to letter F. No. CIT(A)-5/Appeal No. 01 64/2015- 16/Remand Report /2016-17/897 dated 23.12.2016 received on 26.12.2016 and this office reply vide letter F. No. ITO/Ward-14(4)/Misc./201 6-1 7/175 dated 27.01.2017 regarding above mentioned subject. (Copy enclosed).

As directed to verify all the six companies who had purchased the share of M/s. Regent Real tech Pvt. Ltd. (Formerly Known as M/s. Modi Hoover International Ltd.) from the assessee company during the F. Y. 2011-12, the fresh notice u/s 133(6) of the Act were issued to following six parties for necessary compliance on 13.02.2017. After the verification, the resultant of the same is being produce as under:-

S  No Name of the Party and Address  Date of Reply  received Remarks
1. Srishti Developers Pvt. Ltd.

228A Bagur Avenue block- B, 4th Floor, Kolkata, West Bengal-700055

Not received Notice u/s 133(6) of the Act issued vide dated 27.01.2017 received back unserved on 21.02.2017
2. Intime Dealers Pvt. Ltd.

12, Sir Hariram Goenka Street 1st Floor, Kolkata, West Bengal-700007

Reply dated

11.02.2017

received on

20.02.2017

As per notice u/s 133(6) of the  Act dated 27.01.2017 in point no. 4, it was asked to provide copy of bank account along with source of income through which transaction has been made with the assessee.

In response to this M/s Intime Dealers Pvt. Ltd., has filed copy of bank account where in amount of Rs. 50,00,000/- has been debited on .5.2011 and this amount of Rs. 50,00,000/- was credited to its account on 7.5.2011 i.e. on the same date. However, on perusal of the balance sheet and Profit & Loss

Account, credit worthiness of the M/s Intime Dealers Pvt  Ltd could not be established because as per balance sheet of the investor it has been found that (i) Income Sale of current investment : Rs. 1.77 Crore Less additional loans / advances given: Rs. 1.75 Crore. Remaining balance: Rs. 0.02 Crore. On perusal of Balance Sheet and P & L Account it is crystal clear that there is no change in reserve & surplus, in liabilities and there is no sufficient income in the year under consideration then from  where investor has invested Rs. 30,00,000/- (Rs. 50,00,000/- – Rs. 20,00,000/-) for purchasing shares from assessee company and there is no explanation filed by the investor on this issue.

3. M/s Vedant Commodeal Pvt. Ltd.

114, Rabinra Sarani, 1st Floor, Room No. 39/1, Kolkata, West Bengal- 700007

Reply dated 14.02.2017

received on 20.02.2017

As per notice u/s 133(6) of the Act dated 27.01.2017 in point no. 4, it was asked to provide copy of bank account along with source of income through which transaction has been made with the assessee. In response to this M/s Vedant Commodeal Pvt. Ltd., has filed copy of bank account where in amount of Rs. 50,00,000/- has been debited on 4.5.2011 and this amount of Rs. 0,00,000/- was credited to its account on 4.5.2011 i.e. on the same date. On perusal of balance sheet and P & L account of the M/s Vedant Commodeal Pvt. Ltd.,the credit worthiness of the investor seems to be proved.
4. M/s Jackpot Vintrade Pvt. Ltd.,

42, Matcalfe Street, Room No. 204, 1st Floor, Kolkata, West Bengal- 700013

Reply dated 10.02.2017

received on 20.02.2017

As per notice u/s 133(6) of the Act dated 27.01.2017 in point no. 4, it was asked to provide copy of bank account along with source of income through which transaction has been made with the assessee. In response to this M/s Jackpot Vintrade Pvt. Ltd., has filed copy of bank account where in amount of Rs. 50,00,000/- has been debited on 8.4.2011 and this amount of Rs. 0,00,000/- was credited to its account on 4.5.2011 i.e. on the same date.On perusal of balance sheet and P & L account of the M/s.Jackpot Vintrade Pvt. Ltd., thecredit worthiness of the investor seems to be proved.
5. M/s Snowdrop Tradecome Pvt. Ltd.

29A Weston Street, 3rd Floor Room no. C5 Kolkata West Bengal- 700012

Not Received No reply has been received till date.
6. M/s NewEdge Vinimay Pvt. Ltd.

1, Muktaram Babu Street 2nd Floor, Kolkata West Bengal-700007

Reply dated 10.2.2017

received on 20.2.2017

As per notice u/s 133(6) dated 27.1.2017 in point no. 4. It was asked to provide copy of bank account along with source of income hrough which transaction has been made with the assessee.

In response to this M/s. NewEdge Vinimay Pvt. Ltd., has filed copy of bank  ccount where in amount of Rs. 50,00,000/- has been debited on 10.5.2011 and this amount of Rs. 50,00,000/- was credited to its account on 10.5.2011 i.e. on the same date  On perusal of balance sheet and P & L account of the M/s NewEdge Vinimay Pvt. Ltd., the credit  worthiness of the investor seems to be proved.

27. After perusal of the remand report as discussed above, we are of the view the conditions specified under Section 68 of the Act has been duly satisfied in respect of four companies namely In time Dealers Private Limited, Vedant Commodeal Private Limited, Jackpot Vintrade Private Limited and Newedge Vinimay Private Limited. Now the issue remains to be answered in respect of Sh. Shrishti Developers Private Limited and Snowdrop Tradecom Private Limited which was also added to the total income of the assessee on account of unexplained cash credit due to the fact that these parties did not respond to the notices issued under Section 133(6) of the Act.

28. The investment in RRPL was sold by the assessee to the aforesaid six companies which has been shown in the Annual Return of RRPL as evident from the copy of the annual return filed by the RRPL to ROC. The same is placed on page 127 of the paper and reproduced as under :

Regent Realtech Limited

(Formerly Modi Hoover International Ltd.)

Mezzanine Floor, Modi Tower, 98 Nehru Place, New Delhi-110019

Part VI, List of Share Transfers (Equity), Value per share, Rs. 10/-

Date of Transfer No. of Shares Transferors’ Name Transferee’s Name
20.7.2011 500,000 2194 Kesha Appl. P. td 3259 Snowdrop
Tradecom Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl P. td 3260  Jackpot
Vintrade Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. td. 3261 Srishti
Developers Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. td. 3262 Vedant
Commodeal Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. Ltd. 3263 Intime Dealers Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. td. 3264 Newedge
Vinimay Pvt. Ltd.

The above transaction of the transfer of shares has also been confirmed by RRPL which is placed on page 21 of the PB and reproduced as under:

TO WHOM IT MAY CONCERN

We wish to confirm that the following equity shares were transferred to the enlisted transferees during the FY 2011-12

Date of Transfer No. of Shares Transferors’ Name Transferee’s Name
20.7.2011 500,000 2194 Kesha Appl. P. Ltd 3259 Snowdrop
Tradecom Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl P. Ltd 3260 Jackpot
Vintrade Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. Ltd. 3261 Srishti
Developers Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. Ltd. 3262   Vedant
Commodeal Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. Ltd. 3263 Intime Dealers Pvt. Ltd.
20.7.2011 500,000 2194 Kesha Appl. P. Ltd. 3264   Newedge
Vinimay Pvt. Ltd.

In view above we hold that the ownership of the investment shown by the assessee in its audited financial statement in RRPL cannot be doubted.

The lower authorities have not brought any iota of evidence suggesting that the transactions were not made offline. Thus there is no question of involvement of DP arises in the given facts & circumstances. The transactions for the sale of shares were taken place on 20-7-2011 in off line market whereas the ld. CIT-A held that the shares were listed on the stock exchange. The view of the CIT-A was based on the master data from the ROC website as on 31-3-2015. As there is a time gap between the date of transaction and the information relied by the ld. CIT-A thus the information on the basis which the opinion was formed by the ld. CIT-A cannot be relied. There was no information brought on record by the lower authorities whether the shares were listed in the year when the transaction for the sale of shares was taken place. Moreover the value for the sale of the shares has not been questioned by the lower authorities.

It is undisputed facts that the distinctive nos. for the sale of shares in respect of three companies were not provided by the assessee but the same cannot be basis for treating the same as unexplained cash credit under section 68 of the Act after disregarding the other evidences submitted by the assessee during the course of proceedings before the AO & ld. CIT-A.

We also observe that the assessee has furnished all the necessary details of the aforesaid six companies along with PAN but none of the lower authorities have confirmed the same from the AO having jurisdiction over the six aforesaid companies. Thus the assessee cannot be penalized merely on the ground that the six companies as discussed above failed to reply to the notices issued to them under section 133(6) of the Act.

The assessee has duly explained the source of money received on the sale of shares/ investment and the assessee is not answerable for the source of money in the hands of aforesaid six companies. In this regard we draw support from the judgment of Hon’ble Supreme Court in the case of Lovely  exports (Supra) wherein it was held as under :

2. Can the amount of share money be regarded as undisclosed income under section 68 of IT Act, 1961?. We find no merit in this Special Leave Petition for the simple reason 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 assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.

29. It is undisputed fact that the necessary details as the confirmation and contract notes were duly filed by the assessee in respect of the aforesaid parties and no defect of whatsoever was pointed out by the lower authorities.

30. On specific question from the Bench to the learned DR about the remand report submitted by the AO, the learned DR has not pointed out any defect.

31. We also find support & guidance from the order of this Tribunal in the case of ITO Vs. Neelkanth, Finbuild Ltd. in ITA no. 282 1/Del/2009 wherein it was held as under :

“Keeping in view of the findings given so Assessing Officer as well as the Ld. First Appellate Authority and the documentary finding by the assessee before us. We are of the considered view that Ld. First Appellate Authority has deleted the addition in dispute on the basis of various documentary evidence filed by the assessee before the Assessing Officer as well as before him. Hon’ble Supreme Court of India in the case of CIT v. Lovely Export 299 MANU/SC/8539/2008 : ITR 261 (SC) which has confirmed the order of Hon’ble Delhi High Court has held that once the identity of the share holder have been established, even if there is a case of bogus share capital, it cannot be added in the hands of company unless any adverse evidence is not on record. Ld. First Appellate Authority has examined the documentary evidence filed by the assessee before the Assessing Officer as well as before him and held that the assessee has provided confirmations from all the parties as well as various evidences to establish the genuineness of the transaction, assessee has also relied upon the judgment of Nemi Chand Kothari v. CIT MANU/GH/01 71/2003 : 264 ITR 254 (Gauhati) wherein it has held that it is a certain law that the assessee is to prove the genuineness of transaction as well as the creditworthiness of the creditor must remain confined to the transactions which have taken place between the assessee and the creditor. It is not the business of assessee to find out the source of money of creditors. Similar observation has also been given in the case of Hastimal MANU/TN/0536/1962 : 49 ITR 273 (Madr) and Daulatram Rawatmal MANU/SC/0290/1972 : (1973) 87 ITR 349 (SC). Ld. First Appellate Authority has cited various decisions rendered by the Hon’ble Supreme Court of India as well as the Hon’ble Jurisdictional High Court in the impugned order and finally has held that the assessee has substantiated the transaction regarding share application money received by it was genuine transaction and the same were not accommodation entries. He did not find any evidence collected by the AO which could prove otherwise and deleted the additions in dispute. As regard to the addition of Rs. 12,500/- made on account of commission which was presumed to have been allowed by the assessee for obtaining the Hawala entrey in dispute, the ld. CIT(A) observed that the Assessing Officer was not able to brought anything on record that it was assessee’s own money which was rooted in the form of share application money and has rightly deleted the same.”

32. After considering the facts and totality of the case as discussed above, we are inclined to reverse the order of authorities below hence the ground of appeal of assessee is allowed.

33. The second issue raised by the assessee in this appeal is that the learned CIT(A) erred in confirming the order of the AO by sustaining the disallowance of Rs. 43,852/- on the ground that no activity was carried on by the assessee.

34. The assessee during the year has claimed expenses of Rs. 43,850/- in its profit and loss account but the same was disallowed by the AO on the ground that there was no business activity carried on by the assessee. Thus, the amount disallowed for Rs. 43852 was added to the total income of the

35. Aggrieved assessee preferred an appeal to learned CIT(A). The assessee before the learned CIT(A) submitted that the expenses were incurred towards bank charges, professional charges, audits remuneration and general expenses including depreciation. As per the assessee, these expenses were necessary to be incurred to keep the status of the company active. Therefore, the assessee should be entitled for such expenses. However, learned CIT(A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under:-

“I have given careful considerations to the submissions. It is noted that the appellant company had been engaged in the business of manufacturing of Modi Brand Appliances, but such operations had been stopped in the year 1993. It is also noted that vide the submissions dated 04.02.2015 made before the AO, it was stated that this company CIN had been deactivated and hence has been struck off the ROC Website due to non-filing of the statutory documents with the ROC. The expenses in question have not been proved to be genuine as even the statutory audit report has not been filed with the ROC. The bank statement does not clearly demonstrate that any activity has at all been carried on except the liquidation of share in Modi Hoover Internationai Ltd. Consequently, the AO has correctly come to the conclusion that it is a case of no business activity and there is also no possibility of the business being revived. The Chandigarh Third Member Bench of ITAT in the case of Royal Beverages Pvt. Ltd. (158 ITD 125) has held that when there is a case of no business activity and it is not merely a temporary discontinuation of business, expenses cannot be allowed u/s 3 7(1). The operative portion of the order reads as under:

“12. Section 3 7(1) of the Income Tax Act provides that any expenditure not being in the nature of capital expenditure or personal expenses of assessee, laid out or expanded wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head ‘profits & gains’ of business or profession, the explanation to this Section also provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The provisions of Section 37 therefore, clearly provides that the expenditure which is laid out or expanded wholly and exclusively for the purpose of business or profession, shall be allowed as deduction. The business of liquor in any form is controlled by the State Government. The license is granted for one financial year only and is renewed time to time. Admittedly in the year under consideration, the assessee was not granted license to run the business/trade of liquor. Therefore, it is not a case of temporary lull or temporary dis-continuation of business. It is a case of no-business carried on by assessee in the year under appeal. It is well settled law that when the assessee claimed deduction of the expenditure, the burden is upon assessee to prove that expenditure is laid out or expended wholly and exclusively for the purpose of business or profession”.

The Hon’ble Delhi High Court in the case of Dalmia Dairy Industries Ltd. v. CIT [2000] 241 ITR 9/[1999] 107 Taxman 544, in similar circumstances, also held as under :

“Held, that the expenditure incurred was in connection with the assessee’s business ventures in Pakistan which stood transferred to the PPCIL and hence the assessee did not have any business which it could be said to be carrying on. Since the same was not incurred wholly and exclusively for the assessee’s business it was not allowable under Section 37 of the Income Tax Act, 1961. The main object of the expenditure in question was to realize the sale consideration of the fixed assets in Pakistan in cash or in kind. The expenditure related directed to fixed assets and was capital in nature. Hence, the amounts claimed were not allowable.”

The Hon’ble Allahabad High Court in the case of Inderchand Hari Ram  v. CIT [1953] 23 ITR 437 held as under:

“In order that an expenditure can be deducted as business expenditure under Section 1 0(2)(xv) of the Indian Income-tax Act, 1922, the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. If, during the relevant period there was, in fact, no business either because it was discontinued or for some other reason it had ceased to exist, the question of computation of its income after deducting the expenses cannot arise.

The assessee firm was the managing agent of a sugar mill and was also carrying on business as sole selling agents. By reason of the Sugar Control Order and a notification issued thereunder the assessee could not work as setting agents of the mill from .30th April, 1942, but the company continued to pay the assessee brokerage up to 30th September, 1944, on the sale of sugar made by the company direct to the dealers nominated by the Government. On 7th March, 1945, the directors of the company passed a resolution that the assessee would not be given any more brokerage for the sale of sugar after 1st October, 1944. The Appellate Tribunal found that during the period 1st October, 1944, to 30th September, 1945, the assessee did not enter into any agreement and did not receive any sugar from the company, nor did they do any work as selling agents nor were they paid any brokerage. The assessee claimed that the expenses incurred by it in maintaining the selling office between 1st October, 1944, and 7th March, 1945, should be deducted under Section 1 0(2)(xv) as expenditure laid out or expended wholly and exclusively for the purpose of the selling agency business: Held, that in the circumstances of the case the expenditure incurred was not an admissible deduction under Section 1 0(2)(xv).”

Keeping in view these facts and circumstances, when it is found that the expenses have not been shown to be necessary even for the statutory compliances, these expenses cannot be claimed as wholly and

exclusively incurred for purposes of business. Ground no. 2 is dismissed.”

36. Being aggrieved by the order of learned CIT(A) assessee is in second appeal before us. The learned AR before us submitted that the expenses incurred by it were necessary to keep the status of the company active. On the other hand, the learned AR vehemently supported the orders of the authorities below.

37. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, the assessee has claimed certain expenses to keep the status of the assessee-company active. These expenses were claimed as business loss under the head “business and profession”. It is well settled law that a private limited company being a body corporate has to incur certain expenses to keep its status active. In this regard, we find support and guidance from the judgment of Hon’ble Calcutta High Court in the case of CIT vs. Ganga Properties Ltd. reported in 199 ITR 94 (Cal) wherein it was held as under:-

“A limited company even if it does not carry on business, even if it derives income from other sources, has to maintain its establishment for complying with statutory obligation so long as it is in operation and its name is not struck off the register or unless the company is dissolved. So long as the company is in operation, it has to maintain the status as a company and it has to discharge certain legal obligations and for that purpose it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income was a reasonable conclusion.

The Tribunal was, thus, justified in allowing the expenditure claimed by the assessee as deduction.”

In view of above we reverse the order of authorities below. Thus the ground of appeal filed by the assessee is allowed.

38.  In the result, the appeal of the assessee is allowed.

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Tags : ITAT Judgments (5490) Section 68 (222)

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