AO not justified in treating share application money as unexplained without rebutting evidences filed by Assessee

Shakti Hardware Collection Pvt. Ltd Vs DCIT (ITAT Mumbai)

We find that there are ample evidences to support the case of the assessee that the share application money received by assessee is genuine but this information was never examined by the AO or CIT(A) despite the fact that the same was available with the authorities below before finalization or adjudication of the issue. We find that the AO proceeded to discredit the investors of the assessee, which is completely erroneous. The AO was looking for proof beyond doubt and proceeded on an element of suspicion that the amounts of investments are really those of the assessee, which have been ploughed back by the assessee. But the settle principle of law is that any amount of suspicion however, it strong might be, is no substitute for proof. Suspicion is not sufficient enough to lead to the conclusion that the investments received by the assessee company are all manipulated receipts and on that basis he can record a finding that the explanation of the assessee is not satisfactory. According to us, so long as the proof and identity of the investor and the payment received from him is through a doubtless channel like that of a banking channel, the receipt in the hands of the assessee towards share capital or share premium does not change its colour. The money so invested in the assessee company would still be the money available and belonging to the investors. The consistent principle followed is that the investors sources and creditworthiness cannot be explained by the assessee. If the Department has a doubt about the genuineness of the investor’s capacity, it is open to it to proceed against those investors. Without taking such a course of action, the AO proceeded on conjectures and surmises that the assessee has, in fact, ploughed back the money. The very approach of the AO is completely opposed to settled legal principles enunciated and they have arrived at conclusions contrary to the legal principles on the subject. Further, they are finding fault with the assessee for the alleged failure of its investors in proving beyond doubt that they have the capacity to invest at the moment they did in the assessee. The Assessee is not expected to perform a near impossibility.

Undisputedly, assessee had  completely produced the evidences before the AO i.e. the identity of the shareholder by filing the registered address with ROC, PAN No. along with copy of returns of income furnished with particular Ward of the department of the investors. The assessee has also received money from shareholders through account payee cheque and issued documents such as share certificate, return of allotment filed with ROC forms which were filed before the AO. The assessee has also filed copies of bank statement of the subscribers showing that it had sufficient balance in its accounts to enabled the subscriber to subscribe the share capital. In view of these facts and circumstances, once the AO has not rebutted the evidences, the AO cannot disbelieve the same and addition made under section 68 was therefore not justified.

FULL TEXT OF THE ITAT JUDGMENT

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-39, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-39/IT-346/2007-08 dated 27-08-2014. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle 22, Mumbai (in short DCIT) for the assessment year 2006-07 order dated 31-12-2007 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).

2. The two inter connected issues i.e. addition of share application money received by the assessee treated as unexplained under section 68 of the Act by the AO and confirmed by CIT(A) and further, confirming the addition commission paid for the share application money. For this assessee has raised the following four grounds: –

“1. On the facts and in the circumstances of the case, the Ld. Clt(A) erred in confirming addition of Rs.2,37.00.000/- wade a1s 68 of the Income Tax Act, 1961 in respect of share application money received by the appellant company Ay holding that the same are not genuine

2. On the facts and in the circumstances of the case, the LA. CIT(A) erred in confirming addition of’ Rs. 2,37,00.000/- made u/s 68 of the Income Tax Act. 1961 without appreciating the fact that the appellant has proved the identit) and credit worthiness of the subscribers and genuineness of the transaction.

3. On the facts and in the circumstances of the case, the IA. C1T(A) erred in confirming addition of Rs. 2,37,000/- treating the same as commission paid for the share application money received by the appellant company.

4. The appellant prays that addition made of 2,39,37,000/- may be deleted.”

3. Briefly stated facts are that the AO noticed from the accounts of the assessee that it had received share application money from various parties during the year under consideration, which he required to explain in term of section 68 of the Act. The issue summons under section 131 of the Act and summons return unserved. The assessee has received share application money from the following 10 parties, which is treated as unexplained under section 68 of the Act by the AO and confirmed by CIT(A). The following are the parties:

4. The AO going through the survey report, added the share application money of ₹ 2.37 crore as unexplained under section 68 of the Act by observing as under: –

“On going through the survey report from Kolkata in connection with the above parties, it is evident: that spot enquiry by the officers either these parties were not available or someone stated about accommodating entry given to the assessee company. Thus, it is clear that these transactions of share application money in the above cases are rot genuine The assessee company also could no produce the parties through submitted the relevant details of the parties. Hence, it is concluded that the assessee has Utilized his own funds in the garb of share application money to the extent of Rs 237,00,300/-. In this context, statement of Shri Pradeep Kainya, director of the assessee company has been recorded and he has shown his inability to produce the above parties. However, he stated that share application money is received from the above parties and have been accounted for in the company‘s books of accounts. This statement of the director of the company is not acceptable in view of non-service of summons u/s. 131 sent through RPAD by the undersigned and report from Investigation Wing after survey as discussed above Hence, the amount of Rs 2,37,00000/- is added to the total income shown received from share application money and found non-genuine u/s 68 of the I.T. Act,1961. Further, the assessee has taken these share application money by paying commission @ 1% and hence, 1% of total undisclosed income taken under Sec 68 which comes to 237,000/- is also added u/s 68 of the IT Act, 1961. Further the assessee has taken this share application money by paying commission @ 10% and hence, 1% total undisclosed income taken under sec 68 which comes to 2,37,000/- is also added under section 68 of the IT Act. Penalty proceedings under section 271(1)(c) are separately initiated.”

Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of the AO by observing in Para 8 as under: –

“8. I have very carefully considered the findings of the Assessing Officer, the submissions as made by the appellant, the report as called for from the Assessing Officer, the rejoinder as filed by the appellant and all the documents/ material placed by the appellant in order to establish the bonafides at the transaction. It is now well settled in law that the burden of proof as to the genuineness of share application money under s. 58 is on the assessee as for any other cash credit. The fact is that there arc 10 share applicants who have claimed to have made substantial investments in the appellant company by way of subscription to equity. In order to verify the genuineness of the claim, the Assessing Officer issued summons under s 131 to all the ten parties. As per thc summons issued the parties were required to attend in person and to provide relevant materials/ documents in support of the transaction made by them. It is stated by the Assessing Officer that there has been no response to the summons issued; the summons have been returned unserved though they were sent as per the addresses provided by the appellant. There upon the AO called upon the appellant to produce the parties in person. – However, the appellant failed to produce the parties; on the other hand the appellant only furnished certain documents in support of the purported transaction. Further, the Assessing Officer has made a mention that even during the course of survey conducted by the Investigation Wing it was found that entities such as Mahashakti Vyapar P Ltd., Innocent Mercandise P. Ltd., Navneet Marketing P. Ltd. and Saraswathi Advisories Ltd. , Netscope Dealcomm P Ltd., did not exist or no such party was available at the addresses provided. Further it has also been mentioned by the Assessing Officer that in the case of M/s Dakeon Impex Pvt. Ltd., M/s Maradona Holding Pvt. Ltd., M/s Fidility Marketing Pvt. Ltd. and M/s Nairity Tieup Pvt. Ltd., the Investigation Wing, as per the appraisal report has mentioned that the Directors of the said company had admitted that these were only accommodation entries. Despite the said facts, the appellant has made a claim that it has furnished enough documentary material so as to establish identity, genuineness and creditworthiness. As stated in the pit-paragraphs above, I have scrutinized the documents as furnished by the appellant and has also pointed the several anomalies/discrepancies as noted. The one common pattern that emerges from an examination of the bank statements of the subscribers is that there are deposits in the bank account prior to withdrawal albeit through cheques. The three tests to be applied to determine the genuineness of credit in the books under s. 68 are (1) identity of the subscriber, (ii) capacity of the subscriber and (iii) genuineness of the transaction. The provisions of section 68 incorporate the rule of burden which is placed on the assessee in respect of matters on which he alone is familiar. This burden will not easily shift on mere furnishing of certain material for the reason that the assessee being a private company has every likelihood having better familiarity with the party with whom he is dealing. Admittedly, with respect to all these companies the appellant company was unable to produce them; on his part the Assessing Officer had issued summons but they were returned un-served. Factually) none of these 10 companies in whose names the amounts have been received by the appellant company are available, nor have they been made available. The companies themselves are found riot to be functioning in the addresses given. Thus, it has to be stated that even the identity of some of these companies particularly that of MIs Mahashakti Vyapar Pvt. Ltd. , Shri Deb Commercial, M/s Neiscope Dealcomm Nt. Ltd., M/s Innocent Merchandise Nt. Ltd., M/s Navneet Marketing Nt. Ltd., and MIS Saraswathi Advisory Services Pvt. Ltd., have not been established; they have not been found at the addresses as provided, nor the summons issued by the department been served on them. Also, in respect of all the 10 companies, it has been observed that there is hardly any worthwhile business carried on by the respective companies and that the withdrawals for subscribing in the appellant company had been made subsequent to receipt of large amounts in their bank accounts. The provisions of section 68 require the ‘assessee to prove the identity as well as the creditworthiness of the contributor of the share capital. Undoubtedly, all the said companies are seen to be bereft and devoid of any creditworthiness. So also the genuineness of the transactions in doubt, when without exception with respect to all the said companies there are deposits made from unexplained sources prior to withdrawal for making the payments. This aspect coupled with the observations as available in the appraisal report, which has been taken into account by the Assessing Officer that many of the Directors had admitted that these are mere accommodation entries, bring these amounts assessable to tax under s. 68 of the Income Tax Act. The entire gamut reasonably appears to be convoluted exercise so as to reintroduce its own money into to the books of the appellant company in the garb of share capital, involving more than one company. Factually it has been examined and found that the investments have been done by companies which hardly carry on any business. No worthwhile business activities arc carried on by these subscriber companies. The income as returned, as shown in the returns of income by the respective companies, is very meagre. The entire reserves and surplus of these companies are entirely made up of share premium. All these companies have no capital or assets of their own. All these companies are seen to be registered in Calcutta. The transactions thus undertaken arc ostensibly made to look respectable by stating that all the transactions are through bank and that no deposits are involved and further that all these companies have furnished their PAN, audited accounts, filed returns and so on. But as set out in pre-paragraphs above, in the case of certain companies the documents and bank statements as furnished do not accord with the claims as made. It has to be stated here that mere supply of PAN or copies of bank statements does not discharge the burden which is cast on the appellant under the provisions of section 68 of the Act. As held by the Delhi High Court in CIT v. R.N. Portfolio (1′) Ltd. (2013) 87 DIR 102, the duty of an assessee does not cease by merely furnishing name, address, PAN, Hank statement etc. It has been held by the Delhi High Court in the said case that if during proceedings the Assessing Officer cannot contact the share applicant, or that information provided becomes unverifiable, or that there are further doubts in pursuit of such details, the onus shifts back to the assessee. The 1(1gb Court has made the finding taking into consideration the fact that these are private companies, the share applicant are known and surely their relationship is closer than arms length. It has been held in the case of CIT vs. Titan Securities Ltd (2013) 089 DTR 8jDclhi) that if there is material found to discredit and impeach the stand taken by the assessee, and there is a link to establish that they are accommodation entry, then addition can very well be made under s. 68 of share application money. Further, section 68 not only applies to cash transaction but also to amounts received by cheque or draft. In the instant case, the appellant has taken the plea that the deposits are not cash deposits, the said plea fails since the section applies to cash deposit or otherwise. In the instant case, the appellant had failed to prove creditworthiness and genuineness of the transaction, merely establishing the identity is not enough. Reliance is placed upon Bhola Shankar Cold Storage(P) Ltd. 270 ITR 487 (Cal). In the instant case oil it has been stated that even if it is assumed that identity has been established, the creditworthiness of the subscriber companies and the genuineness of the transactions have not been proved. Mere filing of documents or mere appearance alone will not discharge the burden cast on the assessee under s. 68 of the Act. All the three ingredients have to be necessarily proved so as to escape the mischief of section 68 of the Act. In these circumstances, I have no hesitation in confirming addition made under s. 68 of the Act. Since the claim of share application money has been brought to tax as deemed income under s. 68 of the Act, the addition made by the Assessing Officer in a sum of Rs.2,37,000/- treating the same as commission payment is also confirmed.”

5. The learned Counsel for the assessee before us stated the facts that that search under section 132 of the Act was conducted in the case of shri Pradeep N Kainya and Anil N Kainya on 18-01-2006. Consequently, search on assessee was also conducted. The learned counsel stated that the assessee has filed bank statement of the companies from whom the share application money have been received, income tax details i.e. ITR copies, copies of balance sheet/ P&L Account etc., details of mode of payment and any other detail asked for by the AO. The learned Counsel for the assessee drew our attention to the following details filed before AO as well as before CIT(A): –

6. In view of the above, the learned counsel for the assessee stated that during statement certain directors of these companies stated that the share application money invested by the respective companies is accommodation entry, were never confronted to the assessee till the stage of adjudication by the CIT(A). The entire basis of addition is only those statements and that the summon issued under section 131 of the Act sent through RPAD, return unserved. The learned Counsel for the assessee stated that for FY 2005-06 the assessee filed complete details in respect of share application money by the application and not disputed by the AO. The learned counsel for the assessee also disputed that the enquiries made with the Kolkata parties or somebody who was available merely confirms that the survey team has resorted to take statements of care takers of the buildings or anyone found in the premises. He argued that such people like care takers cannot be considered as responsible persons of the share applicant companies who could have given such vital information for this purpose of having carried out the transaction with the assessee. The learned counsel for the assessee further stated that the proper and complete records of the share application by way of share application form, board resolution, bank statements, balance sheet and P&L account, Memorandum and Article of association, IT returns, PAN Card and allotment letter of shares were submitted and the AO has nowhere denied this fact. These documents were again submitted vide letter dated 10-10-2008 and 17-10-2008 under Annexure-A10 volume C. The assessee now before us also filed details in its paper book three volumes consisting of pages 1-637. In term of the above, the learned Counsel for the assessee stated that once these details are available, no addition under section 68 can be made without rejecting the information.

7. On the other hand, the learned CIT DR Shri Manjunatha Swamy filed letter dated 09-11-2017, wherein he cited various case laws of various high courts but none is of Hon’ble Bombay High Court.

8. We have heard the rival contentions and gone through the facts and circumstances of the case. We have also made enquiry from the learned Sr. Departmental Representative, whether the investors or this company is a Shell company or in the list prepared by Ministry of Corporate Affairs, Govt. of India. The learned Sr. DR, stated that this information is not available with the department. Further, we made enquiry from the learned Counsel for the assessee whether this company has been strike off from the Registrar Of Companies or not, the learned Counsel stated that it is very much on the register of Registrar Of Companies. In view of these facts, we reach to a conclusion that this is existing company and even the investors are existing.

9. We find that there are ample evidences to support the case of the assessee that the share application money received by assessee is genuine but this information was never examined by the AO or CIT(A) despite the fact that the same was available with the authorities below before finalization or adjudication of the issue. We find that the AO proceeded to discredit the investors of the assessee, which is completely erroneous. The AO was looking for proof beyond doubt and proceeded on an element of suspicion that the amounts of investments are really those of the assessee, which have been ploughed back by the assessee. But the settle principle of law is that any amount of suspicion however, it strong might be, is no substitute for proof. Suspicion is not sufficient enough to lead to the conclusion that the investments received by the assessee company are all manipulated receipts and on that basis he can record a finding that the explanation of the assessee is not satisfactory. According to us, so long as the proof and identity of the investor and the payment received from him is through a doubtless channel like that of a banking channel, the receipt in the hands of the assessee towards share capital or share premium does not change its colour. The money so invested in the assessee company would still be the money available and belonging to the investors. The consistent principle followed is that the investors sources and creditworthiness cannot be explained by the assessee. If the Department has a doubt about the genuineness of the investor’s capacity, it is open to it to proceed against those investors. Without taking such a course of action, the AO proceeded on conjectures and surmises that the assessee has, in fact, ploughed back the money. The very approach of the AO is completely opposed to settled legal principles enunciated and they have arrived at conclusions contrary to the legal principles on the subject. Further, they are finding fault with the assessee for the alleged failure of its investors in proving beyond doubt that they have the capacity to invest at the moment they did in the assessee. The Assessee is not expected to perform a near impossibility.

10. From the above, it is clear that the assessee has completely produced the evidences before the AO i.e. the identity of the shareholder by filing the registered address with ROC, PAN No. along with copy of returns of income furnished with particular Ward of the department of the investors. The assessee has also received money from shareholders through account payee cheque and issued documents such as share certificate, return of allotment filed with ROC forms which were filed before the AO. The assessee has also filed copies of bank statement of the subscribers showing that it had sufficient balance in its accounts to enabled the subscriber to subscribe the share capital. In view of these facts and circumstances, once the AO has not rebutted the evidences, the AO cannot disbelieve the same. This issue is squarely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure Pvt. Ltd. (2017) 394 ITR 680 (Bom), wherein  Hon’ble High Court had held as under : –

(e) We find that the proviso to section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1st April, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so introduced states that it was introduced “for removal of doubts” or that it is “declaratory”. Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of Section 68 of the Act both before and after the adding of the proviso. In any view of the matter the three essential tests while confirming the pre-proviso Section 68 of the Act laid down by the Courts namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on facts it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders i.e. they are bogus. The Apex Court in Lovely Exports (P.) Ltd.(supra) in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit.

(f) In the above circumstances and particularly in view of the concurrent finding of fact arrived at by the CIT(A) and the Tribunal, the proposed question of law does not give rise to any substantial question of law. Thus not entertained.

11. Further, in recent decision of Hon’ble Bombay High Court in the case of CIT vs. Orchid Industries Pvt. Ltd (2017) 397 ITR 136 (Bom), following the case law of Gagandeep Infrastructure Pvt. Ltd deleted the addition by observing in as under: –

“5] ‘ The Assessing Officer added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the ground that the parties to whom the share certificates were issued and who had paid the share money had not appeared before the Assessing Officer and the summons could not be served on the addresses given as they were not traced and in respect of some of the parties who had appeared, it was observed that just before issuance of cheques, the amount was deposited in their account.

6] The Tribunal has considered that the Assessee has produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money. It was also observed by the Tribunal that the Assessee has also produced the entire record regarding issuance of shares i.e. allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account. The balance sheet and profit and loss account of these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the Assessee. The judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be applicable in the facts and circumstances of the present case”

12. In view of the above facts and circumstances, we delete the addition made by AO and confirmed by CIT(A) on account of share application money as unexplained amounting to ₹ 2.37 crores. Consequently, the issue of commission paid is also deleted and allowed in favour of assessee. Both the issues of the assessee’s appeal are allowed.

13. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 31-01-2018