Brief of the case:
AO made addition on account of share application money u/s 68 which was confirmed by the CIT. On appeal ITAT held that assessee has proved identity, genuineness & creditworthiness of the investors. On further appeal to HC it was held that revenue failed to discover any legal infirmity out of the order of ITAT and it cannot be said that assessee failed to prove identity, genuineness and creditworthiness of the investors.
Facts of the case:
- Assessee is a company with the object of running a shopping mall. The business of the Assessee had not commenced till 31st March 2009 because the Mall was under construction.
- Search was conducted on SVP group (assesses in one of the company) and it was found that these companies received huge amount of share capital. Assessee received investments in different AYs.
- These four companies were found to have received share capital from 106 companies between AYs 2003-04 to 2009-10. The said shareholders have been categorised Table-I, II and III shareholders. Table-I shareholders, which were 20 companies, were subjected to search under Section 132 of the Act.
- It was alleged that ‘on-money’ on account of sale of flats, shops etc. was taken in cash and in turn was routed back into the Group companies in the form of share application/unsecured loans, share capital etc.
- The broad general allegation was that in the course of the investigation the SVP Group of companies did not produce the shareholders despite being served with notices for that purpose. It was alleged that the shareholders were not produced till finalization of assessment order, i.e., upto 21 months thereafter.
- As far as the Table I shareholders were concerned, the AO noted that none of the companies were found to be operating at the given addresses.
- As far as the Table III companies were concerned, many of the summons issued were returned unserved with the remarks “unknown” or “no such person”. 24 of the companies submitted replies and some filed affidavits but did not submit any other details.
- The nexus of the shareholders and the beneficiary, i.e. the SVP Group stood proved from the fact that shares were bought back by the individuals/concerns belonging to SVP Group. During the search, original share certificate worth Rs. 38 crores were found out of which some were seized.
- The Assessee had failed to prove the identity, genuineness and creditworthiness of the said shareholders. Accordingly, the aforementioned sums shown as investments in its shares for the AYs in question were added to its income for those AYs.
- Appeals filed against assessment orders before CIT (A) were dismissed.
- ITAT allowed appeals filed by assessee and how the appeal are before high court.
Contention of the revenue:
- CIT (A) had found that the Assessee had manipulated substantial fund movement through ‘paper existence’ of the investor companies.
- CIT (A) found that the common directors repetitively appeared in the list of directors of the companies which clearly indicated that they belonged to the same group, and were manipulating their books for the purpose of introduction of unexplained cash money and creating 5-6 steps of cheque transactions before the investment was made eventually in SVP group of companies.
- CIT (A) checked the creditworthiness of three shareholding companies, viz.,
- Quality Security Services Pvt. Ltd.
- United Head Hunters Pvt. Ltd. and
- Wellset Pharma & Drugs Pvt. Ltd.
and found that these companies did not have any worthwhile share capital and their activities were only in the form of management of fund rotation in the garb of share application money invested in each other.
- Such rotation was with a view to artificially inflate their credit worthiness. Fourthly, the AO had found that the Assessee bought back its own shares at a very low price.
- The share allotted at the face value of Rs. 10 were transferred in the names of individuals/ concerns belonging to SVP group at a meagre price ranging from Rs. 0.50 to Rs. 2 per share.
- The persons available at the premises during search of the Table I companies denied the existence of such companies at that place. The Assessee had received huge amounts of money of Rs. 11 crores in cash in the form of share application money, which was not explained.
- It was submitted that the decision in M/s.Nova Promoters and Finlease (P) Ltd. (supra) was wrongly distinguished by the ITAT in its application to the facts of the present case.
Contentions of the assessee:
- No substantial question of law arises since the findings of the ITAT were purely factual and consistent with the well settled law explained by the Supreme Court and the High Courts in several decisions concerning Section 68.
- As regards the 38 shareholders who contributed share capital for AY 2007-08, a sum of Rs. 4,56,47,500, 14 belonged to Table-I, 9 to Table-II and 15 to TableIII. Evidence in respect of each of the 14 Table I companies was filed by the Assessee. This included, inter alia
- copy of share application forms;
- copy of board resolution;
- copy of allotment letter confirming the allotment;
- confirmation in affidavit by the investor
- copy of share certificate evidencing the allotment of shares;
- copy of income tax return (‘ITR’) for the relevant AY;
- the relevant extracts of the copy of bank book; and
- copy of the letter with enclosures filed by the investor company addressed to AO in response to summons issued under Section 131 of the Act making direct enquiries
- Similar details were provided for 9 corporate shareholders belonging to Table-II who invested in Five Vision for AY 2007-08 and in respect of 15 corporate shareholders belonging to Table-III who invested in the same AY, i.e., 2007-08.
- Following details were furnished in respect of the four corporate ITA Nos. 234, 235 & 236/2015 Page 15 of 23 shareholders which contributed a sum of Rs. 2 crores for the share capital of Five Vision for AY 2008-09:
(a) copy of certificate of incorporation/MOA;
(b) copy of ITR filed for relevant AY;
(c) copy of share application forms;
(d) copy of board resolutions;
(e) copy of bank statement (relevant extracts);
(f) copy of confirmation;
(g) confirmation in the affidavit by the investor
(h) copy of the letter with enclosures submitted by the investor companies in response to the summons under Section 131 of the Act.
- Assessee had therefore, discharged its initial onus on the identity, creditworthiness and genuineness of the transactions. He submitted that the ITAT had itself recorded the fact that the AO had issued summons under Section 131 of the Act which had been duly complied with and then the shareholders independently confirmed having subscribed to the share capital in Five Vision.
- Reliance was placed on the decision of the Supreme Court in CIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC), CIT v. Divine Leasing and Finance Ltd. (decision dated 21st January 2008 of the Supreme Court in Special Leave to Appeal (Civil) (CC) 375 of 2008) and decision dated 17th September 2012 of the Supreme Court in CIT v. Kamdhenu Steel & Alloys Limited [SLP (Civil) CC 15640 of 2012)]. In all the above three decisions the Supreme Court had affirmed the corresponding decisions of this Court including CIT v. Divine Leasing and Finance Ltd. 299 ITR 268.
Held by the court:
- There is a basic fallacy in the submission of the Revenue about the precise role of the Assessee, Five Vision. The broad sweeping allegation made is that “the Assessee being a developer is charging on money which is taken in cash”.
- This, however, does not apply to the Assessee which appears to be involved in the construction of a shopping mall. In fact for the AYs in question, the Assessee had not commenced any business.
- The profit and loss account of the Assessee for all the three AYs, which has been placed on record, shows that only revenue received was interest on the deposits with the bank. The Assessee is right in the contention that the basic presumption of the Revenue as far as the Assessee is concerned has no legs to stand. The further allegation that such ‘on money’ was routed back to the mainstream in the form of capital has also to fail.
- As noted by the ITAT in the assessment proceedings of the investor companies, the monies invested were sought to be added as income of those companies by the AOs. The said additions were deleted by the CIT (A) in their cases holding that the additions if at all should be made in the hands of the beneficiaries. The Revenue then filed appeals in the ITAT insisting on the additions being sustained. Thus there is no clarity in the stand of the Revenue in these cases.
- Coming to the core issue concerning the identity, creditworthiness and genuineness of the investor companies, it is seen that as far as the Table I investors were concerned, only 9 were searched and in their cases, the ITAT on a very detailed examination was satisfied that they not only existed, but that the Assessee had discharged the primary onus of proving their creditworthiness and genuineness.
- Detailed findings have been given by the ITAT in the present cases after a thorough examination of the records. The Court finds no reason to differ from the decision of the ITAT in its rejection of the very same contentions urged before the Court by the Revenue. In particular, the Court concurs with the ITAT that the mere fact that some of the investors have a common address is not a valid basis to doubt their identity or genuineness.
- The fact that the shares of the Assessee were subsequently sold at a reduced price is indeed not germane to the question of the genuineness of the investment in the share capital of the Assessee.
- Indeed the Revenue was unable to produce material to substantiate its case that the genuineness and creditworthiness of the investors and the source of the money received by the Assessee by way of investments in the AYs in question was not satisfactorily explained by the Assessee.
- The ITAT rightly distinguished the decision in M/s. Nova Promoters and Finlease (P) Ltd. in its application to the facts of the present case.
- No substantial question of law arises from the appeals filed by revenue.