RONIT CAPITAL MANAGEMENT LTD.,MUMBAI vs. ITO 4 (2)(1), MUMBAI

The main grievance of the assessee is against the action of the Ld. CIT(A) confirming the addition to the tune of Rs.10,43,77,000/- u/s 68 of the Income Tax Act, 1961 (hereinafter “the Act”).

Brief facts are that the assessee had filed return of income on 30.09.2012 declaring total income to the tune of Rs.70,768/-. Later, the case of the assessee was selected for scrutiny. The AO noted that the assessee had only partly complied with the notice issued by him on 30.01.2015 and therefore in view of the non-compliance, he framed best judgment assessment u/s 144 of the Act, making several additions totalling Rs 68.83 crores, which are as under: -

Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) and filed additional evidences along with submissions in support of the grounds raised against the above addition/s. It is noted that the Ld. CIT(A) had called for a remand report from the AO, which was submitted by the latter on 13.12.2017. Taking into account the remand report and the submissions of the assessee, the Ld. CIT(A) deleted the additions made on account of securities premium, supressed interest income & professional fees. The Ld. CIT(A) further restricted the addition made on account of share application monies to the tune of Rs.10,43,77,000/- and also restricted the addition regarding transaction in Multi Commodity Exchange to Rs.1,98,350/- in place of Rs.53,40,06,550/-. Aggrieved by the same, before us, the assessee has only challenged the action of Ld. CIT(A) confirming addition of Rs.10,43,77,000/- in respect of share application money.

Assailing the action of Ld. CIT(A), the Ld. AR of the assessee, Shri Dharmesh Shah, submitted that since the AO during the assessment proceeding could not examine the identity, creditworthiness and genuineness of the share applicants from whom the assessee had collected the share application money, the Ld. CIT(A) had called for remand report and the AO pursuant to the same filed his remand report on 13.12.2017. He showed us that the AO had made

The Ld. AR submitted that only because some investor companies have shown meagre income during the impugned assessment year, could not be a ground to doubt the creditworthiness of the said company especially when the said companies had their own sufficient funds and that the source of funds were discernible from their bank statement/s. The Ld. AR took us through the respective financial statements of the share applicants and brought to our notice that each share applicant barring M/s. Anagi Trading Pvt. Ltd. had substantially own funds to justify the investment made by them in the assessee. Even in respect of M/s. Anagi Trading Pvt. Ltd, he showed that the source of investments were company’s own funds, turnover and borrowings, both of which were discernible from the financial statements and drew our attention to balance-sheet placed at page no. 105 PB and showed us that M/s. Anagi Trading Pvt. Ltd. had long term borrowings of Rs.2,24,37,500/- and trade payable to the tune of Rs.8,44,82,150/- and turnover was to the tune of Rs 69.24Crores (refer page 106 PB). Taking us through its bank statement which was placed at Page 113 to 115 of Paper Book, he showed that there was no prior cash deposit in the bank account of this investor and that their source of funds was verifiable. In this regard, the Ld. AR relied upon the decision of this Tribunal in the case of M/s. Mantram Commodities Pvt. Ltd. Vs. ITO (ITA. No. 105/Del/2021) dated 25.04.2022 and Chemicon Engineering Consultant Pvt. Ltd. Vs. ACIT (142 taxmann.com 297).

The Ld. AR further explained that there is no requirement in law that only trading/manufacturing companies who have major fixed assets, administrative expenses etc. can only subscribe to share capital. The Ld. AR pointed out that the share subscribers were investment companies whose primary activity was making & holding investments in shares/projects. He accordingly submitted that, having regard to this nature of business, there was no requirement for investment in fixed assets or incurrence of major operating/administrative expenses. The Ld. AR further showed us that, barring two investors M/s Crown Corps Science Pvt Ltd & M/s Rishabhdev International, all the other investors were group/related entities of the assessee, and had been independently assessed to tax by the Income-tax Department for the relevant AY 2012-13. With regard to M/s Crown Corps Science Pvt Ltd & M/s Rishabhdev International, the Ld. AR demonstrated that these two entities had invested with the assessee in earlier year/s as well and that the Revenue had not disputed their identity, creditworthiness and genuineness in the earlier year/s. On these facts the Ld. AR submitted that the AO had rightly submitted the remand report dated 13.12.2017 stating that these investors were verifiable and that the action of the Ld. CIT(A) disputing the same for the aforementioned reasons was unjustified.

Per contra, the Ld. CIT-DR Smt. Riddhi Mishra supported the order of Ld. CIT(A). She further submitted that this is a classic case wherein the assessee company doing no business worth its claim has collected share premium Rs 340 per share having face value of Rs.10. 6 A.Y. 2012-13 Ronit Capital Management Ltd. According to the Ld. DR, the assessee is not a listed company; and the investors would invest only when there is credibility of the assessee company. According to the Ld. DR, the assessee company has not given any dividend to any of these share applicants. The Ld. DR therefore questioned high premium commanded by the assessee from the shareholders. The Ld. DR also invited our attention to Para 10 of Ld. CIT(A)’s order which contained the opening, receipt, refund and closing balance of share application monies. The Ld. DR submitted that there was partial refund of share application monies received in earlier years and again fresh receipt of share application monies, which according to her, was suspicious and defied commercial prudence. The Ld. DR further supported the order of Ld. CIT(A) by relying on the decision of this Tribunal in the case of DCIT Vs. Leena Power Tech Engineers P. Ltd. (2021) (130 taxmann.com 341) and M/s. Anagi Trading Pvt. Ltd. Vs. ITO in ITA. No.1179/Mum/2020 dated 31.01.2023. The Ld. DR accordingly did not want us to interfere with the order of the Ld. CIT(A).

In his rejoinder, the Ld. AR submitted that although the reasons for charging high share premium could not be questioned in the relevant AY 2012-13 as the amendment by way of Section 56(2)(viib) of the Act came into effect only from AY 2013-14 and onwards, he however showed that the book value of the shares of the assessee had gradually increased and that the existing book value of shares as on 31.03.2012 stood at Rs.185 per share. Having regard to this history, the assessee company expected good growth and therefore had raised

After hearing the rival contentions and perusing the material on record, we observe that the assessee has raised share subscription monies of Rs.10,34,77,000/- during the year in relation to equity share having face value of Rs.10/- at a premium of Rs. 340/- per share. It is noted that, in the remand proceedings, the assessee has furnished complete details in support of share capital and share premium raised during the year. The AO thereafter had made enquiries u/s 133(6) from all the investors for carrying out independent verification of these transactions which were duly responded by these investors by filing all the requisite details comprising of PAN/CIN details, share application forms, board resolution, financial statements, bank statements and IT Acknowledgments, copies of which has been placed at Pages 31 to 224 of the Paper Book. Having perused the same, it is noted that each of the investor(s) have PAN / CIN and are filing income-tax returns. It is noted that except 2 investors [i.e, M/s. Crown Crops Science Pvt. Ltd. and M/s. Rishabhdev International] all other 7 investors/companies have been subjected to scrutiny u/s 143(3)/144 of the Act for AY. 2012-13/AY 2013-14 and therefore, their identity is not in doubt. The Ld. AR drew our attention to the financials/share capital/reserves of the share applicants and brought to our notice that the own funds of these investors as per the balance-sheet as on 31.03.2012 was 9 A.Y. 2012-13 Ronit Capital Management Ltd.

51 Share Application Form  Automation U99999MH1994PTC083972 Pvt. Ltd. Board Resolution  Address: - G- Confirmation  9 Shop No.9, ITR Janta Co-op Acknowledgment Hsg Society, for AY. 2012-13  Jeasl Park, PAN Card  Bhayandar CIN Master Data  East Thane- 401105 Certificate Statements for year ending 31.03.2012  Bank statement of Investor 4,93,44,511  2 M/s JVS AABCJ0282B 70,00,000 52-72 Share Application Form  Builders & U45200MH1995PTC092223 Infra Pvt Ltd Board Resolution  97 Heera Confirmation  Panna ITR M.R.No.2, Acknowledgment Mhada for AY. 2012-13  Layout, A PAN Card  Oshiwara CIN Master Data  Jogeswari(W) Bhd. Shreeji Certificate Hotel Statements for year ending 31.03.2012  Mumbai - 400058 Bank statement of Investor 1,95,96,759  3 M/s Corwn AADCC3551E 62,00,000 73-90 Share Application Form  Crops Sciens U72100MI2000PTC127661 Board Resolution  Pvt Ltd G-9 Shop Confirmation  No.9, Janta ITR Co-Op Hsg Acknowledgment Society, C for AY. 2012-13

From the above, it is noted that except M/s Anagi Trading Pvt Ltd, all the investors had sufficient own funds to justify the investment made in the assessee. As far as M/s Angadi Trading Pvt Ltd is concerned, it is noted that this company had own funds of Rs.1.07 cr and balance it was explained to have been from long term borrowing of Rs.2,24,37,500/- and trade payable to the tune of Rs.8,44,82,150/- and also received from substantial sale proceeds which was in excess

Addition on account of Share Application Money- Rs11,50,00,000/- 3.(i) During the course of scrutiny assessment proceedings, an addition of Rs.11,50,00,000/- was made on account of Share Application Money. 3(ii) During the course of remand proceedings, the assessee company was asked to furnish the details of the share application money. In reply the assessee’s authorized representative has submitted the detailed break-up of the share application money received by the assessee company during the year under consideration as follows: 3(iii) Thus, it is seen that during the year, the assessee company has received an amount of Rs.10,43,77,000/- as Share Application Money. In view of the above, letters calling for information u/s 133(6) of the Income Tax Act, 1961 were issued to the above share applicants in respect of share application money received during the year.

It is noted that the above report was submitted by the AO who had made independent enquiries from these investors. The AO did not dispute the identity, creditworthiness and genuineness of these investors and therefore we find that this remand report submitted by the AO supported the case of the assessee. The Ld. AR has rightly pointed out that the Ld. CIT(A) was also unable to point out any factual infirmity therein or controvert the findings recorded by the AO in his remand report. Rather, we note that, the Ld. CIT(A) had doubted the creditworthiness because these investors did not derive sufficient profits during the year. We agree with the Ld. AR that this cannot be reason enough to doubt their creditworthiness. As noted above, the shareholders have demonstrated that the investments made by them with the assessee and their source of funds and the same is noted to have been accepted by the AO as well upon verification. The reliance placed by the Ld. AR on the decision of this Tribunal in the case of Mantram Commodities Pvt Ltd (supra) is found to be useful. The relevant extracts of the decision is as follows:

Gainful reference in this regard may also be made to the following findings of this Tribunal in the case of Chemicon Engineering Consultant Ltd Vs ACIT (supra) wherein also it was held as under:

The Ld. AR also brought to our notice that, expect M/s. Crown Crops Science Pvt. Ltd. and M/s. Rishabhdev International, all other seven (7) investors were related/associate entities of the assessee and therefore the genuineness of the monies received from them could not be doubted. The Ld. AR has demonstrated the same in the form of chart as under: - Sr. Name and Address of Share PAN And ROC CIN Director as on 31.03.2012 No Applicants 1 Rishi Automation Pvt Ltd AAACR8467K (a) Shivaraman Subramanian G-9 Shop No.9, Janta Co- CIN No. U99999MH1994PTC083972 (b) Padamchand Burad Op Hs Society, Jesal Park, Bhayandar East Thane - 401105. 2 M/s JVS Builders & Infra AABCJ0282B (a) Ritesh Padamchand Burad Pvt Ltd CIN No.U45200MH1995PTC092223 (b) Shweta Ritesh Burad 97 Heera Panna M.R.No.2, Mhada Layout, A Oshiwara Jogeswari(W) Bhd. Shreeji Hotel Mumbai - 400058 3 M/s Corwn Crops Sciens AADCC3551E (a) Vikas Dharmichand Pvt Ltd CIN No.U72100MI2000PTC127661 Birawat G-9 Shop No.9, Janta Co- (b) Nilesh Naresh Rane Op Hsg Society, C Jesal Park, Bhayandar East Thane - 401105. 4 Anagi Trading Pvt Ltd AAAJCA4557A (a) Zinki Madangopal Ruhela B 43, 1St Floor, Cotton CIN No. U51109MH2011PTC213858 (b) Santosh Paramhans Dube Exchange Building Coton Green East Mumbai - 400033 5 Henna Textiles Ltd AACCH0454N (a) Vishal Chunilal Sharma 901, Dhukka Chamber, Nr CIN No.U17121MH1991PLC063359 (b) Mala M Singh Gurudwara; Off Poddar Park Road, Malad (East) Mumbai - 400097

The Ld. AR also brought to our notice that, barring M/s. Crown Crops Science Pvt. Ltd. and M/s. Rishabhdev International all other companies have been subjected to scrutiny u/s 143(3)/144 of the Act for AY. 2012-13/AY. 2013-14 and that their source of investments in the assessee had been examined by their respective AOs. With regard M/s. Crown Crops Science Pvt. Ltd. and M/s. Rishabhdev International, it is noted that they were existing investors of the assessee who had invested Rs.4.5 crores and Rs.2.5 crores respectively in the earlier years. The Ld. AR also pointed out that, portion of their earlier investments were refunded during the year and out of the same monies were received back during the year. The Ld. AR has therefore rightly pointed out that when the Revenue has not doubted the identity,

As far as the contention of the Ld. DR that, some of these investors did not have trading/manufacturing business, fixed assets or major expenses, is concerned, the Ld. AR showed that those investors were core investment companies and their main object was making investments, which according to the Ld. AR is also a recognized business activity. We find merit in his submission that such investment companies generally will not have major fixed assets or operating expenses and therefore their absence in the books of accounts cannot be decisive enough to doubt the genuineness of their transaction, which is otherwise found to be supported by corroborative evidences.

In respect of the Ld. DR’s contention that the adequacy of share premium of Rs.340/share was not established by the assessee, the Ld. AR had showed us that the book value of the assessee had gradually risen to Rs.185/share and therefore having regard to the past history and future outlook, the share premium of Rs.340/share was reasonable. Further, according to Ld. AR in the case of unlisted companies, where the investors are related entities/ associate concerns, it is common knowledge that premium fixed is a matter of mutual agreement. It is noted that this Tribunal in the case of Gagandeep Infrastructure Pvt. Ltd., has held that it is a prerogative of the Board of Directors of the 19 A.Y. 2012-13 Ronit Capital Management Ltd. company to decide the premium amount and it is the wi om of the shareholders whether they want to subscribe to such a high premium. The relevant findings are noted to be as follows :- "We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956. Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipt and is not income for its ordinary sense. It is not in dispute that the assessee had filed all the requisite details/documents which are required to explain in the books of accounts by the provisions of Sec. 68 of the Act. The assessee has successfully established the identity of the companies who have purchased shares at a premium. The assessee has also filed bank details to explain the source of the share holders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the