KIRTIPRADA FASHIONS PVT. LTD.,SURAT vs. ITO, WARD -1(1)(3), SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकरअपीलसं./ITA No.95/SRT/2018 (�नधा�रणवष� / Assessment Years: (2012-13) (Virtual Court Hearing) Kritiprada Fashion Pvt. Ltd., Vs. The Income Tax Officer, Block No.41-42, Plot No.1, B/h Ward-1(1)(3), Surat. Garden Vareli, Vill. Vakaneda, Kadodara, Surat-394327. �थायीलेखासं./जीआइआरसं./PAN/GIR No.: AADCK6111E (Assessee) (Respondent) Assessee by : Shri Ramesh Malpani, FCA Revenue by : Ms Anupama Singla, Sr. DR सुनवाईक�तार�ख/ Date of Hearing : 05/08/2021 घोषणाक�तार�ख/Date of Pronouncement : 09/09/2021 आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: Captioned appeal filed by the assessee, pertaining to the Assessment Year (AY) 2012-13, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)-1, Surat [in short “the ld. CIT(A)”] in Appeal No. CAS/1/81/2015-16, dated 29.12.2017, which in turn arises out of an order passed by the Assessing Officer (AO) u/s 143(3) of the Income Tax Act, 1961 [hereinafter refer to as the “Act”], dated 13.03.2015.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. 3. The assessee craves leave to add, alter, delete or modify any ground of appeal.”

The share premium of Rs.40/- has been received from 3 companies based at Kolkata. In order to verify the identity, creditworthiness and the genuineness of the transactions, AO issued notices u/s 133(6) of the Act to the investor companies. The notices could not be served in the case of Kamdhanu supply Pvt Ltd and Vertex Distributors Pvt Ltd, as the companies were not found traceable in the given, addresses. No response was received from Jagdhatri Sales Pvt. Ltd. An enquiry was got conducted by the AO in respect of all the above investor companies by issuance of commission u/s 131(1)(d) of the Act to the Investigation Wing, Kolkata and these investor companies were found to be bogus and nom traceable. The AO on the analysis of the bank account found that these investor companies were not carrying out any actual business activity. Hence, the AO held that the amount of investment of Rs.1,65,85,000/- in form of share capital/share premium was in form of cash credit and therefore he made an addition u/s 68 of the Act to the tune of Rs.1,65,85,000/-.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. 5. Shri Ramesh Malpani, Learned Counsel for the assessee begins by pointing out that assessee during the assessment proceedings submitted before the AO that all the transactions were duly supported by share application form, acknowledgement of return of income, audited financial statements, bank statements, MOA and AOA of the share applicants. Learned Counsel also submitted before us written submissions, however, the sum and substance of his written submissions are that all transactions have been made through proper banking channels and the investor companies are registered with ROC and are active companies as per ROC records. The Ld Counsel also relied on several case laws in support of his contention, regarding the genuineness of the share capital.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the assessing officer, the sum so credited may be charged to income tax as the income of the assessee of that assessment year. The assessing officer may consider such sum as cash credit due to lack of sufficient explanation. It is well known that provisions of section 68 have been introduced into the taxing enactments step by step in order to plug loopholes. Even long prior to the introduction of section 68 of the Act, in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the assessing officer, is not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of the relevant assessment year.

We note that with effect from assessment year 2013-14, section 68 of the Income Tax Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the assessing officer, the same shall be deemed to be the income of the company under section 68 of the Act. We note that the amended provisions of section 68, is not applicable to the assessee company under consideration, as the assessee`s, assessment year is 2012-13. The Hon`ble Bombay High Court, in the case of Gagandeep Infrastructure 80 Taxmann.Com 272 (Bom), held that amendment to section 68 is prospective and applicable only from assessment year 2013-14. With this background, now we shall proceed to examine in the assessee`s case under consideration, whether assessee has discharged his onus to prove, prima facie, the identity, creditworthiness and genuineness of the share capital and share premium received by it from share subscribers companies.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. Sales Pvt. Ltd, (ii) Kamdhanu Supply Pvt. Ltd and (iii) Vertex Distributors Pvt. Ltd ), the followings documents: 1) Return of ROC, that is, form No. 2 submitted before R.O.C. 2) PAN Number copies of each share subscriber. 3) Copy of Balance Sheet, Profit and loss account of all share applicant companies. 4) Details of investments sold by all share applicant companies. 5).Transaction with the assessee was duly highlighted in the bank statement 6). Explanation along with evidence of source of source of the funds of the share applicant Companies. 7).Audited Accounts of the share holders. 8) Relevant address proofs / Form filed by the share applicants with ROC. 9). Income Tax Return of share applicant companies. 10) Copy of the Bank Statement of Share applicant companies where from the amount was debited. 11) Copies of Bank statement of the assessee company where the share application money and premium were credited. 12) Information about Common Director of these three share applicant companies.

With help of these plethora documents and evidences submitted before AO, during the assessment proceedings, the ld Counsel claimed that the assessee company has proved the identity, genuineness and creditworthiness of all these three share applicant companies in the following manner.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. Identity of all the share applicants have been proved by the assessee with help of PAN Number, ROC details and bank statements. We note that before issuing PAN, the Income Tax Department requires address proof. Similarly, R.O.C requires the address proof of the Registered office of the share applicant companies. Moreover, bank account requires the address proof before opening of Account. Therefore, identity of these three share applicants have been proved by the assessee with help of PAN, ROC details and Bank Statements. Creditworthiness of these three share applicants have been proved by the assessee by submitting, Copy of Balance Sheet, Profit and loss account, Details of investments sold, Bank statement, Explanation along with evidence of source of source of the funds of the share applicant Companies. Genuineness of these three share applicants have been proved by the assessee by submitting, Audited Accounts of the share applicant companies, Income Tax Return of share applicant companies, Copy of the Bank Statement of Share applicant companies where from the amount was debited, Copies of Bank statement of the assessee company where the share application money and premium were credited. 9. As regards the contention of assessing officer that investors have very low income, it is submitted by ld Counsel that assessee has already filed Income Tax Return and Bank statement of investor along with Balance sheet and other evidences. Besides, M/s Kamdhanu Supply Pvt. Ltd. and M/s Vertex Distributors Pvt. Ltd. have made necessary compliance of notice issued u/s 133(6) of the Act and they have duly confirmed the investment made by them in share capital of assessee. Investment made by them is clearly reflected in their respective balance sheet under the head "Non-Current Investment". Hence, assessee has explained the source of investment. With regard to observation made by assessing officer in para 11 of assessment order in relation to M/s Jagdhatri Sales Pvt. Ltd. it is submitted by ld Counsel that said investor company holds tangible asset of Rs.2,45,20,235/-. However, assessing officer has erred in observing that tangible assets held by said investor are Nil. Further on perusal of balance sheet of said Page | 6

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. investor it is evident that investment made by them in shares of assessee company is reflected under the head "Current Investment".It is also submitted by ld Counsel that there is no evidence on record that deposit in bank account of investor entities came from the coffers of assessee company. There are no evidences whatsoever relating to any cash transfer made by assessee or payment of alleged commission by assessee to any entry operator. With regard to observation made by assessing officer in para 15 of assessment order that notice issued u/s 133(6) of the Act returned unserved in case of 2 investors and no reply is received from 3rd investor, it is submitted by ld Counsel that two investors namely M/s Kamdhenu Supply Pvt. Ltd. and Vertex Distributors Pvt. Ltd. have directly submitted their replies to department via Post. Further with regard to non receipt of reply from M/s Jagdhatri Sales Pvt. Ltd. adverse inference cannot be drawn in the case of assessee, as assessee has duly filed relevant details to prove the identity of investors. Above explanation offered by assessee along with cogent evidences referred above clearly go on to establish all the three vital ingredients viz. identity and capacity of investors and also genuineness of transactions. As regards the basis for making investment in share capital of assessee company, ld Counsel submitted that assessee is engaged in the business of dyeing of grey cloth on job work basis and is continuously progressing which can be seen from the table comparing the turnover with last year. A.Y Turnover (Rs.) Reserves & Surplus (Rs.) Net Worth (Rs) 2011-12 7,56,24,679 2,54,43,572 3,42,27,572 2012-13 10,37,30,711 3,92,99,934 5,14,00,934

In view of rising turnover and profitability, charging of share premium @ Rs. 40 per share cannot at all be regarded as excessive. It is also pertinent to mention here that with increase in turnover of assessee also net profit has improved for the year under consideration and cash profit i.e. profit before depreciation and amortization has significantly increased for the year as compared to preceding year as can be seen in the table shown below:

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. A.Y. Net Profit/ (Loss) (Rs.) Cash Profit (Rs.) 2011-12 (67,74,595) 18,13,564 2012-13 5,88,362 1,08,82,127

Thus, ld Counsel submits that charging of premium @ Rs. 40 per share is quite reasonable.

STATEMENT OF YEARWISE BIFURCATION OF SHARE APPLICATION MONEY PARTICULARS JAGDHATRI KAMDHENU VERTEX TOTAL SALES P. LTD. DISTRI BUTORS P. LTD SUPPLY P. LTD. Share Application Money Received in F.Y. 1900000 2750000 3500000 * 8150000 2010-11 (A.Y. 2011-12) Share Application Money Received in F.Y. 2500000 3935000 2000000 8435000 2011-12 (A.Y. 2012-13) Total Amt. Reed, in both years Number of Shares Allotted 4400000 6685000 5500000 16585000 88000 133700 110000 331700 Issue price per share 50 50 50 50 Total Amount appropriated on allotment of 4400000 6685000 5500000 16585000 shares

Date of Allotment 31/03/2012 31/03/2012 31/03/2012 * In VERTEX, sum of Rs.10,00,000/- received on 24/11/2010 was mistakenly credited to wrong account in F.Y. 2010-11. However, same was rectified by passing J.V. entry on 01/04/2011.

After going through the bifurcation, we note that Assessing Officer made the addition in respect of the share application money received in AY.2011-12 which is not justified. In AY.2011-12, the assessee company received share application money to the tune of Rs.81,50,000/-which is not the subject matter of addition for AY 2012-13. The assessee company has received the share application money in AY 2012-13 only to the tune of Rs.84,35,000/- which may be the subject matter of addition under section 68 of the Act. Therefore, Assessing Officer has erred in making addition to the tune of Rs.81,50,000/- under section 68 of the Act which is pertaining to the AY.2011-12.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd.

"68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year. " The phraseology of section 68 is clear. The Legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the words ‘shall’ be charged to income-tax as the income of the assessee of that previous year". The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word "may" and not "shall". Thus the un-satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. assess such credit in the hands of the creditor (after making due enquiries from such creditor). In arriving at this conclusion, the Hon'ble Court has further stressed the presence of word "may" in section 68. Relevant observations at pages 369 and 370 of this report are reproduced hereunder:-

"Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non- genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue's case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non-compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by' treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69. 14. In the case of Nemi Chand Kothari 136 Taxman 213, (supra), the Hon'ble Guahati High Court has thrown light on another aspect touching the issue of onus on assessee under section 68, by holding that the same should be decided by taking into consideration the provision of section 106 of the Evidence Act which says that a person can be required to prove only such facts which are in his knowledge. The Hon'ble Court in the said case held that, once it is found that an assessee has actually taken money from depositor/lender who has been fully identified, the assessee/borrower cannot be called upon to explain, much less prove the affairs of such third party, which he is not even supposed to know or about which he cannot be held to be accredited with any knowledge. In this view, the Hon'ble Court has laid down that section 68 of Income-tax Act, should be

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. read along with section 106 of Evidence Act. The relevant observations at page 260 to 262, 264 and 265 of the report are reproduced herein below:-

"While interpreting the meaning and scope of section 68, one has to bear in mind that normally, interpretation of a statute shall be general, in nature, subject only to such exceptions as may be logically permitted by the statute itself or by some other law connected therewith or relevant thereto. Keeping in view these fundamentals of interpretation of statutes, when we read carefully the provisions of section 68, we notice nothing in section 68 to show that the scope of the inquiry under section 68 by the Revenue Department shall remain confined to the transactions, which have taken place between the assessee and the creditor nor does the wording of section 68 indicate that section 68 does not authorize the Revenue Department to make inquiry into the source(s) of the credit and/or sub- creditor. The language employed by section 68 cannot be read to impose such limitations on the powers of the Assessing Officer. The logical conclusion, therefore, has to be, and we hold that an inquiry under section 68 need not necessarily be kept confined by the Assessing Officer within the transactions, which took place between the assessee and his creditor, but that the same may be extended to the transactions, which have taken place between the creditor and his sub-creditor. Thus, while the Assessing Officer is under section 68, free to look into the source(s) of the creditor and/or of the sub-creditor, the burden on the assessee under section 68 is definitely limited. This limit has been imposed by section 106 of the Evidence Act which reads as follows: "Burden of proving fact especially within knowledge.-When any fact is especially within the knowledge of any person, the burden) of proving that fact is upon him. " ******** What, thus, transpires from the above discussion is that white section 106 of the Evidence Act limits the onus of the assessee to the extent of his proving the source from which he has received the cash credit, section 68 gives ample freedom to the Assessing Officer to make inquiry not only into the source(s)of the creditor but also of his (creditor's) sub-creditors and prove, as a result, of such inquiry, that the money received by the assessee, in the form of loan from the creditor, though routed through the sub-creditors, actually belongs to, or was of, the assessee himself. In other words, while section 68 gives the liberty to the Assessing Officer to enquire into the source/source from where the creditor has received the money, section 106 makes the assessee liable to disclose only the source(s) from where he has himself received the credit and IT is not the burden of the assessee to prove the creditworthiness of the source(s) of the sub-creditors. If section 106 and section 68 are to stand together, which they must, then, the interpretation of section 68 are to stand together, which they must, then the interpretation of section 68 has to be in such a way that it does not make section 106 redundant. Hence, the harmonious construction of section 106 of the Evidence Act and section 68 of the Income- tax Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the creditworthiness of his creditor,

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. the burden of the assessee to prove the genuineness of the transactions as well as the creditworthiness of the creditor must remain confined to the transactions, which have taken place between the assessee and the creditor. What follows, as a corollary, is that it is not the burden of the assessee to prove the genuineness of the transactions between his creditor and sub-creditors nor is it the burden of the assessee to prove that the sub-creditor had the creditworthiness to advance the cash credit to the creditor from whom the cash credit has been. eventually, received by the assessee. It, therefore, further logically follows that the creditor's creditworthiness has to be Judged vis-a-vis the transactions, which have taken place between the assessee and the creditor, and it is not the business of the assessee to find out the source of money of his creditor or of the genuineness of the transactions, which took between the creditor and sub-creditor and/or creditworthiness of the sub- creditors, for, these aspects may not be within the special knowledge of the assessee. " ********** " ... If a creditor has, by any undisclosed source, a particular amount of money in the bank, there is no limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case, if the creditor fails to satisfy as to how he had actually received the said amount and happened to keep the same in the bank, the said amount cannot be treated as income of the assessee from undisclosed source. In other words, the genuineness as well as the creditworthiness of a creditor have to be adjudged vis-a-vis the transactions, which he has with the assessee. The reason why we have formed the opinion that it is not the business of the assessee to find out the actual source or sources from where the creditor has accumulated the amount, which he advances, as loan, to the assessee is that so far as an assessee is concerned, he has to prove the genuineness of the transaction and the creditworthiness of the creditor vis-a-vis the transactions which had taken place between the assessee and the creditor and not between the creditor and the sub-creditors, for, it is not even required under the law for the assessee to try to find out as to what sources from where the creditor had received the amount, his special knowledge under section 106 of the Evidence Act may very well remain confined only to the transactions, which he had' with the creditor and he may not know what transaction(s) had taken place between his creditor and the sub-creditor… " ********** "In other words, though under section 68 an Assessing Officer is free to show, with the help of the inquiry conducted by him into the transactions, which have taken place between the creditor and the sub-creditor, that the transaction between the two were not genuine and that the sub-creditor had no creditworthiness, it will not necessarily mean that the loan advanced by the sub- creditor to the creditor was income of the assessee from undisclosed source unless there is evidence, direct or circumstantial, to show that the amount which has been advanced by the sub-creditor to the creditor, had actually been received by the sub-creditor from the assessee …." **********

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. "Keeping in view the above position of law, when we turn to the factual matrix of the present case, we find that so far as the appellant is concerned, he has established the identity of the creditors, namely, Nemichand Nahata and Sons (HUF) and Pawan Kumar Agarwalla. The appellant had also shown, in accordance with the burden, which rested on him under section 106 of the Evidence Act, that the said amounts had been received by him by way of cheques from the creditors aforementioned. In fact the fact that the assessee had received the said amounts by way of cheques was not in dispute. Once the assessee had established that he had received the said amounts from the creditors aforementioned by way of cheques, the assessee must be taken to have proved that the creditor had the creditworthiness to advance the loans. Thereafter the burden had shifted to the Assessing Officer to prove the contrary. On mere failure on the part of the creditors to show that their sub-creditors had creditworthiness to advance the said loan amounts to the assessee, such failure, as a corollary, could not have been and ought not to have been, under the law, treated as the income from the undisclosed sources of the assessee himself, when there was neither direct nor circumstantial evidence on record that the said loan amounts actually belonged to, or were owned by, the assessee. Viewed from this angle, we have no hesitation in holding that in the case at hand, the Assessing Officer had failed to show that the amounts, which had come to the hands of the creditors from the hands of the sub-creditors, had actually been received by the sub-creditors from the assessee. In the absence of any such evidence on record, the Assessing Officer could not have treated the said amounts as income derived by the appellant from undisclosed sources. The learned Tribunal seriously fell into error in treating the said amounts as income derived by the appellant from. undisclosed sources merely on the failure of the sub-creditors to prove their creditworthiness.” 15. When a question as to the creditworthiness of a creditor is to be adjudicated and if the creditor is an Income Tax assessee, it is now well settled by the decision of the Calcutta High Court that the creditworthiness of the creditor cannot be disputed by the AO of the assessee but the AO of the creditor. In this regards, we rely on the decision of the Hon'ble High Court, Calcutta in the COMMISSIONER OF INCOME TAX, KOLKA TA-Ill Versus DATAWARE PRIVATE LIMITED ITAT No. 263 of 2011 Date: 21st September, 2011 wherein the Court held as follows:

“In our opinion, in such circumstances, the Assessing officer of the assessee cannot take the burden of assessing the profit and loss account of the creditor when admittedly the creditor himself is an income tax assessee. After getting the PAN number and getting the information that the creditor is assessed under the Act, the Assessing officer should enquire from the Assessing Officer of the creditor as to the genuineness" of the transaction and whether such transaction has been accepted by the Assessing officer of the creditor but instead of adopting

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. such course, the Assessing officer himself could not enter into the return of the creditor and brand the same as unworthy of credence. So long it is not established that the return submitted by the creditor has been rejected by its Assessing Officer, the Assessing officer of the assessee is bound to accept the same as genuine when the identity of the creditor and the genuineness" of transaction through account payee cheque has been established. We find that both the Commissioner of Income Tax (Appeal) and the Tribunal below followed the well-accepted principle which are required to be followed in considering the effect of Section 68 of the Act and we thus find no reason to interfere with the concurrent findings of fact recorded by both the authorities.”

"Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax 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.

ITA No.95/SRT/2018 Assessment Year. 2012-13 Kritiprada Fashion P Ltd. any investigation, much less gathering of evidence by the Assessing Officer, we hold that an addition cannot be sustained merely based on inferences drawn by circumstances. Therefore, based on the facts and precedents applicable to facts, as narrated above, we delete the addition of Rs.1,65,85,000/-

Order is pronounced on 09/09/2021 by placing result on notice board.

Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat / �दनांक/ Date: 09 /09/2021 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr.CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat