INCOME TAX OFFICER, WARD-1, BEAWAR vs. M/S SHEPHALI HOTELS & RESORTS PVT. LTD., BEAWAR

ORDER

PER VIJAY PAL RAO, JM

1. Deleting addition of Rs. 21,5,00,000/- made on account of bogus share application money received

1(a) not appreciating the fact that the information received from the investigation wing that these are paper companies leads to the conclusion / destination, as the information called for u/s 133(6) of the I.T. Act, 1961 at the known addresses of these companies returned back unserved with remarks ’ Not Known’.

1(b) not appreciating the fact that the identity & creditworthiness of these paper companies and genuineness of the transaction is not proved in absence of any reply received from these companies on the information called u/s 133(6) by the AO.

2. Not appreciating the finding of the AO that assessee company issued shares at Par to Shruti Agarwal, Kanika Agarwal and Kapil Agarwal whereas shares to the paper companies were issued at premium of Rs. 490/- per share without any justification.

3. Deleting addition of Rs. 2,15,00,000/- on account of bogus share application money received from various paper companies disregarding the decision rendered by the Hon'ble Jurisdictiona High Court of Rajasthan in the case of Rameshwar Lal Mali vs CIT [2012] 256 ITR 536 (Raj) while placing reliance on unconnected case Andman Timber Industries vs Commissioner of Central Excise.’’ 2.1 The assessee is a company and engaged in the business of Hotels & Resorts. The assessee filed its return of income on 30-03-2013 declaring total income of Rs. 88,350/-. During the course of scrutiny assessment, calling for information / details / documents from the assessee regarding the share applications received by the assessee. In response, the assessee filed requisite details as well as confirmations of the investors to whom shares were allotted by the assessee. The AO noted that the assessee has issued 1.00 lac shares of face value of Rs. 10/- at par to each of the promoters of the assessee company namely Ms.Shruti Agarwal, Ms.Kanika Agarwal and Shri Kapil Agarwal whereas other shares were issued to outside entities of persons at a premium of Rs. 490/- per share.

After initial details filed by the assessee, the AO then referred to the information received from the Investigation Wing, Mumbai regarding the search and seizure action and statement of Shri Praveen Kumar Jain recorded on 1-10-2013 and again issued a show cause notice to the assessee. In response, the assessee filed all the details which includes bank statements of share applicants, Resolution passed by the assessee company, allotment of shares etc. The AO did not accept the explanation of the assessee as well as the documents filed by the assessee in support of the genuineness of the share capital received from the companies other than the promoters. The AO finally disallowed the claim of share capital Nakshatra Pvt. Ltd. and Olive Overseas Pvt. Ltd and treated the same as bogus entries received by the assessee. Consequently, the AO made an addition of Rs. 2.15 crores u/s 68 of the I.T. Act, 1961. The assessee challenged the action of the AO before the ld. CIT(A) and submitted the detailed submissions giving the reference to various documentary evidences as well as judgements on the issue. The ld. CIT(A) has deleted the addition made by the AO on the ground that the AO has made the addition relying on the statement of Shri Praveen Kumar Jain recorded during the course of search and seizure action which was subsequently retracted by Shri Praveen Kumar Jain. Therefore, the addition is made solely on the basis of statement of third party recorded behind the back of the assessee which cannot be considered as a valid evidence without giving the opportunity of cross examination to the assessee. The ld. CIT(A) has also given the reference of various documents filed by the assessee in support of the claim which includes confirmations of investment made by these companies, copy of share application forms, bank statements of the share applicants showing remittances of the amount, copy of Board Resolution of the share applicant authorizing their applicant companies and copy of allotment letter issued by the assessee to each share applicants. Aggrieved by the impugned order of the ld. CIT(A), the Revenue has filed the present appeal.

2.2 Before us, the ld. DR submitted that the AO has given a finding that these companies are controlled and managed by Shri Praveen Kumar Jain, Group and Shri Praveen Kumar Jain in his statement recorded by the Investigation Wing, Mumbai has admitted his indulgence in providing the bogus accommodation entries including the share application money. The ld. DR further contended that financial position of the assessee company as on the date of issue of shares did not carry such a huge premium of Rs. 490/- per share. The ld. DR thus contended that on one hand the assessee issued the shares at par to the promoters whereas at the same time the share were issued to these three companies at a premium of Rs. 490/- per share. The ld. DR further contended that neither the assessee's financial conditions support the premium of such a huge amount nor the applicant companies are having any real business to support their creditworthiness.

The AO issued notice u/s 133(6) which was received back unsrved with the remarks ‘’Not Known’’. This clearly shows that these companies order of the AO and submitted that retraction of Shri Praveen Kumar Jain cannot be accepted as it was made without giving supporting material that retraction is correct statement and earlier statement was not a correct statement. The ld. DR further contended that ld. CIT(A) has held that the statement cannot be relied on without giving opportunity of cross examination to the assessee disregarding the decision of Hon'ble Jurisdictional High Court in the case of Rameshwar Lal Mali vs CIT , 256 ITR 536 (Raj).

2.3 On the other hand, the ld.AR of the assessee submitted that the assessee has discharged its onus casted u/s 68 of the Act by producing all the documentary evidences which proves the identity of the share applicant companies, creditworthiness of the companies as well as the genuineness of the transactions. The ld.AR further contended that assessee furnished the confirmations from these companies alongwith Resolution authorizing the directors to invest in the shares of the assessee company. Further the income tax returns of all these companies were produced which proves the identity and existence of these companies. As regards the genuineness of the transactions, the assessee produced all the applications, Resolution copy, allotment of shares, receipt of share application money through banking channel, financial statements of these companies showing the creditworthiness. Thus the onus stands discharged when the assessee produced all the relevant documentary evidences including the confirmation from these share applicants. The ld.AR of the assessee further submitted that the assessee has issued the shares at a premium of Rs. 490/- per share to six companies out of which the AO had doubted the share application money received from three companies only and share application money received from other three companies were accepted by the AO as genuine. Once the share application money received from other three companies is accepted by the AO then the same cannot be disputed in respect of other three companies when there is no difference in the price at which the shares were issued to these six companies. The ld.AR of the assessee thus submitted that identical issue has been considered by ITAT Jodhpur Bench in the case of ITO vs Divya Finlease Pvt.Ltd vide order dated 24-01-2019 in for the Assessment Year 2012-13 and pointed out that these three share applicant companies which invested in the shares of the assessee Pvt.Ltd. The Tribunal has given the findings regarding the genuineness of the transactions of share application money and allotment of shares to these three companies. Therefore, this issue is covered by the decision of ITAT Jodhpur Bench in the case of Divya Finlease Pvt.Ltd. (supra). The ld.AR of the assessee relied on the decision of Hon'ble Madhya Pradesh High Court in the case of Pr. CIT (1), Indore vs Chain House International Pvt. Ltd (2018( 98 taxmann.com 47 (M.P.) and submitted that Hon'ble High Court has discussed this issued exhaustively and held that issuing the shares at a premium was a commercial decision and prerogative of the Directors of a company to decide the premium amount. It is the wisdom of the shareholders whether they want to subscribe the shares at such a premium or not. The Revenue should not justifiably claim to put itself in the armchair of a businessman or in the position of Board of Directors to assume role of ascertaining how much is a reasonable premium having regard to the circumstances of case. The ld.AR of the assessee relied on the judgment of Hon'ble Delhi High Court in the case of CIT vs Anshika Consultants (P) Ltd. (2015) 62 taxmann.com 192 (Del). The ld.AR of the assessee then refereed to the Pvt. Ltd vs DCIT (ITA No.400/JP/2016 for the Assessment Year 20101- 11) and submitted that the addition made by the AO on the ground of accommodation entries allegedly made from Shri Praveen Kumar Jain Group was deleted by this Tribunal. Similarly in the case of Choice Buildestate vs ITO, this Tribunal vide order dated 28-03-2018 in has again considered and decided this issue. Thus the ld.AR of the assessee submitted that when the assessee has discharged its onus by producing all the documentary evidences then in the absence of any contrary material, the addition made by the AO is not justified and the same may be deleted. The ld.AR of the assessee supported the order of the ld. CIT(A).

2.4 We have considered the rival submissions as well as the relevant materials available on record. The assessee has issued the shares to promoters as well as other persons. The details of the persons are as under:-

1. 1. Shruti Agarwal 2. Kankia Agarwal 3. Kapil Agarwal 4. Ankit Agarwal 5. M/s. Duke Business Pvt. Ltd.

6. M/s. Stock Broking Pvt.Ltd.

10 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar 7. M/s. Gupteshwar Finlease Pvt.Ltd. 8. M/s. Nakshatra Business Pvt. Ltd. 9. M/s. Asshavara Shares & Securities Pvt. Ltd. 10. M/s. Olive Overseas Pvt. Ltd.

This factual position has not been disputed by the AO rather it is produced by the AO in the assessment order that the assessee has issued the shares to 10 persons including 04 promoters who are individual and remaining 06 are companies. Out of these 06 companies to whom shares were issued at premium of Rs. 490/- per share, the AO questioned the genuineness of the transactions in respect of 03 companies namely (1)

M/s. Duke Business Pvt. Ltd (2) M/s. Nakshatra Business Pvt. Ltd and (3) M/s. Olive Overseas Pvt. Ltd. The reason for doubting these transactions of share capital received from these 03 companies was that these entities are controlled by Shri Praveen Kumar Jain who was found to be a bogus entry provider. The AO has made the reference to the information received from Investigation Wing, Mumbai wherein the statement of Shri Praveen Kumar Jain was recorded. Except the said statement of Shri Praveen Kumar Jain, no other material or record was found with the AO to show that the transaction of share applications and allotment of shares to these 03 companies are bogus, though the AO has stated in his assessment order that these 03 companies were asked to the AO has not given details as to when such notice was issued. Only a passing reference has been made in respect of the notice issued u/s 133(6) of the Act. Without going into the controversy of issuance of notice u/s 133(6) of the Act, we note that the AO has allegedly called for the information in the said letter/notice issued u/s 133(6) as under:-

‘’1. Copy of ledger a/c of M/s. Shefali Hotels & Resorts Pvt. Ltd for the F.Y. 2011-12 relevant to A.Y. 2012-13 as appearing in your books of accounts.

‘’4.5 The appellant has furnished, in respect of each share applicant following documentary evidences to prove the identity and creditworthiness of the persons from whom the appellant has received share application money and genuineness of the transactions:-

` a. Confirmation of the directors of the Applicant companies confirming the investment made by their companies into the equity shares of the appellant in the A.Y. 2012-13 alongwith relevant details.

14 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar b. Copy of share Application Form duly signed by the Applicant companies received by the appellant in the A.Y. 2012-13 alongwith their covering letter. c. Copy of the relevant period of the Bank statement of the appellant companies showing the amount of cheque/RTGS remitted to the appellant towards share application money. d. Copy of the Board Resolution of the applicant companies authorizing specific director of each of such applicant company to make an investment into the equity shares of the appellant of the specific amount in the A.Y. 2012-13. e. Copy of Income Tax Return acknowledgement of each of the appellant companies. f. Copy of share allotment letter issued by the appellant to each of such applicant companies.’’ Thus all these documentary evidences filed by the assessee clearly discharges the onus casted on the assessee company and therefore, in the absence of any contrary material or findings to point out any defect in these documentary evidences, the addition made by the AO is not justified. The ITAT Jodhpur Bench in the case of ITO vs Divya Finlease Pvt. Ltd (supra) has considered the issue at a premium of Rs. 490/- per share to all these 06 non-promoter companies which includes 03 companies for which the AO has made the addition in the case of the assessee before us. The ITAT Jodhpur Bench in the case of ITO vs Divya evidences as well as various precedents has held in para 9 as under:-

‘’9. We have considered rival contentions and carefully gone through the orders of the authorities below. We had also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by ld.AR and ld. DR during the course of hearing before us in the context of factual matrix of the case. From the record, we found that addition made by AO on account of share application was deleted by CIT(A) after recording a finding to the effect that the assessee has furnished confirmations of shareholders confirming giving of share premium, furnished bank statements of the share applicants from which the share application money has been paid, furnished the income tax returns of the share applicants. The CIT (A) further observed that without controverting these documentary evidences furnished by the assessee, AO has merely on suspicion treated the share application money as unexplained. The CIT (A) has also found that the statement on the basis of which AO made addition have already been retracted and this fact has already been recorded by AO in his assessment order. Thereafter, considering various documentary evidences filed before AO, the CIT (A) applied proposition laid down in the various judicial pronouncements as referred in his order to the facts of the case and reached to the conclusion that AO was not justified in treating the share application money as unexplained. The detailed finding so recorded by CIT (A) are as per material on record which do not require any interference on our part. Accordingly, we do not find any reason to interfere in the order of CIT (A) for deleting the addition made on account of share application money.’’ Jaipur Bench has considered this issue at paras 18 to 24 as under:-

‘’18. It was further submitted that in respect of the above three companies, the assessee has furnished the following documents to establish the identity, genuineness of the transaction and the creditworthiness of these entities: Name, address and Shares Share Capital Evidences produced before PAN no. applied/allotted the AO M/s Zenith 20,000 Rs. 10,00,000/- Copy of share Automotive P. Ltd. application money, 106, Palco House, confirmation, bank T-10, Main Patel statement, balance Road, Patel Nagar, sheet, ROC return. New Delhi-110008 PAN No. AAACZ0283B M/s Aasheesh Cap. 20,000 Rs. 10,00,000/- Copy of share Services P. Ltd. application money, Royal palace, G-55, confirmation, bank Laxmi Marg, Vikas statement balance Nagar, New Delhi- sheet, ROC return. 110092 PAN No. AAACA6633N M/s Ultimate IT 20,000 Rs. 10,00,000/- Copy of share Solution application money, U-23, Arvind confirmation, bank Nagar, Ghonda, statement, balance Delhi-53, sheet, ROC return. PAN no. AAACU9005G

From the above table it can be noted that the above companies are assessed to tax, their PAN No. is provided, the transaction is through banking channel and the shares has been allotted to them as is evident from Form 2 – Return of Allotment filed with ROC. From the Balance Sheet of these companies, their creditworthiness and genuineness of the transaction can be perceived in as 17 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar much as they have substantial shareholders funds and the name of the assessee company is appearing in the detail of investment made by them. Thus, the assessee has discharged the onus which lay upon it u/s 68. Therefore, solely on the basis of the information received from Investigation Wing, Delhi, the share capital received by the assessee from these companies cannot be presumed to be accommodation entries.

18 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar therein applies equally in the instant case. The relevant findings are reproduced as under: “10. Now, coming to the merits of addition of Rs 35 lacs made by the AO under section 68 of the Act. On careful examination of material available on record, we find that it is a case where the AO has relied blindly on information supplied by the Investigation Wing Mumbai without carrying out any further examination of documents submitted during the course of assessment proceedings and independent investigation of these investor companies. As we have noted above, the information so received from the Investigation Wing, Mumbai and after due examination thereof, the AO has formed a prima facie view and a reason to believe that the income has escaped assessment and has thus assumed jurisdiction u/s 147 of the Act. At the same time, such a prima facie view has to be finalized and a firm view has to be taken on basis of examination of documents so brought on record and further investigation to be carried out before any tax liability is fastened on the assessee. In the instant case, we find that the assessee company has submitted detail documentation in regard to these companies from whom a total amount of Rs.35 lakhs was received namely (i) share application form (ii) copy of Board Resolution (iii) Copy of Bank Statements reflecting payment through cheque (iv) Audited Statement of Accounts and Acknowledgement of ITR (v) Copy of certificate of lncorporation and Certificate of Commencement of Business (vi) Copy of PAN Card. Where the assessee furnishes the documentation and necessary explanation, the AO should examine whether the documents so submitted and explanation so offered establishes the three ingredients i.e. identity of the investor company, creditworthiness of investor company and genuineness of the transaction. Whether explanation of the assessee is reliable or acceptable? If yes, no further action is required and the sum so credited may not be charged to income tax. If the explanation so offered by the assessee is not acceptable or reliable, the AO should give a detailed reasoning in the assessment order for not accepting the same. The order passed by the AO should be speaking one bringing on record all the facts, explanation furnished by the assessee in respect of nature and source of the credit in its books of accounts and reasons for not accepting the explanation of the assessee. In the instant case, we find that the AO has not taken any efforts to examine these documents so submitted by the assessee company during the course of assessment proceedings and has simply gone by his prima facie view formed at the time of assumption of jurisdiction u/s 147 and such a prima facie view without further examination/investigation cannot be a basis for forming a final view of making the addition in the hands of the assessee company. It is a case where the AO was in receipt of material 19 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar information from the Investigation Wing, Mumbai that the assessee company has received accommodation entries in form of share application/investment from seven companies who are not doing genuine business activities as divulged during the course of search and seizure operations in case of Praveen Jain group. In these situations, the Courts have held that the Assessing Officer cannot sit back with folded hands and then come forward to merely reject the explanation so made, without carrying out any verification or enquiry into the material placed before him by the assessee. If the Assessing Officer harbours any doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company. We therefore agree with the contentions of the ld AR that in absence of any falsity which have been found in the documents so submitted by the assessee company to prove the identity, creditworthiness and genuineness of the share transaction, these documents cannot be summarily rejected as has been done by the AO in the instant case. Further, we find that there is no action taken by the AO in terms of calling information from these companies under section 133(6) and/or issuing summons to directors of these companies under section 131 of the Act. Further, where the AO relies upon the statement of third parties (Praveen Jain and others) recorded u/s 132(4), without getting into controversy whether the said statement was retracted subsequently, the fact remains that the assessee deserves an opportunity to cross examine such persons as held by the Hon’ble Supreme Court in case of Andaman Timber Industries (supra). During the course of assessment proceedings, the assessee company has made specific request to the AO to allow cross examination of these persons which has however not being provided to the assessee company. In light of above discussions, we don’t find any basis for making addition under section 68 of the Act. In the result, ground no.2 taken by the assessee company is allowed.”

21 ITO, Ward- 1, Beawar vs M/s. Shaifali Hotels & Resorts Pvt. Ltd., Beawar ‘’52. Issuing the share at a premium was a commercial decision. It is the prerogative of the Board of Directors of a Company to decide the premium amount and it is the wisdom of shareholder whether they want to subscribe the share at such a premium or not. This was a mutual decision between both the companies. In day to day market, unless and until, the rates is fixed by any Govt. Authority or unless there is any restriction on the amount of share premium under any law, the price of the shares is decided on the mutual understanding of the parties concerned.

3.0 In the result, the appeal of the Revenue is dismissed.

Order pronounced in the open court on 05 /03/2020.