GULMOHAR DISTRIBUTORS PVT. LTD.,KOLKATA vs. I.T.O.,WARD-9(2), KOLKATA

This appeal filed by the assessee is against the order of Ld. CIT(A)-12, Kolkata vide Appeal No. 84/CIT(A)-12/Kol./Ward- 9(2)/2016-17 dated 10.07.2017 passed against the assessment order by ITO, Ward-9(2), Kolkata u/s.143(3)/147/263/144 of the Income- tax Act, 1961 (hereinafter referred to as the “Act”), dated 20.03.2015.

At the outset, it is noted that present appeal is barred by limitation by 902 days for which petition for condonation of delay along with affidavit is placed on record. It is noted that order of Ld. CIT(A) dated 10.07.2017 was received by the assessee on 15.07.2017 and the due date of filing the present appeal was 13.09.2017, which in fact has been filed on 03.03.2020. In the petition for condonation of delay, it is stated that director of the assessee relied upon the professional competency of its authorised representative for taking appropriate action as the director was not competent to understand and deal with the taxation matters of the assessee company. Authorised representative inadvertently missed to file the appeal in time for which an affidavit by the authorised representative explaining the reason is also placed on record. It is submitted that there is no benefit to the assessee in filing the appeal belatedly. We have gone through the petition and the affidavit placed on record.

Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. "Every day's delay must be explained" does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner.

Brief facts of the case are that assessee filed its return of income on 07.09.2009 reporting a total income at‘nil’ which was processed u/s. 143(1) of the Act. Subsequently, case was reopened and assessment was completed u/s. 147 read with sec. 143(3) of the Act vide order dated 30.08.2011, determining total income at Rs.63,500/-. While making this assessment, Ld. AO in his order, in para 3 had observed as under: “During the course of hearing, on going through the details submitted by the assessee it was noticed that during the year the assessee company issued 1,02,400 no. of equity share with a face value of Rs.10/- along with a premium of Rs.490/- per share. To verify the transactions, notices u/s. 133(6) of the Act were issued to some of the share applicants on test check basis.”

Before us, ld. Counsel emphasized on the fact noted in the first assessment completed u/s. 147 read with section 143(3), dated 30.08.2011 wherein ld. AO has carried out investigation into the transaction of share capital and share premium raised by the assessee during the year under consideration by issuing notices u/s. 133(6) of the Act, dated 29.04.2011to three share subscribing companies out of total ten, on test check basis. Copy of one such notice issued is extracted below so as to demonstrate the details called for by the ld. AO from the investor company.

Per contra, ld. Sr. DR submitted that assessee failed to comply with the summons issued u/s. 131 of the Act which qualifies the addition made by the ld. AO. It was submitted that though the directions given by the ld. CIT in the order passed u/s. 263 was not followed, however, the addition so made is correct and ought to be upheld. It was also contended that furnishing plethora of documents and flawless paper work compliance is of least significance if the Gulmohar Distributors Pvt. Ltd. AY 2009-10 assessee fails to comply with the summons issued u/s 131 of the Act.

We have heard the rival contentions and gone through the records.It is an undisputed fact as borne out from the records that in the course of assessment proceedings u/s 147 rws 143(3), ld. AO had made enquiries in respect of share capital raised by the assessee during the year under consideration and a report from the Inspector is also placed on record in respect of three investor companies, already extracted above. Assessee had furnished all the relevant documents and details in the course of said assessment proceedings as well as during the revisionary proceedings, for all the ten investor companies, which are on record. These documents and details are also placed in the paper books furnished by the Ld. Counsel in the present appeal.

From the perusal of impugned assessment order, it is observed that it is an order which has summarily disposed the direction given by the Ld. CIT. In this order, after giving background of the litigation, ld. AO mentioned about the issue of notices under section 142(1) and summons u/s 131 of the Act and their non-compliance to pass the order ex parte. These observations are reproduced as under: “In compliance to the directions of the Ld. CIT, Kolkata-III, notice u/s 142(1) of the Act was issued to the assessee company requiring it to appear before the undersigned, either personally or through its authorised representative, and furnish certain details. Summon u/s 131 of the Act was also issued to the directors of the company for their personal attendance. However, neither anyone on behalf of the assessee nor the directors of the assessee company appeared before the undersigned till date. Summons u/s 131 of the Act were also issued to the directors of the subscriber companies, as claimed by the assessee in the course of assessment proceeding, for their personal attendance. Once again none of the directors of the subscriber companies appeared before Gulmohar Distributors Pvt. Ltd. AY 2009-10 the undersigned till date. Since there was no compliance on the part of the directors of the assessee company or the directors of the subscriber companies, there is no option but to pass the order ex parte.”

Ld. Counsel placed reliance on the decision of Co- ordinate Bench of ITAT Kolkata in the case of Aastha Vincom Pvt. Ltd. vs. DCIT in dated 26.08.2022 wherein under similar facts and circumstances, appeal of the assessee was allowed. Since similar fact pattern is involved, Gulmohar Distributors Pvt. Ltd. AY 2009-10 we also place our reliance on this decision for the purpose of giving our finding. In this case also, ld. AO had made enquiry of five investor companies out of the total eight during the assessment proceedings u/s 147 by calling the details u/s 133(6) of the Act. Ld. AO having satisfied, did not make addition towards share capital raised by the assessee during the year. This assessment was also subjected to revisionary proceedings u/s 263 of the Act wherein directions were given by the ld. PCIT for detailed enquiry by the AO towards share capital raised by the assessee. In the effect giving order of section 263, passed by the ld. AO, additions were made u/s 68 towards share capital raised by the assessee. Matter went in appeal before the ld. CIT(A) who confirmed the addition and then Coordinate Bench of ITAT Kolkata gave relief to the assessee. observations and finding arrived at in this decision are reproduced for ease of reference: “15. Similar details/information was filed by the other investors to whom the notices under section 133(6) of the Act were issued. We note that these investor have responded to the notices issued under section 133(6) of the Act by furnishing the details of payments duly evidenced by the bank statement, copies of ITRs, balance-sheets and Profit & Loss A/cs, and source of investments, etc. and the ld. Assessing Officer, after examining these details furnished by the assessee accepted these investments and no addition was made in the assessment u/s 143(3) r.w.s. 147 of the Act. The ld. Pr. CIT in the revisionary order passed under section 263 of the Act dated 07.03.2013 issued the following directions to the ld. Assessing Officer to carry out the investigation after conducting independent inquiry in paragraph 19 of the order, which is extracted as below:- 19. In view of the above, the order passed by the A.O. is erroneous and prejudicial to the interest of revenue and hence, the order passed by the A.O. is set-aside with the direction that he/she should pass the assessment order after conducting independent detailed and complete enquiries into the subscription to the share capital and premium to the extent of Rs. 7,86,50,000/- introduced in this case. The A.O. should trace the source of share capital by enquiring into the various layers through Gulmohar Distributors Pvt. Ltd. AY 2009-10 which the money has been introduced in this company as share capital and also examine the directors of subscriber companies by issuing summons u/s 131 of the I.T. Act. The A.O. should send information to the A.Os. having jurisdiction over the subscriber company to the share capital regarding its investment into share capital & premium paid. The A.O. should conduct independent enquiries to verify the documents filed before him in respect of proof of subscription to share capital. The A.O. should not confine himself to conducting enquiries into the subscribers to the share capital only on selective basis. The A.O. should also call upon the assessee to identify the persons who are shown as directors of the assessee company and examine them on oath to verify their credential as directors. The A.O. should pass speaking order after providing reasonable opportunity to the assessee and verifying the source of share capital including the share premium of all the subscribers and rotation of money through various hands so as to ascertain the true nature of transaction which will bring to the fore, the reality of the transactions. Hence the order passed by the A.O. u/s 143(3) r/w 147 for the AY 2008-09 is set aside to be framed de-novo as per directions contained in the above parts of this order”.

It is pertinent to observe that the ld. Assessing Officer was required to conduct the enquiry as contemplated in the above finding. We have made an analysis of the assessment order dated 31.03.2014. This impugned order is running into four pages and the first one & half page, the ld. Assessing Officer has given background of the litigation. In pages no. 3 & 4, he has made reference to the judgments of the Hon’ble High Courts as well as Hon’ble Supreme Court namely CIT, Meerut –vs.- Nav Bharat Duplex Limited 35 taxman 289 (Allahabad). Some of the judgments we have already taken cognizance in our observation. The factual finding which was required to investigate is contained only in paragraphs no. 3 to 5, which read as under:- “3. Investigation was carried out by calling for information U/S.133(6) of the IT Act, which specifically asked for, besides other details, the following information : (A) Copies of Trade license of the subscriber companies. (B) Certified copy of the resolution adopted by the subscriber companies for subscribing to the share capital of the assessee company. (C) I.D proof, PAN and DIN of the directors. None of the subscribers furnished the above details. This gives a clear indication about the back also seen from the profit and loss account and Balance they did not have any business activities and their net rupees only. It appears from the information Gulmohar Distributors Pvt. Ltd. AY 2009-10 collected; companies existed on papers only with a sole purpose a other companies, like the assessee company.

Further, summons u/s 131 of the I.T Act were issued to the directors of the assessee company at their .given addresses, but most of the summons were returned unserved by the India Post. However, one person namely Shri Rakesh Kumar Choubey appeared in compliance to the summons. The statement of Shri Choubey was recorded u/s.131 of the I.T. Act on 24.03.2014. The salient points that emerged from his statement are : A) Shri Rakesh Kumar Choubey has no PAN and is not assessed to Income Tax. B} Shri Choubey has no idea of Company, Director or Share Capital. C) Shri Choubey is not aware of the subscriber companies or its subscription in the Share Capital of the assessee company. D) During the relevant financial year i.e. F.Y: 2007-08 Shri Choubey worked as a Peon in M/s. Khaitan and Associates. Therefore, it is evident from the statement of Shri Choubey that the assessee company has used the name of Shri Choubey for the purpose of their directors. It is a normal practice for such paper companies to use the name of lowly paid employees likes peons, drivers etc. as directors.

On perusal of the complete order, it nowhere reveals when ld. Assessing Officer has started the investigation? When he has issued notice under section 142(1) or 133(6) to the subscriber of the shares as well as summons under section 131 of the Act to the Directors of the assessee-company? There is no analytical finding at the end of the ld. Assessing Officer. He simply made a narrative observation on this issue, which is almost a cut and paste type of finding. It is pertinent to note that specific directions given by the ld. CIT in the order under section 263 are that the ld. Assessing Officer would issue summons under section 131 of the Income Tax Act to the Directors of subscriber companies. He has not issued any summons. He simply called information under section 133(6) of the Act. Such information are already on the Gulmohar Distributors Pvt. Ltd. AY 2009-10 record and collected in the first round itself. He was directed to transmit the information to the ld. Assessing Officer having jurisdiction over the subscriber companies. He has not complied with. A perusal of the finding extracted supra, nowhere disclosed the line of action required to be followed, has been followed by the ld. Assessing Officer. Thus if we were called upon the weigh the original assessment order, vis-a-vis the present one, both are non-speaking, material was collected in the original proceeding as is available on record. We have referred in this order. But the only difference is the Assessing Officer did not make addition there without conducting any inquiry. The ld. Assessing Officer put the assessee undertake liability. It struck to our mind whether it should be reinvestigated but how many proceedings are to be taken against the assessee. None of the authority is analysing the details in an analytical manner.

It is furnished that in the set aside assessment proceedings, the ld. Assessing Officer issued notices under section 131 of the Act to the present and erstwhile Directors of the assessee- company, who did not comply with the summons except Shri Rakesh Kumar Choubey, whose statement was recorded. The ld. Assessing Officer noted that Shri Rakesh Kumar Choubey is not having any PAN and not assessed to income-tax. The Ld. Assessing Officer also noted that Shri Choubey is not having any knowledge about its either Directors or share capital of the assessee-company and he was working as a peon in M/s. Khaitan and Associates during F.Y. 2007-08 and thus he came to the conclusion that Shri Rakesh Kumar Choubey was used by the assessee-company just for formalities sake to comply with various statutory requirements, which is a common practice and held that the share capital raised by the assessee is bogus thereby adding the same to the income of the assessee under section 68 of the Act. Further the assessee has filed the proofs of identities creditworthiness of the investors and genuineness of the transactions before the ld. Assessing Officer. We also note from the record before us that Mr. Rakesh Kumar Choubey retracted his statement as recorded under section 131 on 26.03.2014 vide Affidavit which was attested on 27.03.2014 by Notary Public. We also note that from the evidences before us that Mr. Rakesh Kumar Choubey was holding a PAN bearing No. AFHPC3909G and assessed to tax and has regularly been filing his return of income under the charge of ITO, Ward-37(1), Kolkata. Therefore, it is clear from the above that the statement as called by the ld. Assessing Officer under section 131 is not correct and cannot be allowed as basis for making addition. To the above extent, we note that the allegation of the Assessing Officer for making addition was not correct. Further the ld. Assessing Officer observed that the assessee-company being a newly incorporated company has issued and raised share capital of Rs.7 crores by issuing shares at a premium of 19 times the face value and also that none of the subscribers furnished the details as requisitioned in the notices under section 133(6) of the Act. Besides ld. Assessing Officer noted that upon perusal of the Profit & Loss Gulmohar Distributors Pvt. Ltd. AY 2009-10 Account and Balance-sheet of the share subscriber companies, it is clear that they did not have any business activity and their net worth was meagre. The ld. CIT(Appeals) confirmed the order of ld. Assessing Officer for three reasons namely (i) the share applicants did not respond to the notices issued under section 133(6) of the Act though the notices were duly served on them; (ii) Summons issued to Shri Pradip Kejriwal, present Director of the Company remained un-served and (iii) that on the basis of statement recorded of Shri Rakesh Kumar Choubey, erstwhile Director, it appears that he was a dummy Director and therefore, an opportunity of cross examination could not be allowed since Shri Rakesh Kumar Choubey himself was the Director of the assessee-Company at the relevant point of time.

Having considered the aforesaid facts and observations of the ld. CIT(Appeals) and the extent of verification done by the ld. Assessing Officer in the proceedings under section 147 of the Act, we observe that the ld. Assessing Officer has carried out full investigation into the share capital/share premium in the assessment proceedings under section 147 of the Act by issuing notices u/s 133(6) of the Act, which were duly supplied by the said investors. Besides we note that the assessee has fully furnished all the details before the ld. Assessing Officer to prove the identity, creditworthiness (source of money) of the investors and the genuineness of these transactions. But in the set assessment proceedings, the Assessing Officer has not carried out any investigation and harped on the fact that the assessee has failed to discharge its onus to prove the identity, creditworthiness and genuineness of the transactions by ignoring and overlooking the facts available on record. We note that the ld. Assessing Officer has all the records before him on the basis of which in the first assessment proceedings, the ld. Assessing Officer held the investments in share capital/share premium as genuine, whereas in the set aside proceedings, the ld. Assessing Officer has treated the same investments as bogus and non-genuine without carrying out any investigation by merely relying on the fact that summons issued under section 133(6) were served but not responded by the investors and also former and present Directors of the assessee company did not comply with summons issued u/s 131 of the Act except one Shri Rakesh Kumar Choubey. In our view, the action of the ld. Assessing Officer in making addition without complying the direction issued by the ld. Pr. CIT specifically in paragraph 19 of the order as reproduced hereinabove cannot be sustained. The addition was made simply for the reason that ld. Pr. CIT has exercised his jurisdiction under section 263 of the Act setting aside the original assessment. We also note that the ld. Assessing Officer has ignored the facts, documents, confirmations and evidences, which were available on record on the assessment folder. In our opinion, there is no bar in the Act to issue of shares at a premium as it is the prerogative of the Board of Directors to decide the premium amount and the assessee was not required to prove the purpose or justification for charging premium on shares. The ld. Counsel for the assessee to buttress the contentions in Gulmohar Distributors Pvt. Ltd. AY 2009-10 favour of the assessee placed reliance is placed on the judgment of the Hon’ble Mumbai Tribunal in the case of ACIT –vs.- Gagandeep Infrastructure Pvt. Limited (2014) 40 CCH 0128. The operating part is extracted as under:- “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 receipts 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 credits 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 shareholders and the genuineness of the transaction was also established by filing copies of share application forms and Form No. 2 filed with the Registrar of Companies. The entire dispute revolves around the fact that the assessee has charged a premium of Rs. 190/- per share. No doubt a non-est company or a zero balance sheet company asking for Rs.190/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. The amendment has been brought in the Income Tax Act under the head “Income from other sources” by inserting Clause (viib) to Sec. 56 of the Act wherein it has been provided that any consideration for issue of shares, that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be treated as the income of the assessee but the legislature in its wisdom has made this provision applicable w.e.f. 1.4.2013 i.e. on and from A. Y. 2013-14. In so far as the year under consideration is concerned, the transaction has to be considered in the light of the provisions of Sec. 68 of the Act. There is no dispute that the assessee has given details of names and addresses of the share holders, their PAN Nos, the bank details and the confirmatory letters.”

The above decision of the Tribunal has been affirmed by the Hon’ble Bombay High Court by dismissing the appeal of the Revenue reported in (2017) 394 ITR 680 (Bombay.). The case of the assessee also finds support from the another decision of the Hon’ble Madhya Pradesh High Court in the case of CIT –vs.- Chain House International (P) Ltd. reported in 98 taxmann.com 47, wherein the Hon’ble Court has held as under:- "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 Gulmohar Distributors Pvt. Ltd. AY 2009-10 premium amount and it is the wisdom of shareholder whether they want to subscribe the shares 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 if fixed by any Govt. Authority or unless there is any irestriction on the amount of share premium under any law, the price of the shares is decided on the mutual understanding of the parties concerned.”

Therefore, the issue of share at premium cannot be a ground for making addition. We also note that the allegation of the authorities below that the share applicants did not respond to the notices issued under section 136 of the Act, whereas this is not the allegation that notices were not served upon the share applicants. We note that the information /details/evidences of all these share applicants were available with the ld. Assessing Officer such as PANs, addresses, copies of bank statement, annual audited accounts, etc. Admittedly and undeniable, the initial burden of proof lies on the assessee but once he proves the identity of the share applicants by either furnishing PAN or income tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee or by draft or any other mode, then the onus of proof would shift to the revenue. Just because the creditors/share applicants could not be found at the address given, it would not give the revenue the right to invoke section 68 of the Act. One must not lose sight of the fact that it is the revenue which has all the powers to trace any person and is also settled law that the assessee need not to prove the source of source. The case of the assessee finds support from the decision of the Hon’ble Delhi High Court in the case of CIT –vs.- Orissa Corporation Pvt. Limited (1986) 159 ITR 78 (Del.), wherein it has been held as under:- The assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index number was in the file of the Revenue. The Revenue, apart from issuing notices under s. 131 at the instance of the assessee, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the allowed loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises. It cannot, therefore, be said that any question of law arose in these cases. The High Court was, therefore, right in refusing to refer the questions sought for”.’ 22. The above decision of the Hon’ble Delhi High Court has been affirmed by the Hon’ble Apex Court in (1986) 159 ITR 78. Therefore, we observe that non-compliance of notice by the share Gulmohar Distributors Pvt. Ltd. AY 2009-10 applicants in the second round of assessment proceedings cannot be used to draw adverse inference against the assessee as the Revenue was having all the necessary evidences/documents which were filed by the share applicants in the first round of assessment in response to the notices issued under section 133(6) of the Act.

On the issue of share applicants, they are not having any business activity and their net worth was also very meagre. We note that the share application was received through Banking channel out of own funds of investing companies as is clear from the audited annual accounts and that it is not necessary that source of investment is to be out of taxable income. The assessee’s case finds support from the decision of Ami Industries (India) Pvt. Limited (ITA 1231 of 2017) passed by the Hon’ble Bombay High Court, wherein the Hon’ble Court has observed as under:- “It was not necessary that share application money should be invested out of taxable income only”.

On the third issue that summons issued under section 131 fo the Act to the erstwhile and present Directors returned un- served except Mr. Rakesh Kumar Choubey, who was erstwhile Director and appeared to comply with the summons. We note that according to the ld. Assessing Officer, he was not assessed to tax and he was not having any PAN and he was working as a Peon to M/s. Khaitan& Associates. We note that the observations of the ld. Assessing Officer are not correct as Shri Rakesh Kumar Choubey is holding PAN and also assessed to tax and filing his return of income under the charge of ITO, Ward-37(1), Kolkata. We also note from the reasons before us that the statement given under section 131 was retracted just after two days recording. We note that in the first round of assessment, the transactions were examined and verified completely and accepted by the ld. Assessing Officer, then what new facts have come on record prompting the ld. Assessing Officer to take a contrary view. The ld. Assessing Officer has not recorded any finding as to how the share capital/share premium received by the assessee were bogus and unexplained or his own money was converted in the form of share capital/share premium. Thus no adverse material/evidences were brought on record and documents already on record remained uncontroverted. Under these facts and circumstances, the ld. Assessing Officer cannot be allowed to disturb the satisfaction recorded by the first ld. Assessing Officer in the first round based upon evidences available on record that too just on the surmises and conjectures.

In view of our above facts, observation and legal position, we are inclined to set aside the order of ld. CIT(Appeals) and direct the ld. Assessing Officer to delete the addition.”

In the result, appeal of the assessee is allowed.