M/S. DWARKA GOODS PVT. LTD.,KOLKATA vs. I.T.O., WARD-1(1), KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘SMC’, KOLKATA [Before Dr. Manish Borad, Accountant Member & Shri Sonjoy Sarma, Judicial Member] I.T.A. No. 524/Kol/2022 Assessment Year : 2016-17 M/s. Dwarka Goods Private Limited vs ITO, Ward-1(1), Kolkata PAN: AADCD 1402 B Appellant Respondent Date of Hearing 08.12.2022 Date of Pronouncement 07.02.2023 For the Assessee Shri Sunil Surana, AR For the Revenue Shri P.P. Barman, Addl. CIT

ORDER Per Sonjoy Sarma, JM: The present appeal has been preferred by the assessee against the order dated 29.07.2022 of the National Faceless Appeal Centre [hereinafter referred to as ‘CIT’] passed u/s 250 of the Income Tax Act (hereinafter referred to as the ‘Act’). The assessee has taken the following grounds of appeal: “i. For that the ld. CIT(A) erred in confirming the order of the AO in adding back the share capital including premium of Rs. 39,41,475/- raised from two companies during the year as unexplained cash credit u/s 68 when all the details and evidences were filed to prove the same and the assessee discharged the onus that lay upon him to prove the same.

ii. For that the ld. CIT(A) failed to appreciate the fact that AO has brought no evidence on record to controvert the submissions of the assessee as well as the share subscribers and as such the order of the ld. CIT(A) is against the well established principles of law.

iii. For that on the facts and circumstances of the case, the action of ld. CIT(A) in confronting the order of the AO was unjustified and uncalled for.”

2 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. 2. Brief facts of the case are that the assessee is a private limited company. During the assessment year in question, assessee had received additional share capital including share premium aggregating of Rs. 1,50,00,000/- and in the course of assessment proceeding, the assessing officer had enquired about the source as well as creditworthiness of all the share application money received by the assessee and while framing the assessment, ld. AO added back of Rs. 39,41,475/- in respect of equity advance by M/s. Ortem Consultants Pvt. Ltd. of Rs. 22,02,125/- and M/s. Rhino Investments Pvt. Ltd. of Rs. 17,39,350/- respectively u/s 68 of the Act in the hands of assessee. Although during the assessment proceeding both the allottee companies in their reply to notice u/s 133(6) duly furnished their respective source of fund necessary to invest in the assessee company. However, the ld. AO did not satisfy with such reply filed by the assessee and accordingly entire amount received on account of issue of share along with share premium was added back as unexplained cash credit making an addition of Rs. 39,41,475/- u/s 68 of the Act.

3 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. subscriber companies in their reply to notice u/s 133(6) had duly proved their respective source of fund necessary to invest in the assessee company but did not consider the claim of the assessee and confirmed the addition by referring to the judgment on Hon’ble Supreme Court in the case of PCIT vs NRA Iron & Steel Pvt. Ltd. confirmed the findings of the ld. AO observing as follows:

“If we look at the mere paperwork submitted by the appellant, on a superficial level, as pleaded by the appellant, the source of the investment and the credit-worthiness of the investors stands proved. On the other hand, if we follow the path of putting genuineness to test on the basis of an overall larger picture and ground realities, it will be difficult to overlook all the red flags raised by the case history of such companies and the conclusion will be that these are mere paper companies acting as conduct of funds to rake up the bogus capital in the balance sheets of these entities. The fact that every time these companies had to make payments to the assessee company, there were similar credits in its bank accounts from different sources. This investment has been made at a huge premium and there is no justification on record for such a huge premium-that too through a private placement, and the fact that both the companies aptly meet the description of shell companies which are used for financial maneuverings. The phenomenon of shell companies being used for financial maneuverings and even money laundering, as even Hon'ble Prime Minister took note of in his 2017 Independence Day address, is not an open secret- secret if it is, we cannot even pretend to be so naïve to be oblivious of it. When we so look at this case without any blinkers on, the share capital transaction in question can be anything but genuine, and genuineness is a critical factor for deciding whether or not a transaction can be said to be unexplained credit under section 68. The appellant has been harping on the identity and the credit- worthiness of the so-called ‘angel investors’ but has not made a single statement about the genuineness of the transaction. In light of the above discussion, and respectfully following the decisions cited, the addition of Rs. 39,41,475/- made by the AO under section 68 of the Act is hereby confirmed.”

4 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. 4. Aggrieved by the aforesaid order, the assessee is now in appeal before this Tribunal. The ld. counsel for the assessee to substantiate its claim filed a paper book containing detailed submissions filed before the lower authorities and also took us through various details and documents filed in the paper book which includes the audited financial statement of both the subscribing companies replies to the notices u/s 133(6) of the Act. However, the ld. AO while framing the assessment completely ignored such document furnished before him. The ld. AO in his opinion stated that the amount invested in equity shares, loan and advances, sundry debtors and other receivables are not capable of proving creditworthiness of a company. However, in the case of assessee, the investor company had filed a detailed reply explaining the source of money invested in the assessee company and furnished the names and address, PAN as well as the source of funds along with all receipts. Besides that they had also furnished the bank statement of such parties from whom the investor companies in turn received the money which basically comprised of sale proceeds of investment revised of loans and advances and other receivables which had they received. The ld. AO while framing the assessment instead of examining such source of party by issuing notice u/s 133(6) or section 131 summarily rejected the submission made by the assessee during the assessment proceeding.

5 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. relied on the judgment in the case of PCIT Central-1, Kolkata vs NRA Iron & Steel Pvt. Ltd. 412 ITR 161.

We have heard the rival contentions and perused the 6. records placed before us and carefully gone through the judgment referred by the parties. The addition made u/s 68 of the Act at Rs. 39,41,475/- is under challenge before us. It was made by the AO alleging that the assessee failed to explain the source of share capital and share premium of Rs. 39,41,475/- received during the year which was subsequently confirmed by the ld. CIT(A).

It is noticed that the appeal is against the addition of share 7. capital including share premium u/s 68 of the Act. The aggregating of Rs. 39,41,475/- received by the assessee from two investors companies namely M/s. Ortem Consultants Pvt. Ltd. of Rs. 22,02,125/- and another is M/s. Rhino Investment Pvt. Ltd. of Rs. 17,39,350/- received by the assessee during the year which was subsequently confirmed by the ld. CIT(A). Certain undisputed facts which were placed before the ld. CIT(A) vide their submission and same is reproduced as under:

“The above appeal is against the addition of share capital including premium us 68 of the IT Act aggregating to Rs. 39,41,475/- received from the following parties:- Sl. No. Name of Investor Company Amount 1 Ortem Consultants Private Limited 22,02, 125.00 2 Rhino Investment Private Limited 17,39,350.00

The aforesaid addition has been made by the learned AO basically on the ground that in his opinion, creditworthiness or capacity of

6 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. investing by the investor companies are unsatisfactory The learned AO has therefore treated the aforesaid amount as unexplained cash credit u/s 68 of the IT Act. All the grounds taken in the appeal relate to the addition of the aforesaid amount. While making the. additions, the learned AO has not considered the submissions made by the appellant and also by the investor companies in response to notices u/s 133(6) of the 1T Act served on them. The net worth of the investor companies as on Mar’ 2015 as per their respective audited Balance Sheets and the investments made by them in the appellant company is as under: Sl. No. Name of Investor Company Net worth Amount 1 Ortem Consultants Private Limited 70,00,327.00 22,02, 125.00 2 Rhino Investment Private Limited 59,58,368.00 17,39,350.00

The learned AO has alleged that the investor companies do not have any property so that the same can contribute to the creditworthiness of the investing companies. In his Opinion, the amount invested in unquoted shares, loans advances, sundry debtors and other receivables are not capable of proving creditworthiness or a company. The investor companies had filed a detailed reply explaining the source of the money invested in the appellant and furnished the names & addresses, PAN number of the source along with the nature of receipts. They had also furnished the bank statements of such parties from whom the investor companies had in turn received the money which basically comprised of sale proceeds of investments, refund of loans & advances and other receivable and a small amount of loan received. The learned AO instead of examining such source parties by issuing notices u/s 133(6) or section 131 rejected the submissions made during the assessment proceedings and summarily added the amounts which is against the provisions of law and natural justice. We are filing herewith the following documents which will clearly prove the genuineness and the creditworthiness of the investor companies. 1. Audited annual accounts for the year under appeal of the appellant- Annexure A

7 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. 2. Bank statement of the appellant in which the aforesaid amounts has been credited -Annexure B 3. Annual audited accounts of Ortem Consultants Pvt Ltd for F.Y 2014-15 - Annexure C 4. Bank statements of Ortem Consultants Pvt Ltd showing the amount invested in the appellant company and also from all source parties - Annexure D 5. Annual audited accounts of Rhino Investments Pvt Ltd for F.Y 2014-15 – Annexure E 6. Bank statements of Rhino Investments Pvt Ltd showing the amount invested in the appellant company and also from all source parties – Annexure F 7. Copies of the replies of the investor companies in response to notice u/s 133(6)- Annexure G 8 Tabular statements showing details of names, addresses, PAN number, nature of receipts and amount received by the investor companies along with supporting documents like bank statements along acknowledgement etc of such source parties- Annexure H On perusal of aforesaid documents and evidences, the source of the money received and the credit worthiness of the investor companies are fully proved. The addition made by the learned AO was without any valid basis and without appreciating the facts of the case. The additions made is therefore required to be deleted.” From the perusal of the above details, which are also placed 8. before us in the paper book and the fact narrated includes the details filed by the assessee i.e. bank account, income tax return, audited balance sheet of the investor companies at the time of subscribing to the equity shares of the assessee company and the

8 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. sufficient availability of funds during the year to prove the fact that the said transaction has been carried out between the investor companies and the assessee company. In similar type of cases which we are adjudicating, the only basis of addition u/s 68 of the Act for unexplained share capital and share premium in case the AO made addition u/s 68 by alleging that investor companies do not have any property so that the same can contribute to the creditworthiness of the investing company. However, in the instant case, subscribing company has not only filed complete details showing financial strength of the investor companies, sufficient funds available to make the investment but had also confirmed the transaction before the ld. AO. Thus, all the limbs of section 68 as normally accepted by the revenue and judicial authorities required to be fulfilled about the identity and creditworthiness of the share subscriber and genuineness of the transaction has been successfully proved in the instant case.

9 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. This Court in the land mark case of Kale Khan Mohammed Hanif v. CIT [1963] 50 ITR 1 (SC) and Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source.”

9.1. Further in para 9 of the said decision, the Hon’ble Supreme Court has observed as under:

“9. The Judgments cited hold that the Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries. In the present case, the Assessing Officer made an independent and detailed enquiry, including survey of the so-called investor companies from Mumbai, Kolkata and Guwahati to verify the credit- worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the share-holders were either non-existent, or lacked credit-worthiness.”

9.2. Thereafter the Hon’ble Supreme Court summed up the principles which emerged after deliberating upon various case laws as under: “11. The principles which emerge where sums of money are credited as Share Capital/Premium are: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor/subscriber, verify the identity of the

10 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.”

9.3. The Hon’ble Supreme court, thus, has held that once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness of the subscribers, then the AO is duty bound conduct to conduct an independent enquiry to verify the same. However, as noted above, the ld. AO in this case has not made any independent enquiry to verify the genuineness of the transactions. The assessee having furnished all the details and documents before the Assessing Officer and the ld. AO has not pointed out any discrepancy or insufficiency in the said evidences and details furnished by the assessee before him. As observed above, the assessee having discharged initial burden upon him to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, the burden shifted upon the ld. AO to examine the evidences furnished and even made independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee and confronting with the same to the assessee. In view of this, the aforesaid decision of the Hon’ble Supreme Court in the case of PCIT vs. NRA Iron and Steel Pvt. Ltd. (supra), in our humble view, is not applicable to the facts and circumstances of the case in hand.

11 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. 10. We also observe that since the assessee has filed sufficient details to our satisfaction to prove the identity, genuineness and creditworthiness of the transaction, we find infirmity in the findings of the ld. CIT(A) by confirming the alleged addition made by the ld. AO. Our view is further supported by judicial pronouncements: i) CIT vs. Gagandeep Infrastructure (P) Ltd. 80 taxmann.com 272 (Bombay) wherein it was held by High Court that the proviso to section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1st April, 2013. Thus it would be effective only from the Assessment Year 2013-14 onwards and not for the subject Assessment Year. In fact, before the Tribunal, it was not even the case of the Revenue that Section 68 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so introduced states that it was introduced "for removal of doubts" or that it is "declaratory". Therefore it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to Section 68 of the Act is immaterial and does not change the interpretation of Section 68 of the Act both before and after the adding of the proviso. ii) PCIT vs. Chain House International (P) Ltd. 98 taxmann.com 47 wherein Madhya Pradesh High Court held that “The question raised by the revenue in regard to issuing the share at a premium is purely a question of fact. It is a 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 to shares at such a premium or not and moreover the section 68 does not envisages any law on share premium it only requirement is to identity of the investors, the genuineness of the transaction and the creditworthiness of the share applicants which same has been discharged by the respondent authority and the HIGH COURT OF M.P. BENCH AT INDORE Pg. No.--58-- (ITA No.112/2018 & Other connected matters) same has been accepted by the appellate authorities thus, the same cannot be reconsidered in these appeals as it is a pure question of fact.” SLP preferred by revenue was

12 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. dismissed by Hon’ble Supreme Court and the same is reported in 103 taxmann.com 435(SC). iii) CIT vs. Kamdhenu Steel & Alloys Limited [ITA No.972 of 2009] dated 23.12.2011 wherein the Delhi High Court in a batch of 11 appeals was required to adjudicate on the very issue of addition made by the AO u/s 68 in respect of share application monies received by the assessees as alleged unexplained cash credit. In all these cases, the Department had alleged that the share application monies were received from persons who were ‘entry operators’ and the monies received by way of share application was nothing but was routing of unaccounted money of assessee in the form of subscription to share capital. However, in the assessments made the AOs had not brought on record any material or evidence to substantiate such finding. Accordingly, on appeal the appellate authorities had deleted the additions made u/s 68 of the Act. iv) DCIT vs. Rohini Builders 127 Taxman 523 observed that the assessee had discharged its onus of proving the identity of creditors by giving their complete addresses, permanent accounts number and copies of assessment orders. It was further observed that the assessee had also proved capacity of creditors by showing that amounts were received by account payee cheques. The High Court held that only on the ground that some of the creditors could not be served with notice u/s 131 or they failed to appear before Assessing Officer the loans could not be treated as non-genuine and therefore upheld the order of the Tribunal deleting the addition u/s 68 of the I.T. Act 1961. v) CIT vs. Orissa Corpn (P) Ltd. 159 ITR 78 where the Court held that “In this case 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 section 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 alleged 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 had 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.”

13 ITA No. 524/Kol/2022 AY: 2016-17 M/s. Dwarka Goods Pvt. Ltd. Therefore, respectfully following the judicial precedents and 11. in the light of the facts and circumstances of the case, we are of the considered view that no addition was called for u/s 68 of the Act for the alleged sum of the share capital and premium of Rs.39,41,475/- received during the year. Thus, the finding of the ld. CIT(A) is reversed and grounds of the appeal raised by the assessee are allowed.

Order is pronounced in the open court on 07.02.2023 Sd/- Sd/-

(Manish Borad) (Sonjoy Sarma) Accountant Member Judicial Member Dated: 07.02.2023 Biswajit, Sr. PS Copy of the order forwarded to: 1. Appellant- M/s. Dwarka Goods Private Limited, 101/1/2/1, B.T. Road, Kolkata-700090. 2. Respondent – ITO, Ward-1(1), Kolkata. 3. Ld. CIT 4. Ld. CIT(A) 5. Ld. DR