ITO, WARD-4(4), KOLKATA vs. M/S KEMEX ENGINEERING (P) LTD, KOLKATA

Kemex Engineering Pvt. Ltd., AY 2012-13 6. Per contra, Ld. Counsel for the assessee submitted that to establish the identity and creditworthiness of the shareholders and genuineness of the transactions, assessee has submitted all the relevant details and documents in the course of assessment proceedings in respect of all the five share subscriber companies, details of which are discussed in the order of Ld. CIT(A) in para 4.4(a) to (e) and is extracted below for the ease of reference:

“4.4. In the appellant’s case it is found that all five share subscribers in respect of whom addition u/s. 68 was made were corporate assessees. The assessee had furnished the complete corporate information regarding these five share subscribers. Based on the information gathered from the appellant, the AO made independent enquiries u/s. 133(6) to these five shareholders, it is noted that the AO had called for the information/details to verify their identity, creditworthiness and the genuineness of the transactions. Each of the five share subscribers had furnished the information and documents as requisitioned by the Ld. AO. Copies of the relevant replies furnished by the shareholders have been placed by the appellant at pages 20 to 87 of the paper book. I have examined the relevant facts furnished by each share subscribers which throws light as to their identity & creditworthiness and genuineness of the transactions. Each of the share subscribers is thus being separately discussed as follows: (a) In the case of Faithful Dealtrade Pvt. Ltd. it is noted that the share applicant is assessed under the PAN AABCF7894P. It has invested a sum of Rs.49,50,000/- in the shares of the appellant company during the relevant FY 2011-12. The investments made are supported by the shareholder company’s net worth (88.45 lakhs) which is at Page No. 27 of the paper book. The notice issued u/s. 133(6) by the AO on the shareholder company, was served and duly complied by the shareholder company, copy of which is provided at pages 20-32 of the paper book. In the said reply, the shareholder company furnished copies of IT Acknowledgment and audited financials, enclosed at pages 26 to 32 of the Paper book. Further, copies of relevant and corresponding bank statement were submitted (enclosed at page 24- 215 of paper book), evidencing that funds were transferred to the appellant company on 18.10.2011 & 27.10.2011 through proper banking channel. Copy of the allotment advice was also submitted. The shareholder company has also furnished explanation regarding the source of these funds, viz. share application money received from Maa Gawarja Traders and Hornbill Vinimoy Pvt. Ltd. The AO has not pointed out any defect in the documents furnished by the shareholder company in response to notice u/s. 133(6) of the Act. (b) In the case of S D Vinimoy Pvt. Ltd. it is noted that the share applicant is assessed under the PAN AAPCS6871D. It has invested a sum of Rs.43,00,000/- in the shares of the appellant company during the relevant FY 2011-12. The investments made are supported by the shareholder company’s net worth (2.28 crores) which is at Page No. 39

Kemex Engineering Pvt. Ltd., AY 2012-13 of the Paper book. The notice issued u/s. 133(6) by the AO on the shareholder company, was served and duly complied by the shareholder company, copy of which is provided at Pages 33-44 of the Paper book. In the said reply, the shareholder compny furnished copies of IT Acknowledgment and audited financials, enclosed at Pages 38-44 of the Paper book. Bank statement were also provided (enclosed at page 37 of paper book), evidencing that funds were transferred to the appellant company on 17.10.2011, 25.10,2011, 27.10.2011 & 28.10.2011, through proper banking channels. Copy of the allotment advice was also submitted. The shareholder company has also furnished explanation regarding the source of these funds, viz., share application money received from Hornbill Vinimoy Pvt. Ltd. and DP Eminent Computer Sales Pvt. Ltd. The AO has not pointed out any defect in the documents furnished by the shareholder company in response to notice u/s. 133(6) of the Act. (c) In the case of Divinity Vintrade Pvt. ltd. it is noted that the share applicant is assessed under the PAN AADCD8671L. It has invested sum of Rs.47,00,000/- in the appellant company’s shares during the relevant FY 2011-12. The investments made are supported by the shareholder company’s net worth (2.55 crores which is at page No. 51 of the Paper book. The AO issued notice u/s. 133(6) on the shareholder company, which was served and duly complied by the shareholder company, copy of which is provided at pages 45-58 of the Paper book. In the said reply, the shareholder company furnished copies of IT Acknowledgement and audited financials, enclosed at pages 50 to 58 of the Paper book. Further, copies of relevant and corresponding bank statement were submitted (enclosed at Page 49 of Paper book), evidencing that funds were transferred to the appellant company on 19.10.2011, 25.10.2011 & 28.10.2011, through proper banking channels. Copy of the allotment advice was also submitted. The shareholder company has also furnished explanation regarding the source of these funds, viz., share application money received from the Hornbill Vinimoy Pvt. Ltd. & DP Eminent Computer Sales Pvt. Ltd. No infirmity has been pointed out by the AO in these documents furnished by the shareholder. (d) In the case of Hornbill Vinimoy Pvt. Ltd., it is noted that the share applicant is assessed under the PAN AACCH5926R. It has invested sum of Rs.23,00,000/- in the appellant company’s share during the relevant FY 2011-12. The investments made are supported by the shareholder company’s net worth (3.80 crores) which is at page No. 65 of the Paper book. The AO issued notice u/s. 133(6) on the shareholder company, which was served and duly complied by the shareholder company, copy of which is provided at pages 59-72 of the paper book. In the reply, the shareholder company furnished copies of IT Acknowledgment and audited financials, enclosed at pages 64-72 of the paper book. Further, copies of relevant and corresponding bank statement were submitted (enclosed at page 63 of paper book), evidencing that funds were transferred to the appellant company on 20.10.2011, through proper banking channels. Copy of the share allotment advice was also submitted. The shareholder company has also furnished explanation regarding the source of these funds, viz., share application money received from AB Enterprise. The AO has not Kemex Engineering Pvt. Ltd., AY 2012-13 pointed out any defect in these documents furnished by the shareholder company. (e) In the case of DP Eminent Computer Sales Pvt. Ltd., it is noted that the share applicant is assessed under the PAN AADCD8068P. It has invested sum of Rs.20,00,000/- in the appellant company’s share during the relevant FY 2011-12. The investments made are supported by the shareholder company’s net worth (1.73 crores) which is at page No. 80 of the Paper book. The AO issued notice u/s. 133(6) on the shareholder company, which was served and duly complied by the shareholder company, copy of which is provided at pages 73-87 of the paper book. In the reply, the shareholder company furnished copies of IT Acknowledgment and audited financials, enclosed at pages 77-87 of the paper book. Further, copies of relevant and corresponding bank statement were submitted (enclosed at page 76 of paper book), evidencing that funds were transferred to the appellant company on 20.10.2011, through proper banking channels. Copy of the share allotment advice was also submitted. The shareholder company has also furnished explanation regarding the source of these funds, viz., share application money received from Mithaso Sales Corporation. No defect or infirmity has been pointed out by the AO in these documents furnished by the shareholder company in response to notice u/s. 133(6) of the Act.”

6.1. Ld. Counsel reiterated that all the five share subscribing companies are body corporate, registered with ROC and are assessed to income tax. He further stated that these subscribing companies had confirmed the transactions, filed relevant papers and documents and also explained the source of funds. He thus, emphasized that assessee had discharged its primary onus casted upon it u/s. 68 of the Act. According to him, the onus thus shifted to the Ld. AO to disprove the material placed before him. Without doing so, the addition made by the Ld. AO is based on conjectures and surmises and, therefore, cannot be sustained. 6.2. Ld. Counsel also emphasized on the fact that in addition to other evidence, assessee has submitted letter from the subscribers, confirming the investment made in the share capital of the assessee. He submitted that when a confirmation letter by way of reply to notice u/s. 133(6) of the Act is submitted, it cannot be ignored. The confirmations made in the said letter are to be prima facie considered

Kemex Engineering Pvt. Ltd., AY 2012-13 as correct unless evidence is brought on record to falsify the claim made therein. According to him, even in the submissions including ITRs, audit reports, share application details etc. as listed above, the Ld. AO has not found fault in any of the details submitted and simply proceeded to make addition in respect of the amount of share capital and premium. 6.3. Ld. Counsel further submitted that all the shareholder companies are regular income tax assessees and had filed their income tax returns. It was thus emphasized that identity of all the five share subscribers is well established before the Department and is beyond any doubt. 6.4. To establish the creditworthiness of these five share subscribing companies, details relating to their net-worth and the investment made by them in the assessee were furnished along with their respective bank statement and audited financial statements. The details of sufficiency for net-worth to make investment in the share capital of the assessee is tabulated as under: Sl. Name of investor company Investible Amount No. Funds invested in available as the per assessee Financials company 1. Faithful Dealtrade Pvt. ltd. 88,45,575 49,50,000 2. S D Vinimoy Pvt. Ltd. 2,28,20,552 43,00,000 3. Divinity Vintrade Pvt. ltd. 2,54,95,495 47,00,000 4. Hornbill Viminoy Pvt. Ltd. 3,80,05,335 23,00,000 5. DP Eminint Computer Sales 1,73,20,825 20,00,000 Pvt. Ltd.

6.5. It was further submitted on the aspect of genuineness of the transactions that the amounts were invested by the subscribers through proper banking channel which is duly reflected in the respective audited financial statements of the subscribers. It was thus Kemex Engineering Pvt. Ltd., AY 2012-13 contended that since the investment reflected in the respective financial statements and the source of such investment duly explained by them, the genuineness cannot be doubted. 6.6. Ld. Counsel also submitted that notice u/s. 131 of the Act was issued to the director of the assessee for personal appearance, who was requested to produce all the directors of the subscriber companies which was not complied with, though all the desired submissions were made during the course of assessment by the assessee. He submitted that non-appearance of directors of the subscriber companies is not fatal to the assessee as it was not within its control. He pointed to the fact that though directors of the subscriber companies did not appear in person but all the relevant compliances were fulfilled against the notices issued u/s. 133(6) of the Act by these share subscribing companies. Ld. Counsel thus stated that it is a fact that assessee filed complete details of share capital raised by it during the year. All the investors are income tax assessees and transactions have taken place through banking channel from the accounts held by the investors in their own name and that each of the investors had net-worth many times more than the amount invested by them. The notice and summons issued to the share applicants were duly served and complied with by filing details and evidence as called for and also confirming the investigations made by them explaining the source thereof. The assessee had duly discharged the onus laid upon them u/s. 68 of the Act.

7.2. We also take note of the elaborate and well reasoned findings and decisions arrived at by the Ld. CIT(A) by taking into consideration all the details and documents placed on record. The relevant findings and decisions from the following paras are extracted as under: “4.5. To sum up the foregoing, it is observed that all the notices u/s. 133(6) were served at the respective addresses of ach of the five shareholders by registered post. The share subscribers had furnished copies of income-tax Acknowledgments which showed that each of them were regular income-tax assessees who were assessed in their own rights with reference to their audited financial results. These facts established the identity of the share applicants. It is further noted that each of the share subscriber had furnished copies of the audited accounts for the FY 2011-12. Examination of these accounts revealed that each share subscribing company was having substantial own funds in the form of capital & reserves which were several times more than the share subscription amount paid to the appellant. In find that only a fraction of the net owned funds of the respective subscribing companies was invested in assessee’s equity shares. The investments made by each of the share subscribers were paid by way of account payee cheques and/or RTGS and there was no prior cash deposit in their bank accounts. In Kemex Engineering Pvt. Ltd., AY 2012-13 view of the aforesaid facts it can be safely inferred that the assessee had discharged its onus of substantiating the creditworthiness of the shareholders. The shareholders had also furnished copies of their share allotment advices. They had also explained the nature of their respective source of funds. All these facts considered cumulatively substantiate the genuineness of the transactions involving subscription of share capital. 4.6. It is noted that in the impugned order much emphasis was placed on the act that the shareholders did not respond to the notices u/s.

Kemex Engineering Pvt. Ltd., AY 2012-13 4.8. There is per se no quarrel with the proposition put forth by the AO that `in tax proceedings the AO is not required to accept apparent as real. The AO has both duty as well as obligation to bring out the truth and present the real facts. For that purpose the AO is permitted to undertake investigation and enquiries so as to unearth the actual and real facts. The AO has been given power by the Legislature to prove that apparent is not real and thereafter make the assessment with reference to actual state of affairs. There is also no denial that the AO while assessing the income is permitted to take into consideration the human probabilities and if he proves that the conduct of the parties is not in conformity with the actions of prudent person then he may overlook the form of the transaction and find out the substance of the transaction and determine the tax consequences based on the real facts. In the impugned order the AO has doubted the genuineness of the entire transaction on the ground that it was against the human probability that the companies would invest in shares of the appellant company. The AO has also alleged that the unaccounted monies belonging to the assessee and ploughed back in the form of share capital by adopting the modus operandi where the unaccounted cash was rotated in four-five layers and thereafter the money was brought into the assessee’s bank account in the form of share capital. I however find that before these conclusions were recorded the AO himself did not bring on record sufficient tangible and cogent material to support his conclusion that the amount credited in the assessee’s books in the form of share capital and premium actually represented assessee’s undisclosed income. …… …. 4.15. Applying the judicial principles laid down in the above decisions to the appellant’s case. I find that the AO had made addition u/s. 68 without proper application of mine and incorrect appreciation of the relevant provisions of the Act. In the above judicial decisions, it has been held that before an addition u/s. 68 is made, it is necessary for the AO to bring on record irrefutable material or evidence which would prove that there was no valid issuance of the shares and for that reason the assessee had failed to prove identity & creditworthiness of the shareholders and also failed to substantiate genuineness. If these touchstones are applied to the appellant’s case then I find that the copies income tax acknowledgments and service of notices at their addresses established the identity of all the share subscribers. In the balance sheets of the respective share subscribers, the investments in assessee’s share were recorded and each subscriber in its balance sheet had disclosed sufficiently large investible funds. The assessee had also filed copies of the bank statements of the respective share subscribing companies which established that the share subscription amounts were received through banking channel. The sources of making payment were also furnished and the entries in bank statements indicated that there was no deposit of cash prior to clearance of the cheques in assessee’s favour. All these facts and documents considered cumulatively establish that the assessee had discharged the onus of proving creditworthiness of the share sub subscribers and the genuineness of the transactions. I therefore hold that the AO was not justified in making the impugned addition of Rs.,1,82,50,000/- u/s. 68 of the Act which is accordingly deleted. These grounds are therefore allowed.” 7.3. Before arriving at our finding, we refer to the following judicial precedents to buttress our observations and conclusions :

Kemex Engineering Pvt. Ltd., AY 2012-13 i) The decision of Hon’ble Jurisdictional High Court of Calcutta in the case of CIT v. Dataware Pvt. Ltd. in ITAT No. 263 of 2011 dated 21.09.2011 wherein Hon’ble jurisdictional High Court held that “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 such course, the Assessing officer himself could not enter into the return of the creditor and brand the same as unworthy of credence.” ii) Decision of Hon’ble Madras High Court in the case of CIT v. Creative World Telefilms P. Ltd. (2011) 333 ITR 100 (Mad) wherein it was held as under:

“In the case in hand, it was not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the Assessing Officer to make proper investigation and reach the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement "not traceable". The Assessing Officer ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer. In the above circumstances, the view taken by the Tribunal could not be faulted. No substantial question of law was involved in the appeal.'' iii) Judgment of Hon’ble Jurisdictional High Court in the case of Exoimp Resources (India) Ltd. vs. CIT (supra), wherein it was held as follows:

“It is incumbent upon the Assessing Authority to examine the explanation of the creditor and arrive at a conclusion as to whether the explanation was satisfactory. The conclusion arrived by the Assessing Authority is to be communicated to the assessee if such explanation is not considered satisfactory. If thereupon the assessee submits any comments or furnishes further information, in that event, the Assessing Authority has to examine the same and arrive at his own conclusion. The inbuilt safeguard provided in section 68 cannot be ignored by the Kemex Engineering Pvt. Ltd., AY 2012-13 Assessing Authority at his sweet will. The Assessing Authority can add the share capital as undisclosed income if no explanation is offered by the assessee. But since the details/explanations were offered, it was incumbent on the Assessing Authority to examine the same and arrive at a cogent conclusion. Assessing Officer having failed to discharge such obligation the addition is not sustainable in law.., case of CIT vs. Lovely Exports Ltd. (2008) 216 CTR 195 (SC) that where share application money.” 7.4. In the course of assessment proceeding, Ld. AO directed the assessee to produce the director of the assessee and also the directors of the subscriber companies along with relevant documentary evidence and details which was not complied with in full. Ld. Counsel submitted that mere non-appearance of directors is no basis for invoking provisions of section 68 of the act for which he placed reliance on the decision of Hon’ble Supreme Court in the case of CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC) wherein it was held as under:

“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 the 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 was based on some evidence on which a conclusion could be arrived at, no question of law as such could arise. The High Court was, therefore, right in refusing to refer the questions sought for. Decision of the High Court affirmed.”