ITO, NEW DELHI vs. M/S MAGICAL INFOTECH (P) LTD.,, DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

2. Following grounds have been raised by the Revenue:

“1. On the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law by ignoring the fact that Sec. 68 stipulates that any sum found credited in the books of accounts of assessee without imposing any restriction on the way of receiving such sum.

2. On the facts and in the circumstances of case, the Ld. CIT(A) erred in holding that the ‘sum’ in section 68 denotes money brought into the accounts by way of M/s Magical Infotech (P.) Ltd. cash/cheques/draft ignoring the fact that ‘sum’ denotes any amount of money including share capital credited in the accounts.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law by deleting the addition in respect of share capital plus premium amounting to Rs. 17,81,99,000/- u/s 68 of the Income Tax Act, 1961 on the ground that it revolves around swapping of shares, mere transfer of entries and no cash, cheques or draft was found entered in the books or bank account of the assessee.”

4. Excerpt from the order of the Assessing Officer.

The assessee during the year has raised share capital of Rs.9,90,000/ and is receiving share premium of Rs.17,71,10,000/-. From this fund the assessee submitted that it has purchased computer of Rs.15,600, the of which is never produced before the department. The assessee has declared investment in unquoted shares for Rs.17,80,00,000/-. The assessee having received such a huge investment has received consultancy income of Rs.25,000/- but from whom is never stated by the assessee. The assessee was thus asked to submit the details of the persons who has given credits to the assessee in the form of share capital and share application money and to produce the person who are controlling these concerns.

The assessee company submitted that it is operating from Gautampuri and having no assets, no employee. The assessee has just provided salary of Rs. 5,500/-. The I.T.R for A.Y. 2013- 14 was also perused and it has been observed that the assessee

M/s Magical Infotech (P.) Ltd. has declared total receipts of Rs. 37,500/- and claimed expenses of Rs. 81,431/ declaring loss of Rs.43,931/-. The financials of the company for A.Y. 2014-15 were also not different. It is ironical that the assessee company is receiving such a huge premium and is not able to start its business even after lapse of four years.

The assessee company was incorporated for the following objects:-

To deal, trading, manufacturing, develop export, import, maintenance of software, multimedia, call centre & customer support for softwares.

To curry on in India or elsewhere the business of call centre, Web centres, internet services provider including registration of domain names, Designing and hosting of LUC Websites and other related services, web application, internet and internet/network related system/solution including setting up portals and other commercial/customer information transaction/direct response services via the media of Internet/Telecommunication, Electronics and audio/video technologies Data processing, Data warehousing, data mining, setting up of all types of communication system solution, electronics commerce related applications, manpower training enterprises resource planning, IT resource Management, Establishing computer training institutes, recruiting and deploying trained software professionals in India/or abroad, e- commerce activities including of publicity aggregating collecting/collating compiling, analyzing, disseminating, researching, publishing, vending, buying selling,

M/s Magical Infotech (P.) Ltd. importing/exporting and otherwise dealing in all kinds of economic, commercial and technical information including buying, selling, making trading and otherwise dealing in all kinds of products on the internet, business as consultants and advisors whether India or abroad on matters related to design/development of processes system and software improving exporting, buying, selling, maintaining and licensing call centres, system and packages including all related software instrumentation and services and development.

To carry on the business of computer software developers contractors or sub contractors retailer or wholesale supplier, marketing agents, technical and management consultants and to establish and carry on the work of computer training institutes and of a data processing centre and to provide back office support and develop business processes for clients in India abroad.

The director of the assessee company are Mohd. Sabahuddin, R/O Jamia Nagar; Gopa Kumar R/o Uttam Nagar.

All the aforementioned details were discussed to depict the background of the assessee company. The company and its director and share holder are located in the areas which are not very developed. These areas are either unauthorized colonies or having address difficult to locate and approach. These are not very posh colonies of the Delhi. The Inspector of this ward was deputed to colonies of the Delhi. The Inspector of this ward was deputed to conduct enquiry about these localities but none of these person were found in existence at the given address. Meaning by that the company has provided bogus addresses to M/s Magical Infotech (P.) Ltd. the department. The company who is receiving such a huge premium is operating from such a vicinity which is difficult to locate. In such scenario the case of assessee was examined. The assessee has raised share capital and share premium from the following parties:- a) Gajanan Realcon Pvt. Ltd. b) Corporate Network Solution Pvt. Ltd. c) Pawansut Media Services Pvt. Ltd. d) Oxygen Projects Pvt. Ltd. All these companies has received share of face value of Rs.10/- at a premium of Rs. 1,990/. It is relevant to highlight that the assessee has valued its share at a premium of Rs. 1,990/- and thus the assessee was asked to submit the justification for the high premium. The assessee did not submit any reply to the specific query raised by the department.

To find out the basis of share premium, the financials of the assessee company was thus examined. The contention of the assessee was contrary to the facts. This is the first year of incorporation of company. The company was incorporated on 12.01.2012. The initial capital was contributed by Mr. Gopal Kumar & Mod. Sabahuddin who has given 1 lac in total for 10,000 share meaning by that assessee has issued 10000 share at face value of Rs. 10/- to its original promoters. The assessee during this year allotted 10000 shares at face value, suddenly on 31st day of March, 2012 the accounts of the assessee starts buzing. The assessee within a span of single day has managed to garner credits of Rs.17,80,00,000/- from the concerns listed above. This unique phenomenon was observed in the case of M/s Magical Infotech (P.) Ltd. assessee. It is relevant to highlight that nothing sort of miracle has happened in the assessee company that various companies created a bee line at the doors of the assessee company to get its shares that too at such a high premium. Suddenly four companies approaches the assessee company and agrees to pay Rs.2,000/- for a share whose face value is of Rs. 10/-. In this context it is relevant to highlight the fact that during this period i.e. from the date of incorporation (12.1.12) to the date of allotment of shares to these four companies, the only activity undertaken by the assessee is that the assessee company is managed to get a consultancy commission of Rs.25,000/-. The assessee managed to novice these so called investors that the assessee share is worth Rs.2000/- contrary to fact that, the assessee has no employee; no fixed assets, no leased assets and it trying to venture into the business of call centre which is already overcrowded and is fighting for its survival. These so called investors are thus lured by the assessee for making investment in the assessee business.

In the light of all these facts the assessee was asked to justify the share premium received by it. But the assessee did not file any reply. The reasons were clear that the receipt of share premium does not commensurate with the financial of the assessee company and the real intent of getting the share premium is something else which has to be understood with the unfolding legislations in the coming year i.e. F.Y. 2012-13. The entire exercise was done by the assessee to hoodwink the department. The reason for this was further elaborated which lies in the fact that an Amendment was made by Finance Act,

M/s Magical Infotech (P.) Ltd. 2012 which inserted clause (viib) in sec 56(2) of the Act. That provision is reproduced below:-

“in particular, and without prejudice to the generality of the provisions of sub section (1), the following incomes, shall be chargeable to income tax under the head “Income from other sources—

Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares.”

The Hon’ble Finance Minister of India introduced this provision via Finance Act, 2012 that would be effective from A. Y. 2013- 14. This clause put is break on issuing shares at premium if the value of share exceeds the face value. The share premium thus becomes taxable from A.Y. 2013-14. To cross that hurdle the assessee has floated this scheme and introduced the capital in the form of share premium if the two parties agreed for that. But it is relevant to highlight that the transaction between two parties must pass the test of reasonableness. The company providing credits has no creditworthiness and the company receiving credits has no justification to be assessed at such a higher rate. Is it is alleged that the assessee has made these transaction to hoodwink the department and to bypass the provisions of Section 56(2)(viib), further investigations were made.

M/s Magical Infotech (P.) Ltd.

The financial of assessee for F.Y. 2011-12 were examined and the profit and loss account during this relevant year reveals that the total credits in profit and loss account is Rs.25,000/- against which assessee is claiming expenses of Rs. 25,05/- thereby declaring a loss of Rs. 50/- and paying nil taxes. It is ironical that a company whose turnover is abysmally low and nil profit, is able to get share premium worth crores of rupees.

The transactions entered by the assessee have another unique phenomenon that it received share capital and share premium not through banking channels but in the form of shares. The assessee received these shares at a premium, that too without examining the background of those entities; their financial positions; their profitability. It seems that the assessee has no bank account. As per the balance sheet filed by the assessee the bank balance as on 31.03.2012 was nil. The assessee was asked to provide the copy of bank account but no such details has been provided by the assessee. It is quite surprising that the assessee is getting such a huge premium from the parties but itself is not having any bank account. Int the light of these facts the financials of the companies which has given credits to be assessee were examined. The detailed analysis is reproduced below:-

M/S Gajanan Realcon Pvt. Ltd. (GRPL) is having registered office at Nathupura, Delhi a village in Delhi rural belt. This company has invested Rs.4,46,00,000/- for 22,300 share at a premium of Rs.2990/- per share by selling shares of Coronet Telecom Pvt. Ltd. at Rs.1600/- per share having face value of Rs.10/-. M/S GRPL has filed its return of income declaring

M/s Magical Infotech (P.) Ltd. income of Rs.57,879/-. This company is having capital base of Rs.17,54,250/-. Like the assessee company M/S GRPL has received share capital and share premium totaling to Rs. 1662.93 lac. This company also does not have any assets. All this premium has been used for making investments. Surprisingly, this company got such a high premium despite the fact that it has failed to declare income in six digits since inception. This fact clearly indicates that the transactions are not genuine. The company did not submit any bank account. Infact the transaction between the assessee company and M/S GRPL does not happened through banking channels. Similar to the facts about the status of company, that these companies are paper company, no real activity has been performed by these companies, the transaction between these two companies are also only on paper. The person giving credits to the assessee has not routed any credit through bank but has sold the shares of some other companies those shares. The assessee company is then become bound to declare those shares as investment.

All these transaction are on paper only done to hoodwink the department M/S GRPL has sold shares to the assessee company. It is relevant to highlight the fact that these shares are not traded at any stock exchanges. The unquoted shares have been sold by the person giving credits to the assessee. The value of these shares have no basis. It is just like you take my share at Rs.2,000/-. I will take your share at Rs. 1,600/- thereby increasing my capital as well as yours. In fact the share price does-not depend upon the real financial factor determining the viability of assessee company or to person providing these

M/s Magical Infotech (P.) Ltd. credits M/S GRPL has not sold any shares in its P&L A/C. This company has also not sold any investment. The perusal of profit and loss account and balance sheet reveals that neither the sale of inventory nor that of investment has been declared by M/S GRPL in its P&L A/C. Since these shares are sold only on paper and there is no reflection on the income/loss arising from such transaction.

M/s Corporate Network Solution Pvt. Ltd. (CNSPL):- is having registered office at Trinagar, Delhi not a very posh locality. This company has invested Rs.4,60,00,000/- for 23,000/- share at a premium of Rs.1990/- per share by selling shares of Garnet Textiles Pvt. Ltd. at Rs.1600/- per share having face value of Rs. 10/-. M/S CNSPL has filed its return of income declaring income of Rs. 46,740/-. This company is having capital base of Rs.19,27,650/-. Like the assessee company M/S CNSPL has received share capital and share premium totaling to Rs.17866.12 lac. This company also does not have any assets. All this premium has been used for making investments. Surprisingly, this company got such a high premium despite the fact that it has failed to declare income in six digits since inception. This fact clearly indicates that the transactions are not genuine. The company did not submit any bank account. Infact the transaction between the assessee company and M/S CNSPL does not happened through banking channels. Similar to the facts about the status of company, that these companies are paper company, no real activity has been performed by these companies, the transaction between these two companies are also only on paper. The person giving credits to the assessee has not touted any credit through bank but has sold

M/s Magical Infotech (P.) Ltd. the shares of some other companies to the Assessee Company and got share of Assessee Company in lieu of those shares. The assessee company is then become bound to declare those shares as investment.

All these transaction are on paper only done to hoodwink the department. M/S CNSPL has sold shares to the assessee company. It is relevant to highlight the fact that these shares are not traded at any stock exchanges. The unquoted shares have been sold by the person giving credits to the assessee. The value of these shares have no basis. It is just like you take my share at Rs.2,000/-. I will take your share at Rs.1,600/- thereby increasing my capital as well as yours. In fact the share price does-not depend upon the real financial factor determining the viability of assessee company or to person providing thes credits. M/S CNSPL has not sold any shares in its P&L A/C. This company has also not sold any investment. The perusal of profit and loss account and balance sheet reveals that neither the sale of inventory nor that of investment has, been declared by M/S CNSPL in its P&L A/C. Since these shares are sold only on paper and there is no reflection on the income/loss arising from such transaction.

M/s Pawansut Media Services Pvt. Ltd. (RMSPL) is having registered office at Trinagar, Delhi not a very posh locality. This company has invested Rs.4,56,00,000/- for 22,800 share at a premium of Rs.1990 per share by selling shares of M/s Cm Jai Jagdesh Infrastructure Pvt. Ltd. At Rs.950/- per share having face value of Rs. 10/-. M/S PMSPL has filed its return of income declaring income of Rs.53,504/-. This company is having capital

M/s Magical Infotech (P.) Ltd. base of Rs.17,70,700/-. Like the assessee company M/S PMSPL has received share capital and share premium totaling to Rs. 1496.04 lac. All the other facts were similar as discussed in the proceeding paras.

M/s Oxygen Projects Pvt. Ltd. (OPPL) is having registered office at Nathupura, Delhi a village in rural belt. This company has invested Rs.4,18,00,000/- for 20,900 share at a premium of Rs.1990/ per share by selling shares of M/s Orator Marketing Pvt. Ltd. at Rs. 1,600/- per share having face value of Rs.10/-. M/S OPPL has filed its return of income declaring income of Rs. 6,803/-. This company is having capital base of Rs.17,79,350/-. Like the assessee company M/S OPPL has received share capital and share premium totaling to Rs. 1482.67 lac. All the other facts were similar as discussed in the preceding paras.

Since all these companies have sold their investment in lieu of the shares of assessee company, but surprisingly not a single company; not a single transaction resulted in any income or loss. The transaction is made into crores of rupees but not a single rupee as income or loss arises to the parties entering into these transaction. The parties giving credits to the assessee have sold their investment at the rate on which they have acquired these investments. These transactions of sale purchase of shares lack the profit motive. Share of worth of Rs. 17.80 crore has been sold by the four parties but neither get a profit nor the loss occurred to them. This indicates the nature of the real transaction. The real transaction is merely on paper the share sold, purchase have no value. These companies have M/s Magical Infotech (P.) Ltd. not net worth. The money only lies in paper and no actual movement take place.

M/S corporate Networks solution Pvt. Ltd. was incorporated just when M/S GRPL was incorporated. M/S Pawansut Media Services Pvt. Ltd. (PMSPL) is having the same set of director i.e. Mr. Vikas Kadam who is also director of M/S CNSPL. This company was incorporated on 21.09.2006. M/S Oxygen Projects Pvt. Ltd. (OPPL) is having same address as that of M/S GRPL; incorporated on 15.09.2006. All the companies who has invested in the assessee company are having common feature. They are incorporated on similarly dates; having same addresses and having common director at any one point of time.

Coming to the issue of investment made by the assessee company. It has been observed that the assessee has invested in the following concerns:- a) Cornot Telecon Pvt. Ltd. b) Garnet Textile Pvt. Ltd. c) Om Jai Jagdish Infrastructure Pvt. Ltd. d) Orator Marketing Project Pvt. Ltd. The investments are infact purchased by the assessee from its share holders only. But assessee has not declared the same under any disclosure. The related party disclosure has not been made by the assessee. The assessee own share holder holding more than 20% of voting power has sold these share at a very high premium, wherein the actual price of the share are negligible. This further indicates that the transactions are not genuine.

M/s Magical Infotech (P.) Ltd.

The assessee was asked to file the bank statement. But the assessee did not file any bank statement. It was quite surprising that the assessee is receiving such a huge money but without having any bank account. The assessee is also buying share on such a large scale that too without maintaining any bank account. The assessee in light of these facts was asked to produce its share holder but failed to do so. The inspector of this ward was deputed to conduct the enquiries regarding the share holder but none of them was found existing on the address provided by the assessee. In such circumstances, the assessee was asked to show cause as to why the credits on account of share capital and share application money be not treated as unexplained credits u/s 68 of the Act. The assessee did not submit any reply.

From the perusal of the details it was clear that these companies are man of no means, meaning by that these companies have no net worth which can support or invest such a huge premium.

In the lights of these facts the following conclusion have been arrived:- i. The transaction entered by the assessee company with the other four companies are not genuine. ii. The persons providing credits of the assessee have no creditworthiness. iii. Though these companies might exist no paper, but the real existence is not proved.

M/s Magical Infotech (P.) Ltd. iv. The transactions are entered to hoodwink the department and to bypass the provisions of section 56(2)(viib).

In the light of all these observation the assessee vide order sheet entry dated 03.03.2015 was asked to produced the persons who has given credits to the assessee company alongwith and to submit the evidence of net worth of companies whose shares it has purchased from the share holders. But the assessee failed to produce them in spite the fact that the assessee has time and again taken the adjournment on one pretext or another. It is also relevant to highlight the fact that the assessee has misguided the department by filling the wrong address of various companies who has given credits to the assessee.

The assessee has tried to manufacture the evidences but the same were proved counterproductive when the assessee was asked to produce the share holders for the purpose of cross verification. These facts clearly indicates that even the identity of the parties and not genuine and this has been create for the purpose of assessment only.

From the facts stated above it was clear that the transaction were not genuine. All the four concerns stated above lack creditworthiness and genuineness. The identity remain under doubt though the assessee tried to prove it. The Hon’ble Delhi High Court has find various occasion to deal such issues and the same got reflection in numerous case viz. Maf Academy Pvt. Ltd. (361ITR2858); M/S N.R. Portfolio Pvt. Ltd. (86CCH164); M/S Nova promoters Pvt. Ltd. (342ITR169) and M/S Neelkanth Ispat Pvt. Ltd. (82CCH406).”

M/s Magical Infotech (P.) Ltd.

5. The A.O. has relied upon judicial pronouncements in the case of M/s. MAF AAC Pvt. Ltd. (Delhi High Court), M/s. NR Profit P Ltd. (Delhi High Court), Ms. Nova Promoters Pvt. Ltd. (Delhi High Court), Ms. Ispat Udyog (Delhi High Court), and has further recorded as under:

“In all these cases Hon’ble Delhi High Court has upheld that the submission of PAN, ROC return and I.T.R. does not necessarily proves the identity of that person, The identity has to be looked into from the perspective that whether actual business is being carried out by the said person giving credit to the assessee. The person should exist in the eyes of society as well and not only on paper. Submission of PAN, ROC detail and I.T.R. are the passive documents created by assessee for the purpose of proving the genuineness of the transaction but the real test is that the person does exist in reality; is conducting its business & providing capital from its tax paid capital.

In view of these observation the assessee vide show cause dated 03.03.2015 was asked to show cause as to why the share capital and share premium be not treated as income of assessee u/s 68 of the I. T. Act. The assessee did not file any reply. The assessee case is a classic example of channelizing its own money in the guise of share capital which it has earned out of books.

It has been judicially established that the primary onus is on the assessee to prove the identity, creditworthiness and genuineness of transactions in respect of credits in its books of account. Identity of the party does not simply means its M/s Magical Infotech (P.) Ltd. existence. The Identity should be seen in perspective that it has got a standing in the particular line of activity. Identity defined in the new shorter oxford dictionary as “The condition or fact of a person or thing being that specified unique person or thing” the person has to have some sign of identification other than merely on paper. These signs could be the place of work, staff members, actual transactions, recognition in the eye of public, sign board, premises anything which can prove that some actual activity is going on. Having PAN or assessment particular is merely a response to the applications and returns filed. These types of identity are merely on paper. The authority allotting PAN or processing the return of income seldom verify the actual identity of the person. These tools are being employed intentionally for the purpose of proving existence, however actual identity of the business and its genuineness do not automatically get proved by these passive documents when in fact no actual and active business is being carried out.

The creditworthiness essentially means capacity in financial dealings or capacity to pay. The creditworthiness of a person is something that is assessed by somebody while giving loan to the said person on arm’s length basis. The bank assessees the creditworthiness of the person while allowing it loan. The creditworthiness is reflect in the balance sheet of the person and also in the profit making capacity. The person who has given credits to the assessee do not have their own profit making apparatus. They do not manufacture or produce anything. They do not render any services other than its services for laundering of money. Their balance sheet reflects their creditworthiness. The moneys that come to its account by M/s Magical Infotech (P.) Ltd. way of cash or by way of other similar accounts seldom rest for a day. It immediately finds its destination. However the assessee company, who enjoys the benefit of such money ever after, does not ever after, does not ever give bank any dividend or any share in profit or interest to the persons who has invested money in to assessee company. The profit motive in the entire transaction of theses applicants is conspicuously absent. They give the money to the assessee company and never bother to ask for the benefit of providing so much money to the beneficiary. In case of share capital, in most of the cases, subsequently the shares are purchased back at nominal amount otherwise the shares keep on lying in the name of the entry operators. But in fact no profit is received from having invested so much ever in all cases including the present case. This in itself reflects that the transactions are not genuine. Any person who would invest his own money or forward a loan would certainly seek return in any form. The inherent capacity of money to earn is forgone without any consideration. These facts clearly show that the transaction is not genuine. It is most important to note that he assessee is enjoying the benefit of the said money without any associated financial burden in the same manner as if it is its own tax paid money after utilizing the services of the said so called share applicant.

It is relevant to point out the fact that the courts has also upheld the dictum that to get behind the truth the A.O. has to lift the corporate veil. It is the duty of the A.O. to find out the real intention of the transaction. The transaction in which the applicant having no assessable income but still employing such a great fund, without considering the outcome/profit of such M/s Magical Infotech (P.) Ltd. investment can only be termed as colourable device to evade the taxes. In appropriate cases, law permits looking beyond the corporate veil. The corporate veil can be lifted or pierced where the only actual activity the alleged corporate entity is found to be engaged in is evading the obligations imposed by law, more particularly in tax matters to see whether the entire facade has been put up to evade payment of taxes.

It is relevant to quote the observation of the Hon’ble Delhi High Court in the case of CIT Vs Divine Leasing and finance Limited, “There cannot be two opinions on the aspect that the percenious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of company must be excorciated by the revenue.” Truly, this menace should not be allowed to be perpetuated on technical grounds. The substance of the transaction which is apparent to everybody must not be ignored in the favour of the charade created by the masterminds in the interest of public at large. There are any number of decisions of the Apex Court and various other courts including the celebrated judgment of the Apex Court in the case of McDowell & Co Limited 154 ITR148 on the issue of using dubious means by the assessee for tax evasion. Various other decisions on superiority of substance over form, have been in the public domain. These decisions undisputedly conclude that adopting of dubious means for resorting tax evasion is clearly not permissible. Present case is classic example of utilization of dubious means for the purpose of tax evasion, which should not be allowed to be perpetuated. Moreover The Supreme Court in A. Govindarajulu Mudaliar (1958) 34 ITR 807, 810 (SC), held that-“There is ample

M/s Magical Infotech (P.) Ltd. authority for the proposition that where an appellant fails to prove satisfactorily the source and the nature of cash received, the A.O. is entitled to draw the inference that the receipt are of an assessable nature”.

The supreme Court in kale Mohammad Hanif (1963) 50 ITR 14 (SC) held that- “It is now well-established that the onus of proving the sources of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show that the receipt was not income.... In the absence of such proof, the Assessing Officer is entitled to treat it as taxable income.... ”

The burden of proving the source of a cash credit is on the assessee. When a cash credit entry appears in the assessee’s books of account, the assessee has a legal obligation to explain the nature and source of such credit (Sreelekha Bannerjee (1963 49 ITR (SC) 112, 117).

If the assessee offers an explanation about the cash credit, the income tax department can put the assessee to prove of his explanation, and if the assessee fails to tender evidence or burkes an enquiry then the assessing officer is justified in rejecting the explanation and holding that the income if from an undisclosed source. The assessing officer in not required to specify or proof what that source is, which from the nature of the case must be know only to the assessee (Seth Kalekhan Md. Hanif (1958) 34 ITR 669, 673, 674 (M.P.) affirmed, (1963) 50 ITR 1, 4 (SC)).

M/s Magical Infotech (P.) Ltd.

The Calcutta High Court in Korlay Trading company Ltd. (1998) 232 ITR 82, 824 (Cat.) held that: “mere filing of the Income Tax file numbers of the creditors is not enough to prove the genuineness of the cash credit. There creditor should be identified. Then there should be creditworthiness. There should be a genuine transaction. The income tax file number has been given but that is not enough to prove the genuineness of the cash credit”.

On the question of when the onus of proof shifts from the appellant to revenue, the general principle of onus of proof was laid down by Lord hansworth M.R. in Stoney Vs. Eastbourne R.D. Council (1927) I Ch. 367: “....there can only be sufficient evidence to shift the onus from one side to the other if the evidence is sufficient prima facie to establish the case of the party on whom the onus lies. It is not merely a question of weighing feather on the one side or the other, and saying than if there were two feathers on one side and one on the other, that would be sufficient to shift the onus. What is meant is, that in the first instance, the party on whom the onus lies must prove his case sufficiently to justify a judgment in his favour if there is no other evidence”.

In Kundan Investment Ltd., (2003) 263 ITR 626, the Calcutta High Court held that even if the identity is established, the creditworthiness is required to the proved. Establishment of identity is not sufficient even if the subscriber confirms the subscription u/s 68, the ITRO is empowered to lift the veil and find out whether the apparent is real.

M/s Magical Infotech (P.) Ltd. In Nivedam Vanija Niyojan Ltd., (2003), 263 ITR 623, the Calcutta High Court held that the assessee has to establish the identity of the subscribers to share capital and prove their creditworthiness and genuineness of the transaction; furnishing of income tax file numbers may not be sufficient to discharge the burden. The ITO had asked the assessee to prove the subscribers and establish its case. But the appellant die not do so. The addition made by the A.O. was upheld by the High Court.

In Ruby Traders & Exports Ltd. (2003), 263 ITR 300, the Calcutta High Court held that when Section-68 was resorted to, it is incumbent on the appellant to prove and establish the identity of the subscribes, their creditworthiness and the genuineness of the transaction. Once materials to prove their ingredients are produced, it is for the A. C. to find out whether on these materials the appellant is able to establish the ingredients mentioned above. If the finding is in the affirmative, in that event Section- 68 cannot be attracted. If the finding is in the negative, the section-68 is definitely applicable. It is now a settled proposition of law that A.O. can lift the veil and enquire into the real nature of the transaction.

The Purpose of examining the share holders was to get the first hand information but failure the part of assessee to produce them clearly proves that the evidence submitted by the assessee are merely on paper and no such concern exist in reality. The enquiries made by the inspector about the so call share holders of the assessee company clearly proves that these companies does not exit at the given address or the M/s Magical Infotech (P.) Ltd. address/localities are not traceable. The submission of self serving document by the assessee for the purpose of proving the genuineness further strengthened the case of the department. It was thus clear that the mere production of incorporation details, PAN number as the fact that third person or company had filed income tax details is not sufficient discharge of onus of proof by the assessee company when surrounding and attending facts predicate a cover up and in which case the addition u/s 68 is thus made on account of credits received from these entry operators which has given credits to the assssee. In view of facts detailed above and the legal position on the issue Rs.17,81,00,000/- is treated as income of the assessee company u/s 68 of the Act.

6. Before the ld. CIT(A), the assessee has submitted as under:-

”The AO has referred to following case laws in the assessment order. The facts of the case laws relied upon by the AO are different from the facts for the case. Hence the same are not applicable.

M/s Magical Infotech (P.) Ltd. Details are as under:-

Name of the case Facts of Case Remarks Maf Academy Pvt. Ltd. In this case credit of In the case of appellant (361 ITR 2858) share capital was there is only entry received by way of regarding swap of cheque. The assessee shares. No credits by failed to prove the way of cheque or cash creditworthiness of was received. Hence, subscriber. the facts of the appellant are entirely different then the case relied upon by AO. M/S N.R. Portfolio Pvt. Ltd. - do - - do - (86 CCH 164) M/s Nova Promoters Ltd. - do - - do - (342 ITR 169) M/s Neelkanth Ispat Pvt. Ltd. - do - - do - (82CCH406) McDowell 8&Co Limited The issue was - do - 154 ITR 148 regarding using of dubious means of tax evasion. It's not related to share capital or unsecured loan. A. Govindaraulu Mudaliar The issue was - do - (1958) 34 ITR 807, 810 (SC) regarding satisfactory proof of source and nature of cash received.

Kale Mohammad Hanif (1963) Source of money found - do - 50 ITR 14 (SC) has not been explained. Sreelekha Bannerjee (1963) Source of cash credit - do - 49 ITR (SC) 112, 1171 is not explained. Seth Kalekhan Md. Hanif - do - - do - (1958) 34 ITR 669, 673, 674 (M.P.) affirmed, (1963) 50 ITR 1, 4 (SC) Korlay Trading Company Ltd. - do - - do - (1998) 232 ITR 82, 824 (Cat.) Kundan Investment Ltd., Creditworthiness of - do - (2003) 263 ITR 626, (Cat.) creditor was not explained. Nivedam Vanija Niyojan Ltd., Identity and - do - (2003) 263 ITR 623 (Cal.) creditworthiness of the subscriber was not proved.

Ruby Traders & Exports Ltd. - do - - do - (2003) ITR 300 (Cal.)

M/s Magical Infotech (P.) Ltd. Although the case laws relied upon are not applicable to the facts of the case but the AO has treated the sum of Rs. 17,81,00,000/- as income of the appellant u/s 68 of the IT Act, 1961. The AO has ultimately made additions u/s 68 of the Income Tax Act.

Section 68 of the Income tax Act, 1961 is reproduced herein below for your ready reference:-

“Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the [Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year:

Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:

M/s Magical Infotech (P.) Ltd. Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) section 10.

Broad reasons why the Learned Assessing Officer (“AO”) Made the additions:-

Perusal of the assessment order indicates the following broad reasons which persuaded the AO to make additions under section 68 of the Act:-

4.2.1. The appellant has further submitted as under:-

“Considering the facts and circumstances of the case, it is submitted that section 68 is not applicable to the appellant's case for the following main reasons- I. The Sum found credited in the books of the accounts of the appellant is not cash or cheque, hence, section 68 doesn't get triggered.

M/s Magical Infotech (P.) Ltd. 2. The credit in the books of the appellant arose on account of purchase of shares and not on account of receipt of any money from the investing companies.

3. The investing companies furnished all the documents confirming the transactions.

M/s Magical Infotech (P.) Ltd. 9. Section 68 specifically carries the heading "cash credit". If there is no cash credit this section does not get triggered. This section was brought in with the purpose of taxing unexplained cash/money introduced by the taxpayer. If no money was brought in the system then this section has no application.

With due respect to the AO, We wish to submit that he has failed to appreciate the facts of the case in totality. The AO has fallen in error in not appreciating that Rs.17,81,0, 000/- which was payable to 4 investing companies on account of purchase of shares from them was actually not paid as moneys in cash/cheque but was adjusted against the issue of capital on premium to them. The AO has erroneously treated this amount of Rs. 17,81,00,000/- as unexplained cash credits within the meaning of section 68 of the Income Tax Act, 1961 presuming this to be unexplained cash received on account of issue of shares. This has perhaps happened because the AO did not comprehensively appreciate the facts of the matter. It is also important to appreciate that the appellant company was incorporated on 12.01.2012 and there was hardly any period of M/s Magical Infotech (P.) Ltd. business activity available to the appellant during the financial year under consideration. In fact the AO has himself noted that the appellant is not worthy of attracting capital at such high premium. We are enclosing copy of the annual report of the appellant for ready reference; (Annexure-1)

We are also enclosing herewith, ledgers accounts related to all the four investing companies along with the relevant Journal Entries to make the ledger narrations complete and to facilitate the understanding of the accounting of actual transactions as Annexure-2 to this submission.

The perusal of these documents would indicate the following:- i. All the transactions have been recorded on the 31.03.2012. ii. The transactions have not resulted Into any actual inflow of money by way of cheque or cash to the appellant company. /As a consequence, it can be said that the appellant company has not gained anything in terms of receipt of money. iii. Substance of transactions is that consideration payable by the appellant to a set of 4 entities on purchase of shares of certain companies, at a price allegedly much higher than the market value of the shares was squared off against moneys receivable on issue of capital on allegedly high premium to those 4 entities. iv. The transactions have not resulted into any inflow or outflow to the appellant company or any of the investing company. In that sense, the transaction is cash neutral.

M/s Magical Infotech (P.) Ltd. The assessing officer has in his zeal to make the maximum addition has been driven by only one aspect of the transaction. The AO has himself noted repeatedly in the assessment order that the premium at which shares have been allotted by the appellant is not justifiable on account of it not having any asset or business or even a bank account. The AO has also noted again repeatedly that the shares which have been purchased by the appellant from the investing companies, which was the consideration for allotment of shares was also very high priced and disproportionate to the intrinsic value of the shares. In the simpler words, the AO noted/ alleged that the transaction of purchase of share by the appellant was not at the Fair Market Value. To simplify it further, the allegation made by the AO is that the appellant has allotted share at a value hugely disproportionate to the real value and at the same time purchased shares at a value much higher than the real value. As the allotment has been made to the same party from whom shares have been purchased, there is no inflow or outflow of money even though the stated consideration is inflated.

The AO, however, while taking cognizance of this situation from the tax perspective have looked at the one side of the transaction and totally ignored the other side of the transaction. If, for the argument sake, all the allegations are considered to be true, then the result will be that the allotment of shares should have been at face value and the purchase of the shares from the investing companies should also be at face value. If the accounts are accordingly modified, the balance sheet of the appellant will remain substantively same and there will still not be any income tax implications.

M/s Magical Infotech (P.) Ltd. It is therefore submitted that even if all the arguments/ allegations of the AO are considered to be true and sustainable, then also there should not be any addition to the income of the appellant as there is no tax implication in the case of the appellant.”

4.2.2 The appellant has laid emphasis on the following:-

The case in hand is a very unique kind of case and we are not burdening you with innumerable cases on section 68 which are in favor of the assessee. We would draw your kind attention to a very recent decision of jurisdictional Tribunal. Hon'ble ITAT, New Delhi in the case of CIT Vs. M/s Vital Communication Ltd., IT A No. 2448/Del/2007 [(2016-TIOL- 1102-ITAT- DEL)]. The Hon'ble IT AT has given the findings as below:-

Whether mere transfer of entries from one head to another cannot be treated as sum credited in the account books for the purpose of see 68 of the IT Act.

-Held Yes.

Whether addition of share capital cannot be made in the hands of the company assessee-Held Yes Assessee's business was to provide consultancy service and advice in India and abroad regarding the manufacturing commercial marketing, technical and managerial aspect of the business of electronics and communication hardware.

In assessment proceedings, AO observed that no books of accounts were produced in spite of the repeated requisition /

M/s Magical Infotech (P.) Ltd. opportunities. The assessee has not established the credit worthiness of the shareholders. Since assessee could not prove the genuineness of transaction and credit worthiness of the said creditors, the sum of Rs.27 crores was treated a sun explained cash credit u/s 68.

CIT (A) deleted the addition made by AO observing as under:-

"5.10 The aforesaid addition cannot be sustained for another legal premise also. Section 68 of the IT Act 1961 under which these additions have been made by the Assessing Officer reads as under:-

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and sources thereof or the explanation offered by him is not, in the opinion of the (Assessing) Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

It is evident from the perusal of this provision that section 68 can be invoked only if any "sum" is credited in the account books of the assessee for which no satisfactory explanations could be furnished by the assessee. "Sum" denotes the money brought into the account books by way of cash / cheque / draft. Mere transfer of entries from one head to another cannot be treated as sum credited in the account books for the purpose of see 68 of the IT Act. Similarly, exchange of Shares also cannot be brought into the ambit of Section 68 of the IT Act. In the present case, out of the addition of Rs. 27,00,00,000 made u/s. M/s Magical Infotech (P.) Ltd. 68 of the IT Act, the amount of Rs. 25,00,00,000 was not brought into the account books by way of cash / cheque / draft during the relevant previous year. Shares worth Rs.15,00,00,000 were issued against the outstanding liabilities i.e. there were only the transfer of entries from trade liability head to the share capital head. No fresh capital was brought into the account books by way of cash / cheque / draft. Similarly, the shares worth Rs. 10,00,00,000 were issued against the shares received under the swapping arrangements. Here also, no fresh amount of money was brought into the books by way of cash/ cheque / draft. Hence, the addition made in respect of these share holders to the extent of Rs.25,00,00,000 does not come into the purview of section 68 of the IT Act. On this ground also, the said addition cannot be sustained."

After hearing both the parties, the IT AT held that, “8.3 We find force in the Ld. CIT(A)'s finding that the aforesaid addition cannot be sustained for another legal premise also. Section 68 of the I.T. Act 1961 under which these additions have been made by the Assessing Officer reads as under:-

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and sources thereof or the explanation offered by him is not, in the opinion of the (Assessing) Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.

M/s Magical Infotech (P.) Ltd. 8.3.1 It is evident from the perusal of this provision that section 68 can be invoked only if any "sum" is credited in the account books of the assessee for which no satisfactory explanations could be furnished by the assessee. "Sum" denotes the money brought into the account books by way of cash / cheque / draft. Mere transfer of entries from one head to another cannot be treated as sum credited in the account books for the purpose of see 68 of the IT Act. Similarly, exchange of shares also cannot be brought into the ambit of Section 68 of the IT Act. In the present case, out of the addition of Rs. 27,00,00,000 made u/s. 68 of the IT Act, the amount of Rs. 25,00,00,000 was not brought into the account books by way of cash / cheque /draft during the relevant previous year. Shares worth Rs.15,00,00,000 were issued against the outstanding liabilities i.e. there were only the transfer of entries from trade liability head to the share capital head. No fresh capital was brought into the account books by way of cash / cheque / draft. Similarly, the shares worth Rs.10,00,00,000 were issued against the shares received under the swapping arrangements. Here also, no fresh amount of money was brought into the books by way of cash/ cheque / draft. Hence, the addition made in respect of these share holders to the extent of Rs.25,00,00,000 does not come into the purview of section 68 of the IT Act. On this ground also, the said addition cannot be sustained. Though the said addition made u/s 68 cannot be sustained on the legal grounds itself as discussed above”.

M/s Magical Infotech (P.) Ltd. Adjudication:

7. We have gone through the entire factual matrix of the issue before us, the case needs to be examined as to when the share capital along with premium has been received. The assessee company was incorporated on 12.01.2012 and received monies of Rs.17.80 crores on 31.03.2012 on account of share of value Rs.10/- with a premium of Rs.1190/-. Before the AO, no details with regard to the investors have been given before the ld. CIT(A). It was submitted that the amounts received was on account of swapping of shares which was also not examined. For the sake of ready reference, the rationale of the ld. CIT(A) is reproduced as under:

“4.3.1 It is undisputed that these share transactions by the appellant are only on paper and are in the nature of swapping of shares at a very high premium.

4.3.2 As submitted by the appellant, the said transactions and arrangements have not resulted in earning/receipt of single rupee and no cash or cheque has been received in appellant’s bank or in hand.”

8. Under these facts and circumstances, we deem it proper to remand the matter back to the file of the ld. CIT(A) to pass a cogent, speaking order with regard to the facts and legality of the Assessment Order.

M/s Magical Infotech (P.) Ltd. 9. In the result, the appeal of the Revenue is allowed for statistical purpose.

Order Pronounced in the Open Court on 12/04/2022.