M K SONS FINE JEWELS PVT LTD,MUMBAI vs. INCOME TAX OFFICER 12(3)(4), MUMBAI

During the course of reassessment proceedings, the assessee furnished certain details including ledger accounts, bank statements and particulars of share capital. The Assessing Officer noted that the assessee company, incorporated on 12.01.2012, had received share capital and share premium aggregating to Rs. 3,00,00,000/- during F.Y. 2011–12 from five private limited companies, namely - i. M/s Sampada Chemicals Ltd., ii. M/s Lunkad Textiles Pvt. Ltd., iii. M/s P. Saji Textiles Ltd.,

The Assessing Officer, on the basis of information from the Investigation Wing and statement of Shri VipulVidur Bhatt recorded under section 132(4), formed a view that the aforesaid companies were entities controlled by the said person and were engaged in providing accommodation entries. The assessee was required to furnish complete details including valuation report, bank statements of investors and justification for charging premium. The Assessing Officer also issued summons under section 131 to the investor companies. However, as recorded by the Assessing Officer, neither the assessee produced the concerned parties nor were complete details furnished. The summons issued to the parties were returned unserved and the assessee failed to produce the investors despite repeated opportunities.

The assessee submitted that the share capital was received through banking channels and furnished certain documents such as bank statements and ledger accounts. However, the Assessing Officer observed that the assessee failed to establish the identity, creditworthiness and genuineness of the transactions. It was further observed that the intrinsic value of shares was negligible and the premium of Rs. 190/- per share was excessive and unreasonable. The Assessing Officer concluded that the assessee

Accordingly, the Assessing Officer treated the amount of Rs. 3,00,00,000/- as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee, determining the assessed income at Rs. 3,00,27,550/-. Penalty proceedings under section 271(1)(c) were also initiated.

Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee filed detailed written submissions along with a paper book and affidavit under Rule 46A. It was submitted that the sum of Rs. 3,00,00,000/- represented share capital and share premium received from five companies through account payee cheques and duly recorded in the books of account. The assessee furnished documents including share application forms, allotment advice, share certificates, ROC filings, confirmations from subscribers, bank statements of both assessee and investors, income-tax returns and audited financial statements of investor companies, board resolutions and constitutional documents. It was

The assessee further contended that the Assessing Officer had relied solely on general information from the Investigation Wing without bringing any specific material linking the assessee to Shri VipulVidur Bhatt. It was also submitted that neither the investigation report nor the statement recorded under section 132(4) was furnished and no opportunity for cross-examination was provided. The assessee argued that the addition was based on presumption and borrowed satisfaction. On merits, it was contended that share capital and share premium are capital receipts and cannot be taxed merely because the premium was considered excessive, and reliance was placed on various judicial precedents.

The CIT(A), after considering the assessment order, submissions of the assessee and material on record, proceeded to adjudicate the issue. The CIT(A) recorded that under section 68, the assessee is required to establish identity of the shareholders, creditworthiness and genuineness of the transaction. Relying on the decision of the Hon’ble Supreme Court in PCIT v. NRA Iron & Steel Pvt. Ltd. (412 ITR 161), it was observed that “mere furnishing of PAN and bank details is not sufficient unless creditworthiness and genuineness are established.”

The CIT(A) further observed that despite several opportunities and issuance of summons under section 131,

The CIT(A) also relied upon judicial precedents including CIT v. Nipun Builders & Developers Pvt. Ltd. (350 ITR 407), CIT v. Precision Finance Pvt. Ltd. (208 ITR 465) and CIT v. Nova Promoters &Finlease Pvt. Ltd.(342 ITR 169), and held that mere production of documents is not sufficient where surrounding circumstances indicate lack of capacity and genuineness. Applying the test of human probabilities as laid down in CIT v. Durga Prasad More (82 ITR 540) and SumatiDayal v. CIT (214 ITR 801), the CIT(A) held that it was improbable that independent investors would invest substantial amounts at high premium in a company with negligible business activity. 12. The reliance placed by the assessee on the decision of the ITAT in the case of Shri Deepak ValjiKaria (ITA No. 259/Mum/2021) was distinguished by the CIT(A) on facts by

On the basis of the aforesaid reasoning, the CIT(A) concluded that the assessee failed to satisfactorily explain the nature and source of the credit entries and failed to establish identity, creditworthiness and genuineness of the transactions. Accordingly, the addition of Rs. 3,00,00,000/- made by the Assessing Officer under section 68 was confirmed and the appeal of the assessee was dismissed.

The assessee is in further appeal before us and has raised following concise grounds of appeal: 1. In confirming addition, in reference to share capital Rs. 15,00,000/- and share premium Rs. 2,85,00,000/-, making total of Rs. 3,00,00,000/-. It is said that in view of the evidence furnished, the assessee has discharged the onus and therefore, the addition made may please be deleted. 2. The Lower Authority has also erred in not providing information and statement in reference to VipulVidur Bhatt and also erred in not providing cross examination thereof and therefore, the addition made solely based thereon is liable to be deleted. 3. It is further prayed that in any case, the share premium of Rs. 2,85,00,000/- cannot be treated as revenue receipt for the AY 2012-13 and therefore, the addition in this regard may please be deleted. 4. It is further prayed that there is no such compliance to the provision of Section 151 and therefore, whole proceeding is bad in law and void. 5. The appellant craves leave to add, amend, alter, or delete any or all grounds in the interest of justice.

The Ld. AR relied upon various judicial precedents forming part of the paper book, the relevant judicial precedents are referred as under: i. Reliance was placed on the judgment of the Hon’ble Bombay High Court in the case of Orchid Industries reported in 397 ITR 136, wherein it was held that where the assessee has provided PAN, confirmation and bank statements, no addition is warranted even if summons issued under section 131 were returned unserved. ii. Further reliance was placed on the decision of the Hon’ble Bombay High Court in Gagandeep Infrastructure reported in 394 ITR 680, wherein it has been held that the proviso to section 68 is applicable only from AY 2013-14 and the ratio of the Hon’ble Supreme Court in Lovely Exports applies, wherein the Assessing Officer is free to examine the shareholders. iii. Reliance was also placed on the judgment of the Hon’ble Bombay High Court in Creative World Telefilms Ltd. reported in 333 ITR 100, wherein addition was deleted where PAN and bank details were furnished though summons were returned unserved.

The Ld. AR submitted that the addition made by the Assessing Officer is primarily based on the information and statement of Shri VipulVidur Bhatt. It was contended that the said person has subsequently retracted his statement and, therefore, the same lacks evidentiary value and cannot be relied upon. It was further submitted that the summons under section 131 were issued after an inordinate delay of nearly six years from the date of the transactions, which renders the non-compliance, if any, devoid of adverse inference against the assessee.

The Ld. DR supported the orders of the Assessing Officer and the CIT(A) and invited our attention to the findings recorded therein. It was submitted that the assessee company was incorporated on 12.01.2012 and the intrinsic value of the shares of the assessee company as on 12.01.2012 was Rs. 10 per share and as on 31.03.2012 was Rs. 10.04 per share, if the share premium is not included in the capital. Therefore, according to the Assessing Officer, the share premium of Rs. 190/- per share charged by the assessee was not only excessive but also unreasonable. The Ld. DR further submitted that in order to verify the genuineness of the parties and the transactions, summons under section 131 of the Act dated 29.09.2017 were issued to all the concerned parties, requiring them to attend

We have carefully considered the rival submissions, perused the orders of the lower authorities and examined the documentary evidences placed on record as well as the judicial precedents relied upon by both the parties.

The issue for adjudication relates to the addition of Rs. 3,00,00,000/- made under section 68 of the Act on account of share capital and share premium received by the assessee during the year under consideration.

At the outset, it is a settled position of law that for the purpose of section 68, the assessee is required to establish three fundamental ingredients, namely, (i) identity of the creditor, (ii) creditworthiness of the creditor, and (iii) genuineness of the transaction. The Hon’ble Supreme Court in NRA Iron & Steel Pvt. Ltd.(supra) has reiterated this legal position in clear terms by holding that: “The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors…” (para 11, i.) 22. However, the said principle has to be applied in the context of facts and evidences available on record, and not in a mechanical manner.

In the present case, it is an undisputed position that the assessee has furnished the following documentary evidences in respect of the share applicants: PAN details of all the investor companies  Confirmations from the subscribers  Bank statements evidencing payment through banking channels  Share application forms, allotment details and share certificates  ROC filings and statutory records 

The Assessing Officer has not disputed the existence of these documents. The addition has primarily been made on the basis of (i) non-compliance of summons issued under section 131, (ii) alleged connection with the entry operator Shri VipulVidur Bhatt, and (iii) perceived abnormality in charging of share premium.

The Assessing Officer has placed considerable reliance on the fact that summons issued under section 131 were returned unserved or not complied with. In this regard, the Hon’ble Bombay High Court in Orchid Industries Pvt. Ltd.(supra) has categorically held: “Only because those persons had not appeared before the Assessing Officer would not negate the case of the assessee so as to invoke section 68” 26.The Revenue filed the appeal on the following question – 6.5 The Tribunal ought to have taken note of the fact that the assessee was not able to produce even a single party before the AO despite agreeing before the CIT(A) that it will produce all parties before the AO during remand proceedings. 27. Similarly, in Creative World Telefilms Ltd.(supra), the Hon’ble High Court has observed: “The Assessing Officer ought to have found out their details through PAN cards, bank account details… since all the relevant material details and particulars were given by the assessee” (para 2)

The addition is substantially founded upon the statement of Shri VipulVidur Bhatt. However, it is an admitted position that the said statement was neither furnished to the assessee nor was any opportunity of cross-examination afforded, and further, no direct nexus has been established between the assessee and the alleged entry operator. It is well settled that any material collected at the back of the assessee, without granting an effective opportunity of cross-examination, cannot be relied upon for making an addition. The Co-ordinate Bench in the case of Deepak ValjiKaria (supra), on identical facts involving the same alleged entry operator, has deleted similar addition holding that denial of cross-examination vitiates the entire addition.

It is further observed that the summons under section 131 were issued after an inordinate lapse of nearly six years from the relevant transactions. In such circumstances, non-compliance of summons, if any, cannot be viewed adversely against the assessee so as to discredit the documentary evidences already placed on record. Additionally, the statement of Shri VipulVidur Bhatt is stated to have been subsequently retracted, which materially erodes its evidentiary value. In the absence of

The Assessing Officer has questioned the charging of premium of Rs. 190/- per share by comparing it with intrinsic value. In this regard, it is pertinent to note that: i. For the year under consideration, i.e., A.Y. 2012-13, there was no provision under section 56(2)(viib); ii. The proviso to section 68 regarding source of source is applicable only from A.Y. 2013-14 onwards. 32. The Hon’ble Bombay High Court in Gagandeep Infrastructure Pvt. Ltd. (supra) has held: “Proviso to section 68… would be effective only from assessment year 2013-14 onwards and not for the subject assessment year” (para 3, (e)) Further, the Hon’ble High Court has also held that once identity, genuineness and capacity are established, addition cannot be made merely on suspicion regarding share premium.

The CIT(A) has heavily relied upon the decision of the Hon’ble Supreme Court in NRA Iron & Steel Pvt. Ltd.(supra). However, the facts of the present case are clearly distinguishable. In NRA Iron & Steel, the addition was sustained because investor companies were found to be non-existent; field enquiries established lack of creditworthiness; there was no explanation regarding source of funds; and transactions lacked credibility based on investigation findings. The Hon’ble Supreme Court specifically observed: “The enquiries revealed that the investor companies were non-existent… and lacked creditworthiness” (para 12)

In the present case the identity of the investors is not disputed; documentary evidences including financial statements are on record; no field enquiry has established that the investors are non-existent; no material has been brought on record to show circulation of unaccounted money; and the addition is based on general investigation report without specific linkage. Therefore, the ratio of NRA Iron & Steel Pvt. Ltd. is not applicable to the facts of the present case.

On the contrary, the facts of the present case are closer to the decision of the Hon’ble Bombay High Court in Green Infra Ltd.(supra), wherein it has been held that where identity and genuineness are established and findings of fact are not shown to be perverse, section 68 cannot be invoked.

Upon cumulative consideration of the material on record, we find that: The assessee has discharged the initial onus cast upon it under  section 68; The Assessing Officer has not brought any cogent material to disprove  the evidences furnished; The addition is based on suspicion, general investigation inputs and  denial of cross-examination; The legal position applicable for A.Y. 2012-13 does not permit enquiry  into source of source or commercial justification of share premium; 37. In view of the foregoing discussion, we hold that the addition of Rs. 3,00,00,000/- made under section 68 of the Act is unsustainable in law as well as on facts and is hereby directed to