MISTRY CONSTRUCTION CO. PVT. LTD.,MUMBAI, MAHARASHTRA vs. ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 7(2), MUMBAI, MUMBAI, MAHARASHTRA

Since common issues relating to additions made under section 68 of the Act in respect of share application money and share premium are involved, all the four appeals were heard together and are being disposed of by this consolidated order for the sake of convenience and brevity.

Briefly stated, the Assessee is a private closely held company engaged in the business of real estate development, civil contracting, earthmoving and mining works. The returns of income originally filed under section 139(1) of the Act were as under:

A survey action under section 133A of the Act was initiated at the business premises of the Assessee on 09.07.2008, which was subsequently converted into a search and seizure operation under section 132 of the Act on the same date. Pursuant to notices issued under section 153A of the Act on 28.04.2009, the Assessee requested that the original returns filed under section 139(1) be treated as returns filed in response to the notices issued under section 153A of the Act.

During the assessment proceedings for A.Y. 2007-08, the AO observed that the Assessee had received total share capital and share premium amounting to Rs. 34,79,26,100/-. Out of the said amount, Rs. 17,69,90,000/- was received from a sister concern, M/s. Millennium Clothing Pvt. Ltd., which was accepted by the AO and no addition was made in respect thereof. The balance amount of Rs. 17,09,36,100/- was treated by the AO as unexplained cash credit under section 68 of the Act and was divided into four categories:

In the appeal proceedings before the Ld. CIT(A), a remand report dated 23.03.2017 was called for from the AO. By order dated 23.08.2024, the Ld. CIT(A) partly allowed the Assessee's appeal for A.Y. 2007-08 by deleting the addition of Rs. 9,95,00,000/- under Category D on the ground that the Assessee had discharged the onus cast upon it under section 68 of the Act by producing PANs, bank statements, audited financial statements and ledger confirmations. The additions under Categories A, B and C aggregating to Rs. 7,14,36,100/- were, however, confirmed.

For A.Y. 2008-09, the AO made an addition of Rs. 20,20,00,000/- under section 68 of the Act on account of share application money and share premium, the shares having been issued at a premium of Rs. 240/- per share over and above the face value of Rs. 10/- per share. On appeal, the Ld.

Aggrieved by the respective additions sustained and deletions made by the Ld. CIT(A), the Assessee and the Revenue are in appeal before us. The Assessee has filed ITSSA No. 5419/MUM/2024 challenging the confirmation of additions aggregating to Rs. 7,14,36,100/- under Categories A, B and C for A.Y. 2007-08. The Assessee has also filed ITSSA No. 5418/MUM/2024 for A.Y. 2008-09. The Revenue is in appeal in ITA No. 5911/MUM/2024 against the deletion of Rs. 9,95,00,000/- under Category D for A.Y. 2007-08. The Revenue has also filed ITA No. 5912/MUM/2024 against the deletion of Rs. 19,90,00,000/- for A.Y. 2008-09, comprising Rs. 15,95,00,000/- in respect of 19 corporate entities, excluding the duplicate addition of Rs. 30,00,000/- relating to M/s. Arena Securities Ltd., and Rs. 3,95,00,000/- representing share application money refunded during the same financial year.

The Ld. AR submitted that the Assessee had furnished complete particulars and documentary evidence establishing the identity, creditworthiness and genuineness of the subscribers. The documents furnished included PAN cards, ROC master data, audited balance sheets, profit and loss accounts, auditors' reports, bank statements, share application forms, board resolutions for allotment, share certificates and ledger confirmations.

It was submitted that all subscription funds were received through regular banking channels by account payee cheques. During the remand proceedings, the AO deputed an Income-tax Inspector who carried out spot verifications under section 131 of the Act. The Directors/Principal Officers of entities falling under Categories A and B, including M/s. Benco Finance & Investments Pvt. Ltd., M/s. Prarambh Multitrade Pvt. Ltd., M/s. Suvidha Securities Pvt. Ltd., M/s. Dhwani Marketing Ltd., M/s. Emarald Systems Engineering Ltd. and M/s. Mansi Securities Pvt. Ltd., appeared, produced their books of account, acknowledged the investments and placed on record retraction statements in respect of the earlier statements allegedly obtained from the concerned persons.

It was further submitted that the subscriber entities possessed substantial net worth and reserves. For instance, Suvidha Securities Pvt. Ltd. had reserves exceeding Rs. 20 crores, Emarald Systems Engineering Ltd. had investment resources of over Rs. 10 crores and Prarambh Multitrade Pvt. Ltd. had raised capital of over Rs. 3.19 crores.

With regard to Category C, comprising UAE investors aggregating to Rs. 2,01,86,100/-, it was submitted that complete particulars, foreign inward remittance details and confirmations were furnished. It was also contended that, for the assessment years under consideration, the unamended provisions of section 68 were applicable. The first proviso to section 68, which casts an additional burden upon a closely held company to explain the source of the source of share application money or share premium, was inserted by the Finance Act, 2012 with effect from 01.04.2013 and is prospective in operation.

On the other hand, the Ld. DR supported the additions made by the AO and contended that the Ld. CIT(A) erred in deleting the additions under Category D for A.Y. 2007-08 amounting to Rs. 9,95,00,000/- and the additions for A.Y. 2008-09 comprising Rs. 15,95,00,000/- and Rs. 3,95,00,000/-.

It was submitted that the Assessee had charged an exorbitant premium of Rs. 240/- per share on shares having a face value of Rs. 10/- per share without any commercial valuation or financial strength, despite having reported a net profit of only Rs. 1.28 crores in F.Y. 2005-06. It was further submitted that the promoters, namely, CMD Shri Jagdish M. Mistry and Director Shri Jay Mistry, had admitted in their statements recorded under sections 132/131 of the Act that they could not name the investors or explain the basis for charging such premium.

The Ld. DR further submitted that several corporate subscribers had returned nominal income, such as M/s. Macrosoft Technology Pvt. Ltd., which had returned income of Rs. 6,670/-, and M/s. Clifton Securities, which had returned income of Rs. 26,629/-. It was also submitted that certain entities had invalid PANs or were not traceable during the initial enquiries.

With regard to the same-year refunds, it was contended that section 68 applies to any sum credited during the relevant previous year and that subsequent debits or repayment of the amount would not, by themselves, negate the unexplained nature of the credit. Reliance was placed on the judgments in Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), CIT v. Durga Prasad More (1971) 82 ITR 540 (SC), Royal Rich Developers Pvt. Ltd. v. CIT (Hon'ble Bombay High Court), PCIT v. Minto Park Estates Pvt. Ltd. (Hon'ble Calcutta High Court), CIT v. Nipun Builders & Developers Pvt. Ltd. (Hon'ble Delhi High Court) and CIT v. Focus Exports Pvt. Ltd. (Hon'ble Delhi High Court).

We have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the order passed by the Revenue Authorities.

At the outset, we note that the assessment years under consideration are A.Ys. 2007-08 and 2008-09. The first proviso to section 68 of the Act, requiring a closely held company to also explain the source of the source of amounts received towards share application money, share capital or share premium, was inserted by the Finance Act, 2012 with effect from 01.04.2013. The Hon'ble jurisdictional High Court in CIT v. Gagandeep Infrastructure (P.) Ltd. [2017] 80 taxmann.com 272 (Bom.) has held that the said proviso is prospective in nature and cannot be applied to assessment years prior to A.Y. 2013-14.

Accordingly, for the assessment years under consideration, the applicable legal position with regard to additions under section 68 in respect of share capital and share premium has to be examined in the light of the law prevailing during the relevant assessment years. The Hon'ble Supreme Court in CIT v. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 (SC) has held, in the context of share capital, that where the names of the shareholders are furnished to the Department, the Revenue is free to proceed against such shareholders in accordance with law, but the share application money cannot, merely for that reason, be regarded as undisclosed income of the assessee company.

It is well settled that the assessee is required to establish the identity of the subscriber, the creditworthiness of the subscriber and the genuineness of the transaction. Where the assessee furnishes independent documentary evidence such as PAN details, ROC records, audited financial statements, bank statements reflecting payments through banking channels, share application forms, board resolutions, allotment records and share certificates, the evidentiary burden cast upon the assessee is required to be examined on the basis of the totality of the material available on record.

First of all, in ITSSA No. 5419/MUM/2024, the Assessee has challenged the confirmation of additions aggregating to Rs. 7,14,36,100/-, comprising Rs. 3,07,00,000/- under Category A, Rs. 2,05,00,000/- under Category B and Rs. 2,01,86,100/- under Category C.

With regard to Categories A and B aggregating to Rs. 5,12,00,000/-, we find that the remand report contains the results of physical verification carried out by the Departmental Inspector in respect of the concerned subscriber entities.

In the case of M/s. Benco Finance & Investments Pvt. Ltd., against the investment of Rs. 85,00,000/-, the Inspector found the entity existing at Sujata Chambers, Katha Bazar, Mumbai. Its Director, Mr. Navneet Pawar, appeared and produced the PAN card, audited balance sheet, profit and loss account and ledger confirmation. He confirmed the investment made by account payee cheque out of funds raised through fresh issue of shares and also produced the share allotment letter and share certificates. A copy of the retraction statement in respect of the earlier statement of Shri Jagdish Purohit was also furnished.

In the case of M/s. Prarambh Multitrade Pvt. Ltd., against the investment of Rs. 50,00,000/-, the entity was found existing at Hill View Apartments, Andheri (West), Mumbai. Its Director, Mr. Pravin T. Sawant, appeared and confirmed the investment in 20,000 equity shares. He produced the PAN, financial statements, bank records, share certificates and the retraction statement of Shri Jagdish Purohit. The source of funds was stated to be capital raised by the company amounting to Rs. 3.19 crores.

In the case of M/s. Suvidha Securities Pvt. Ltd., against the investment of Rs. 70,00,000/-, the entity was found existing at Dr. Viegas Street, Kalbadevi, Mumbai. Its Director, Mr. Vishal Paras Rampuria, appeared and produced audited financial statements reflecting accumulated reserves of Rs.

In the case of M/s. Dhwani Marketing Ltd., against the investment of Rs. 1,00,00,000/-, the entity was found existing at Dabholkar Wadi, Kalbadevi, Mumbai. Its Director, Mr. A. N. Patel, appeared and verified the subscription of 40,000 equity shares through banking channels. The balance sheets showing investment assets of Rs. 1.99 crores were also produced, along with the retraction statement of Shri Sanjay Chouhan.

In the case of M/s. Emarald Systems Engineering Ltd., against the investment of Rs. 32,50,000/-, the entity was found existing at Ganesh Nagar, Dahisar (East), Mumbai. Its Director, Mr. Prashant Vardam, appeared and produced audited financial statements reflecting total investment resources of Rs. 10.03 crores, bank statements evidencing payments by cheque, share certificates and the retraction statement.

In the case of M/s. Mansi Securities Pvt. Ltd., against the investment of Rs. 1,00,00,000/-, the entity was found existing at Government Industrial Estate, Kandivali (West), Mumbai. Its Director, Mr. Shah, appeared and produced evidence showing shareholders' funds of Rs. 3.93 crores, bank statements evidencing the payment, share allotment letters and the retraction statement.

Thus, in this way, the material brought on record during the remand proceedings demonstrates that the subscriber entities were physically existing and their respective Directors appeared before the Department and confirmed the transactions. The entities produced their books of account, audited financial statements and bank statements. Share certificates and allotment letters were also produced. Further, the earlier statements relied upon by the AO stood retracted.

In the above factual background, we find that the additions under Categories A and B were primarily sustained on the basis of adverse statements which had subsequently been retracted, notwithstanding the independent documentary evidence furnished by the subscriber companies and the results of physical verification carried out during the remand proceedings. The Revenue has not brought on record any cogent material demonstrating that the amounts received by the Assessee from the said subscriber companies actually represented its own undisclosed funds.

We also find that the subscriber companies had disclosed their respective financial positions and the payments were made through banking channels. Merely because the Revenue entertains a suspicion regarding the source of funds in the hands of the subscribers, such suspicion, in the absence of corroborative material linking the funds to the Assessee, cannot by itself justify an addition under section 68 in the hands of the Assessee for the assessment years under consideration.

With regard to Category C, comprising foreign investors aggregating to Rs. 2,01,86,100/-, the Assessee furnished the names, addresses and transaction particulars of the investors based in the UAE, including Samir Gulamnabi Radiowala, Mohammed Shabbir Virpurwala, Saifuddin Kalimuddin Daruwala, Abedeli Fakruddin Azad and Parvej Mohammed Aslam. The funds were received through international banking channels. In the absence of any concrete material demonstrating that the amounts represented domestic cash belonging to the Assessee which had been routed through hawala or otherwise, the addition cannot be sustained merely on the basis of suspicion.

Therefore considering the totality of facts and circumstances and in view of the foregoing discussion and having regard to the material available on record, we are of the considered view that the Assessee has discharged the onus cast upon it in respect of the impugned share application money/share premium. Accordingly, the additions aggregating to Rs. 7,14,36,100/- confirmed by the Ld. CIT(A) for A.Y. 2007-08 are deleted.

Accordingly, ITSSA No. 5419/MUM/2024 filed by the Assessee is allowed.

We now take up ITA No. 5911/MUM/2024 filed by the Revenue for A.Y. 2007-08, challenging the deletion of the addition of Rs. 9,95,00,000/- under Category D.

At the outset, we note that there is a delay of 14 days in filing the present appeal before us.

In this regard, we have heard the counsel for both the parties and perused the material placed on record as well as the explanation furnished by the Revenue. Considering the entire factual position explained before us and keeping in view the principles laid down by the Hon'ble Supreme Court in the case of Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors., 1987 AIR 1353 (SC), wherein it has been held that where substantial justice is pitted against technicalities of non-deliberate delay, substantial justice is to be preferred, we are of the view that the principle of advancing substantial justice is of prime importance.

Hence, considering the explanation put forth by the Revenue, which justifiably and properly explains the delay in filing the appeal, and adopting a liberal approach in construing the expression "sufficient cause", we are inclined to condone the delay in filing the appeal before us. Consequently, the delay is condoned and the appeal is admitted for hearing on merits.

From the records we find that the Ld. CIT(A), after examining the material furnished during the remand proceedings, recorded a finding that the corporate subscribers were registered legal entities having valid PANs and active ROC status and that confirmations, audited financial statements and bank statements evidencing payments through account payee cheques were furnished.

The principal contention of the Revenue is that the subscriber entities had low returned income, that the premium of Rs. 240/- per share was commercially unjustified and that the bank accounts disclosed circular entries.

In our considered view, the low taxable income of an investor in a particular year cannot, by itself, establish that the investor lacked the financial capacity to make the investment, particularly where the audited financial statements disclose adequate capital, reserves and assets. Likewise, the commercial wisdom of the parties in determining the quantum of share premium cannot ordinarily be substituted by the subjective view of the Assessing Officer unless the Revenue brings on record cogent material demonstrating that the transaction itself was not genuine.

We further note that, for the assessment year under consideration, the first proviso to section 68 was not in force. Therefore, the Assessee could not be required to explain the source of the source in the manner contemplated by the said proviso. The principle laid down by the Hon'ble Bombay High Court in Gagandeep Infrastructure (P.) Ltd. (supra) is applicable in this regard.

In the present case, the identity of the subscribers, their corporate existence and the banking trail of the investments were established through documentary evidence. The Revenue has not brought on record sufficient independent and corroborative material to establish that the amounts received by the Assessee represented its own undisclosed funds.

We, therefore, find no infirmity in the order of the Ld. CIT(A) deleting the addition of Rs. 9,95,00,000/-.

Accordingly, ITA No. 5911/MUM/2024 filed by the Revenue is dismissed.

We now take up ITA No. 5912/MUM/2024 filed by the Revenue for A.Y. 2008-09.

At the outset, we note that there is a delay of 14 days in filing the present appeal before us.

In this regard, we have heard the counsel for both the parties and perused the material placed on record as well as the explanation furnished by the Revenue. Considering the entire factual position explained before us and keeping in view the principles laid down by the Hon'ble Supreme Court in the case of Collector, Land Acquisition, Anantnag & Anr. v. Mst. Katiji & Ors., 1987 AIR 1353 (SC), wherein it has been held that where substantial justice is pitted against technicalities of non-deliberate delay, substantial 15 justice is to be preferred, we are of the view that the principle of advancing substantial justice is of prime importance.

The Revenue has challenged the deletion of additions aggregating to Rs. 19,90,00,000/-, comprising Rs. 15,95,00,000/- in respect of 19 corporate subscribers and Rs. 3,95,00,000/- in respect of share application money refunded during the same financial year.

With regard to the 19 corporate subscribers, the remand proceedings included physical verification by the Ward Inspector. The concerned entities responded, appeared and confirmed the investments. PANs, ROC records, audited financial statements, ledger accounts and bank statements evidencing transactions through account payee cheques were furnished.

The Revenue has placed reliance upon the nominal taxable income returned by certain subscriber companies, including M/s. Macrosoft Technology Pvt. Ltd. and M/s. Clifton Securities Pvt. Ltd. However, as noted by the Ld. CIT(A), the audited balance sheets of the concerned entities reflected their respective assets, capital and financial resources. The mere fact that an entity reported low taxable income in a particular year cannot, in the absence of other cogent material, conclusively establish that the entity lacked creditworthiness.

The contention of the Revenue regarding the source of the funds in the hands of the subscribers also cannot be accepted for the assessment year under consideration, since the first proviso to section 68 was not applicable during the relevant period.

As regards the share premium, the fact that shares were issued at a premium of Rs. 240/- per share, by itself, cannot establish that the underlying transaction was accommodation entry. The commercial basis of the transaction may be examined by the Revenue where there is supporting material demonstrating that the transaction is not genuine. However, in the present case, no sufficient independent corroborative evidence has been brought on record to establish that the amounts received from the concerned corporate subscribers represented the Assessee's own undisclosed funds.

We also note that the addition of Rs. 30,00,000/- relating to M/s. Arena Securities Ltd. was admittedly a duplicate addition pertaining to A.Y. 2007- 08. The same, therefore, could not have been sustained again in A.Y. 2008- 09.

In view of the above, we find no infirmity in the order of the Ld. CIT(A) deleting the addition of Rs. 15,95,00,000/- in respect of the 19 corporate subscribers.

As regards the balance addition of Rs. 3,95,00,000/-, the material on record shows that the amounts were received from nine parties as share application money and were refunded to the respective parties through banking channels within the same financial year, i.e. F.Y. 2007-08. No shares were allotted against these amounts and, consequently, no such amount remained outstanding in the Assessee's books as on 31.03.2008.

The fact that a credit entry arose during the year is not, by itself, sufficient to sustain an addition where the surrounding facts establish that the transaction was subsequently squared up during the same financial year and the amount was refunded through banking channels. In the present case, the Ld. CIT(A) has examined the relevant material and recorded a finding that the amounts were duly refunded and did not remain outstanding at the year-end. The Revenue has not brought on record any material to controvert this factual finding or to establish that the refunds represented a device for introducing the Assessee's undisclosed money.

We, therefore, find no reason to interfere with the order of the Ld. CIT(A) deleting the addition of Rs. 3,95,00,000/-.

Accordingly, the order of the Ld. CIT(A) deleting the additions aggregating to Rs. 19,90,00,000/- is upheld and ITA No. 5912/MUM/2024 filed by the Revenue is dismissed.

We now take up ITSSA No. 5418/MUM/2024 filed by the Assessee for A.Y. 2008-09.

We note that the entire addition of Rs. 20,20,00,000/- made by the AO under section 68 of the Act for A.Y. 2008-09 was deleted by the Ld. CIT(A). Since the Revenue's appeal challenging the said deletion has been dismissed by us hereinabove, the Assessee has already been granted full relief. Accordingly, no further adjudication survives in the Assessee's appeal.

ITSSA No. 5418/MUM/2024 is, therefore, disposed of as infructuous.

In the result, the appeals filed by the Assessee in ITSSA Nos. 5419/MUM/2024 and 5418/MUM/2024 are allowed, and the appeals filed 18 by the Revenue in ITA Nos. 5911/MUM/2024 and 5912/MUM/2024 are dismissed.