DCIT-3(1)(1), MUMBAI, AAYAKAR BHAWAN vs. SPRINGBOARD MACHINE TECHNOLOGIES PRIVATE LIMITED, MUMBAI

The assessee is a private limited company engaged in the business of trading in machinery items useful for the newspaper industry and had also earned rental and interest income during the year under consideration. The assessee e-filed its return of income for A.Y. 2009-10 on 30/09/2009 declaring total income of Rs.16,14,305/-, which was initially processed under section 143(1) of the Act.

Subsequently, information was received from the DGIT (Inv.), Mumbai, vide letter dated 17/03/2014 stating that a search and survey operation under section 132 of the Act was carried out in the case of Pravin Kumar Jain and his group on 01/10/2013. Based on the statements recorded under section 132(4) of the Act of Pravin Kumar Jain and the material gathered during the search, it was alleged that various entities operated by him were engaged in providing accommodation entries. The Assessing

Accordingly, reassessment proceedings were initiated by issuing notice under section 148 of the Act on 26/03/2015.

During the reassessment proceedings, the assessee submitted documentary evidence to establish the identity and creditworthiness of the investor companies and the genuineness of the transactions. The documents furnished included PAN details and Certificates of Incorporation/Registration issued by the Registrar of Companies (ROC), copies of audited annual accounts, Balance Sheets, Profit & Loss Accounts and Income Tax Return (ITR) acknowledgements of the investing companies, bank statements showing the movement of funds through regular banking channels and availability of bank balances/liquidity prior to the investments, and written confirmations along with Form No. 2 (Return of Allotment) filed with the ROC evidencing the allotment of shares to the subscriber companies.

The AO, however, did not accept the aforesaid documentary evidence and, relying upon the statement of Shri Pravin Kumar Jain recorded under section 132(4) of the Act during the search proceedings, treated the receipt

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A), after examining the material on record, held that the assessee had discharged its primary onus of establishing the identity and creditworthiness of the investor companies and the genuineness of the transactions and that the AO had failed to bring any material on record to establish cash routing or payment of any on-money back to the subscriber entities. Relying, inter alia, upon the decision of the Hon’ble Supreme Court in CIT v. Lovely Exports (P) Ltd., (2008) 216 CTR 195 (SC) / (2009) 319 ITR (St.) 5 (SC), the Ld. CIT(A) deleted the addition of Rs.70,50,000/-.

Aggrieved by the deletion of the addition, the Revenue is in appeal before us.

The Ld. DR relied upon the assessment order and submitted that the search operation in the case of Shri Pravin Kumar Jain had unearthed an accommodation entry network. The Ld. DR submitted that Shri Pravin Kumar Jain, in his statement recorded under section 132(4) of the Act, had admitted that entities controlled by him were engaged in providing accommodation entries. It was contended that the surrounding circumstances and human probabilities were required to be considered and that the Ld. CIT(A) erred in deleting the addition on the basis of the documentary evidence furnished by the assessee.

The Ld. AR further submitted that the assessee had discharged its initial onus under section 68 of the Act by furnishing the PANs, ROC filings, ITR acknowledgements, audited financial statements, confirmation letters and bank statements of all three subscriber companies. It was submitted that the financial position of the subscriber companies was also sufficient to support the investments made by them. The Ld. AR pointed out that M/s Ansh Merchandise Pvt. Ltd. had a net worth of Rs.2.15 Crores against an investment of Rs.15 Lakhs; M/s Triangular Inforcom Ltd. had a net worth of Rs.8.23 Crores against an investment of Rs.18 Lakhs; and M/s Raghunandan Rayons Ltd. had a net worth of Rs.4.88 Crores against an investment of Rs.37.50 Lakhs.

It was further submitted that the AO had not conducted any independent inquiry, had not examined the bank statements to establish any cash deposits preceding the transfer of funds, had not confronted the assessee with the statement of Pravin Kumar Jain for rebuttal and had not afforded an opportunity of cross-examination to the assessee.

The Ld. AR also submitted that the assessment year under consideration is A.Y. 2009-10 and, therefore, the proviso to section 68,

We have heard the rival submissions and carefully perused the material available on record, including the assessment order and the impugned order of the Ld. CIT(A). At the outset, we note that the ground raised by the Revenue proceeds on the premise that the assessee had taken a “bogus entry in the name of repayment of unsecured loan”. However, from the assessment order and the material placed on record, it is evident that the addition of Rs.70,50,000/- made by the AO under section 68 of the Act was in respect of share capital/share application money stated to have been received from the following three companies:

There is no finding in the assessment order that the impugned amount represented repayment of any unsecured loan. Thus, the ground raised by the Revenue does not correctly set out the factual basis of the addition made by the AO.

Coming to the merits of the addition, section 68 of the Act provides that where any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not satisfactory in the opinion of the AO, such

In the case of share application money/share capital received during the year under consideration, the assessee was required to establish the identity of the subscribers, their creditworthiness and the genuineness of the transactions. In the present case, the assessee had furnished documentary evidence in support of the aforesaid requirements.

From the material available on record, we note that the assessee furnished the PAN details and ROC records of the subscriber companies, their audited financial statements, Income Tax Return acknowledgements, bank statements, confirmations and Form No. 2 evidencing allotment of shares. The financial statements and bank statements were also relied upon to demonstrate the financial capacity of the subscriber companies and the availability of funds prior to the investments.

Once the assessee had furnished the aforesaid documentary evidence in support of the share application money/share capital received, it was incumbent upon the AO to examine the same and bring contrary material on record if the claim of the assessee was to be rejected. However, from the assessment order, we do not find any independent inquiry or investigation by the AO demonstrating that the funds received by the assessee represented its own undisclosed money routed through the subscriber companies.

The addition made by the AO was primarily based upon the statement of Pravin Kumar Jain recorded during the search proceedings in his case. However, the assessee was not shown to have been provided an effective opportunity to controvert the adverse material relied upon by the AO. The

We further note that the assessment year involved is A.Y. 2009-10. The proviso to section 68, which specifically requires a closely held company to explain the source in respect of 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 Bombay High Court in CIT v. Gagandeep Infrastructure Pvt. Ltd., [2017] 394 ITR 680 (Bom.), has held that the said proviso is prospective and applicable from A.Y. 2013-14 onwards.

Therefore, for the year under consideration, the assessee could not be fastened with the specific statutory obligation introduced by the aforesaid proviso. The assessee was nevertheless required to establish the identity of the subscribers, their creditworthiness and the genuineness of the transactions, which, as noted above, it had sought to establish by furnishing the relevant documentary evidence.

The Hon’ble Supreme Court in CIT v. Lovely Exports (P) Ltd., (2008) 216 CTR 195 (SC) / (2009) 319 ITR (St.) 5 (SC), while dealing with share application money received by an assessee company, observed that where the names of the alleged bogus shareholders are furnished to the Assessing

In the present case, the assessee had furnished the names and relevant particulars of the subscriber companies. The AO, however, did not bring sufficient independent material on record to establish that the impugned share application money/share capital represented the assessee’s unexplained income.

We also note that the Ld. CIT(A), after examining the material available on record, recorded a finding that the assessee had discharged its primary onus and that the AO had failed to establish any cash routing or payment of on-money back to the subscriber companies. The Revenue has not brought any material before us to controvert these factual findings.

Considering the totality of the facts and circumstances of the case, and having regard to the material available on record, we find no reason to interfere with the order of the Ld. CIT(A) deleting the addition of Rs.70,50,000/- made under section 68 of the Act.

Accordingly, the ground raised by the Revenue is dismissed.

In the result appeal filed by the Revenue stands dismissed.

Since we have already dismissed the appeal filed by the Revenue, the Cross-Objection filed by the assessee has become infructuous and, therefore, does not require separate adjudication.

In the result, the appeal filed by the Revenue as well as the Cross- Objection filed by the assessee are dismissed.