COMMISSIONER OF INCOME TAX -3 vs. FIVE VISION PROMOTERS PVT.LTD

ITA Nos. 234, 235 & 236/2015

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$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI

ITA 234/2015

Reserved on: November 17, 2015

Date of decision: November 27, 2015

COMMISSIONER OF INCOME TAX -3

..... Appellant Through: Mr. Rohit Madan and Mr. Akash Vajpai, Advocates.

versus

FIVE VISION PROMOTERS PVT.LTD.

..... Respondent

Through: Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar, Mr Rupinder Aggarwal and Mr Gautam Jain, Advocates,

With

ITA 235/2015

COMMISSIONER OF INCOME TAX -3

..... Appellant Through: Mr. Rohit Madan and Mr. Akash Vajpai, Advocates.

versus

FIVE VISION PROMOTERS PVT.LTD.

..... Respondent

Through: Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar, Mr Rupinder Aggarwal and Mr Gautam Jain, Advocates,

and

ITA 236/2015

COMMISSIONER OF INCOME TAX -3

..... Appellant Through: Mr. Rohit Madan and Mr. Akash Vajpai, Advocates.

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versus

FIVE VISION PROMOTERS PVT.LTD.

..... Respondent

Through: Mr C.S. Aggarwal, Senior Advocate with Mr Prakash Kumar, Mr Rupinder Aggarwal and Mr Gautam Jain, Advocates,

CORAM: JUSTICE S. MURALIDHAR JUSTICE VIBHU BAKHRU

J U D G M E N T %

27.11.2015

Dr. S. Muralidhar, J.

Limitation 2. Considering that the impugned order is dated 29th April 2014 and the appeals were first listed for hearing nearly a year later on 10th April 2015, the question whether the appeals were in time was examined by the Court. In para 8 of the memorandum of appeal in each of the appeals it is stated that the impugned order was received by the Appellant, i.e. the Commissioner of Income Tax, Delhi -3 (CIT-3) on 24th November 2014. The affidavit in support of the appeal has been signed by Mr. Narendra Prasad Sinha, posted as CIT -3.

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One of them is a date stamp of the CIT-3 dated 1st August 2014. Next to it, is a noting of 5th August 2014 asking the matter to be put up for 'appeal effect' urgently. However, also enclosed is a copy of a covering letter dated 24th November 2014 from the Income Tax Officer (ITO), Headquarters-8 (Judicial), New Delhi addressed to the CIT-III (Post restructured) drawing the attention of the latter to the ITAT’s order in the cases of the present Respondent, Five Vision Promoters Pvt. Ltd. (‘Five Vision’).

(2) (a) of the Act. On that basis, the appeal filed on 19th March 2015, with 2015:DHC:9679-DB

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the supporting affidavit attested on 31st March 2015 would be beyond the stipulated limitation period of 120 days in terms of Section 260A (2) (a) of the Act. There is, however, no application for condonation of delay and the appeals have been numbered and listed by the Registry as if they were within limitation.

Question urged 7. The Revenue has in these appeals sought to urge the following question for consideration:

“Whether the ITAT erred in deleting the addition made under Section 68 of the Act of share application money by holding that the identity and genuineness of the share applicants was established?”

Background facts 8. The background to filing of these appeals is that the Assessee, Five Vision, is a company incorporated under the Companies Act, 1956 on 14th 2015:DHC:9679-DB

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January 2005 with the object of running a shopping mall. The business of the Assessee had not commenced till 31st March 2009 because the Mall was under construction.

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money routed through the said channel was reinvested in the purchase of further lands and for new projects. The share application money received in cash was also utilized for booking bogus expenses as site development charges for inflating the cost of construction to bring down profits. Among the SVP Group of companies, which are stated to have constituted the core group, is the Assessee, Five Vision.

(i) Table – I (14 companies): Rs. 1.33 crores

(ii) Table – II (9 companies)

Rs. 87 lakhs

(iii) Table – III (15 companies) Rs. 2.36 crores

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concerned, of the 12 companies therein, 9 were shareholders of Five Vision during 2007-08 contributing in the aggregate Rs. 87 lakhs. These are companies against whom information was gathered during the course of search although these companies themselves were not searched. Of the 74 companies in Table-III, 15 were stated to have contributed in the aggregate Rs. 2,36,47,500 to the share capital of Five Vision during the AY 2007-08.

Assessment order 17. The assessment order was passed on 30th December 2010 by the AO holding that the above investments were not genuine. He held that:

(i) As far as the Table I shareholders were concerned, the AO noted that none of the companies were found to be operating at the given addresses. There was neither any display board for name of these companies nor their books of accounts or related accounts or documents were found from such premises.

(ii) Moreover, even the persons available at the said premises namely Shri Bajrang Bahadur Dubey, Smt. Meena Goyal, Smt. Sushila Goyal and Shri Sachin Garg denied that any of the said companies existed at the said 2015:DHC:9679-DB

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addresses. Further, despite letter dated 5th March 2009, and summons under Section 131 dated 20th March and 6th April 2009, the Assessee failed to produce the shareholders for cross examination.

(iii) As far as the Table III companies were concerned, many of the summons issued were returned unserved with the remarks "unknown" or "no such person". 24 of the companies submitted replies and some filed affidavits but did not submit any other details. The letter of M/s. Ganesh Buildtech showed that it had invested Rs. 10.50 crores in 16 of the companies in figuring in Tables III and they in turn invested in the SVP Group companies. This was proof of the said companies acting as a "conduit channel". Further, the Assessee failed to produce the shareholders for cross-examination.

(iv) Also, the nexus of the shareholders and the beneficiary, i.e. the SVP Group stood proved from the fact that shares were bought back by the individuals/concerns belonging to SVP Group. During the search, original share certificate worth Rs. 38 crores were found out of which some were seized. During the search one Shri Vijay Jindal gave a statement that the shares were allotted at Rs. 10 per share and later on bought back at Rs.2- 3/- per share. The actual average purchase price was Rs. 1.04 per share. Thus shares that were initially issued by the SVP Group to the extent of Rs. 81.19 crores had been cheaply bought back for Rs. 10.38 crores and therefore the transactions were sham.

(v) Thus the Assessee had failed to prove the identity, genuineness and creditworthiness of the said shareholders. Accordingly, the 2015:DHC:9679-DB

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aforementioned sums shown as investments in its shares for the AYs in question were added to its income for those AYs.

Proceedings before the CIT (A) 18. Aggrieved by the aforementioned assessment orders, the Assessee, Five Vision filed appeals before the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. The Assessee furnished some more documents on which remand report was called for by the CIT (A) from the AO. The remand report was submitted by the AO on 11th November 2011. A rejoinder and recapitulation note was submitted before the CIT (A) on 8th December 2011. A reply dated 21st December 2011 was also filed by the Assessee on the questions raised by the CIT (A) on 8th December 2011. Further responses were submitted on 7th and 10th February 2012 for questions raised on 3rd and 8th February 2012 respectively.

Impugned order of the ITAT 21. By the impugned order dated 29th April 2014, the ITAT deleted the additions made under Section 68 of the Act by holding that: 2015:DHC:9679-DB

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(i) The Revenue had been unable to deny the factual position that only 11 of the 20 companies in Table I had actually been searched. The material on record showed that directors of 18 companies of the 20 companies were examined by the AO in the course of the remand proceedings and found from the books of accounts that the share capital stands duly recorded in their books of accounts. Thus there was no justification for drawing an adverse inference particularly since no contrary material was placed on record by the revenue.

(ii) The statements of Shri Bajrang Dubey and Shri Sachin Garg when carefully examined did not show that the investor companies did not exist or did not in fact subscribe to the share capital of the SVP Group companies.

(iii) As far as Ganesh Buildtech was concerned, while no addition was made by the AO of the sum of Rs. 28 lakhs invested by it in Five Vision for AY 2006-07 and Rs. 1,57,27,500 in AY 2007-08, he added the sum of Rs. 1,74,75,000 received from it in AY 2007-08. This apparent contradiction showed that the addition was made without appreciating the complete facts on record.

(iv) The decision of this Court in M/s. Nova Promoters and Finlease (P) Ltd. 342 ITR 169 (Del) was distinguishable on facts since in that case two directors of the shareholder companies admitted to maintaining benami accounts and providing accommodation entries, whereas in the present cases there were no such statements. Also, here the AO did not take any steps to rebut the confirmation and evidence tendered by the shareholders. 2015:DHC:9679-DB

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(v) The common address of shareholders was not a valid basis to disregard the claim of the Assessee in view of the decision of this Court in CIT v. Winstral-Petrochemicals Pvt. Ltd. 330 ITR 603 (Del).

(vi) The subsequent sale of the shares subscribed was not germane to the question of the genuineness of the share capital amount received by the Assessees. Once the capital raised stood explained, the issue of disinvestment by the shareholder subsequently was a non-issue. The addition if at all was to be examined in the hands of the person purchasing the shares.

(vii) There was no material to support the Revenue's case that the 'on- money' collected in cash was routed back into the SVP Group companies in the form of share application and later reinvested in purchase of further lands for new projects.

(viii) There was no material to conclude that some of the investors were 'paper' companies. They had been regularly assessed to tax and had produced their books of accounts during their respective assessment proceedings to show that they had made the investment in question. This had been accepted by the CIT (A) in their assessments by deleting the additions made of the said sums to their income by the AO concerned by holding that the additions if at all should be made in the hands of the beneficiaries. In the appeals filed in those cases, the Revenue had contended that the additions ought to have been sustained. Thus, the stand of the Revenue was contradictory and untenable.

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(ix) The Assessee had discharged primary onus of proving the the identity, genuineness and creditworthiness of the said shareholders.

Submissions of counsel 22. Mr. Rohit Madan, learned counsel for the Revenue reiterated the grounds of appeal. He first submitted that the CIT (A) had found that the Assessee had manipulated substantial fund movement through ‘paper existence’ of the investor companies. Secondly, the CIT (A) found that the common directors repetitively appeared in the list of directors of the companies which clearly indicated that they belonged to the same group, and were manipulating their books for the purpose of introduction of unexplained cash money and creating 5-6 steps of cheque transactions before the investment was made eventually in SVP group of companies. Thirdly, the CIT (A) checked the creditworthiness of three shareholding companies, viz., (i) Quality Security Services Pvt. Ltd. (b) United Head Hunters Pvt. Ltd. and (iii) Wellset Pharma & Drugs Pvt. Ltd. and found that these companies did not have any worthwhile share capital and their activities were only in the form of management of fund rotation in the garb of share application money invested in each other. Such rotation was with a view to artificially inflate their credit worthiness. Fourthly, the AO had found that the Assessee bought back its own shares at a very low price. The share allotted at the face value of Rs. 10 were transferred in the names of individuals/ concerns belonging to SVP group at a meagre price ranging from Rs. 0.50 to Rs. 2 per share. Fifthly, the persons available at the premises during search of the Table I companies denied the existence of such companies at that place. The Assessee had received huge amounts of money of Rs. 11 crores in cash in the form of share application money, which was not explained. Lastly, it was submitted that the decision in M/s. 2015:DHC:9679-DB

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Nova Promoters and Finlease (P) Ltd. (supra) was wrongly distinguished by the ITAT in its application to the facts of the present case.

(i) copy of share application forms;

(ii) copy of board resolution;

(iii) copy of allotment letter confirming the allotment;

(iv) confirmation in affidavit by the investor

(v) copy of share certificate evidencing the allotment of shares;

(vi) copy of income tax return (‘ITR’) for the relevant AY;

(vii) the relevant extracts of the copy of bank book; and (viii) copy of the letter with enclosures filed by the investor company addressed to AO in response to summons issued under Section 131 of the Act making direct enquiries.

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shareholders which contributed a sum of Rs. 2 crores for the share capital of Five Vision for AY 2008-09:

(a) copy of certificate of incorporation/MOA;

(b) copy of ITR filed for relevant AY;

(c) copy of share application forms;

(d) copy of board resolutions;

(e) copy of bank statement (relevant extracts);

(f) copy of confirmation;

(g) confirmation in the affidavit by the investor (h) copy of the letter with enclosures submitted by the investor companies in response to the summons under Section 131 o the Act.

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this Court in (1994) CIT v. Sophia Finance Ltd. (1994)205 ITR 98 (FB) (Del).

Law concerning Section 68 of the Act 28. Before proceeding to discuss the above submissions, a brief recapitulation of the legal position as regards Section 68 of the Act is necessary. Under Section 68 of the Act, the AO has jurisdiction to undertake enquiries with regard to the amount credited in the books of the accounts of an Assessee. This could be any sum whether in the form of sale proceeds or receipt of share capital money. First, the AO is to enquire whether the alleged shareholders in fact exist or not. The truthfulness of the assertion by the Assessee regarding the nature and the source of the credit in its books of accounts can be examined by the AO. Where the identity of the shareholders stands established and it is shown that they had in fact invested money in the purchase of the Assessee's shares, then the amount received would be regarded as capital. Where the Assessee offers no explanation at all or the explanation offered is unsatisfactory, the provision of Section 68 may be invoked.

(i) The Assessee has to prima facie prove "(1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber”.

(ii) If the relevant details of the address of PAN identity of the 2015:DHC:9679-DB

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creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc., it would constitute acceptable proof or acceptable explanation by the Assessee.

(iii) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices.

(iv) The onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the Assessee nor should the AO take such repudiation at face value and construe it, without more, against the Assessee.

(v) The AO is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and veracity of the repudiation.

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are given to the AO, then the Department is free to proceed to re-open their individual assessments in accordance with law.”

“Circumstances might require that there should be some evidence of positive nature to show that the said subscribers had made a genuine investment, acted as angel investors, after due diligence or 2015:DHC:9679-DB

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for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the Assessee might find it difficult to unimpeachably establish creditworthiness of the shareholders.”

Reasons and decision 36. In the present case, there is a basic fallacy in the submission of the Revenue about the precise role of the Assessee, Five Vision. The broad sweeping allegation made is that “the Assessee being a developer is charging on money which is taken in cash”. This, however, does not apply to the Assessee which appears to be involved in the construction of a shopping mall. In fact for the AYs in question, the Assessee had not commenced any business. The construction of the mall was not yet complete during the AYs in question. The profit and loss account of the Assessee for all the three AYs, which has been placed on record, shows that only revenue received was interest on the deposits with the bank. The 2015:DHC:9679-DB

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Assessee is, therefore, right in the contention that the basic presumption of the Revenue as far as the Assessee is concerned has no legs to stand. Correspondingly, the further allegation that such ‘on money’ was routed back to the mainstream in the form of capital has also to fail.

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summons issued to them. Directors of 14 of these companies appeared before the AO and produced their books of accounts.

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Conclusion 44. The Revenue has not been able to show that there is any legal infirmity in the impugned order of the ITAT as regards the analysis of the facts or the application of the law in relation to Section 68 of the Act.

S. MURALIDHAR, J

VIBHU BAKHRU, J NOVEMBER 27, 2015 Rk 2015:DHC:9679-DB