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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
O R D E R
PER G. MANJUNATHA, AM:
This bunch of five appeals filed by the assessee are directed against common order passed by the learned Commissioner of Income Tax (Appeals)-1, Chennai dated 01.06.2018 and pertain to assessment years 2008-09 to 2012- 13. Since, facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are being disposed off, by this consolidated order.
The assessee has more or less filed common grounds of appeal for all assessment years, therefore, for the sake of brevity, grounds of appeal filed for the assessment year 2008- 09 are reproduced as under:-
“1. The common order of the Commissioner of Income Tax (Appeals) -1, Chennai dated 01.06.2018 in I.T.A.Nos.9, 8, 7, 10 /CIT(A)-1/2016-17 & I.T.A.No.148/CIT(A)-1/2015-16 in so far as the issues challenged from the assessment proceedings relating to the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in rejecting the grounds challenging the validity of reopening of the assessment as 'not pressed' in para 15 of the impugned order without assigning proper reasons and justification.
3. The CIT (Appeals) failed to appreciate that the order of re- assessment under consideration was passed out of tirne, invalid, passed without jurisdiction and not sustainable both on facts and in law and ought to have appreciated that the wrong recording of reasons/satisfaction for reopening the proceedings would vitiate the consequential re-assessment order under consideration.
4. The CIT (Appeals) failed to appreciate that the reasons given in the interim/speaking order dated 26.10.2015 in maintaining the validity of the assumption of jurisdiction u/s 147 of the Act were wrong, erroneous, unjustified, incorrect and not sustainable in law and ought to have appreciated that borrowed satisfaction would not constitute valid information for the purpose of assuming jurisdiction u/s.147 of the Act thereby vitiating the consequential re-assessment.
5. The CIT (Appeals) erred in confirming the assessment of Rs.4,65,84,375/- being the monies received from M/s Fruiton Resorts Ltd. as share capital contribution in the hands of the Appellant on the application of section 68 of the Act in the computation of taxable total income without assigning proper reasons and justification.
6. The CIT (Appeals) failed to appreciate that having taken on record the material evidence for substantiating the identity of the contributor, capacity of the contributor and the genuineness of the transaction of share capital contribution by the share capital contributor, the sustenance of the said addition in the hands of the Appellant on mere suspicion and surmise was bad in law.
7. The CIT (Appeals) failed to appreciate that having further taken on record the material evidence for proving the 'source for source', rejection of such evidence in the process of sustaining the addition in the hands of the Appellant was wrong, erroneous, unjustified, incorrect and not sustainable in law.
8. The CIT (Appeals) failed to appreciate that the findings recorded on the analysis of the documents filed for establishing the 'source for source' of the share capital contributor from para 28 to para 45 of the impugned order were wrong, erroneous, unjustified, incorrect and not sustainable in law.
The CIT (Appeals) failed to appreciate that the analysis of the legal arguments and conclusions reached in relation thereto from para 46 onwards of the impugned order were completely erroneous and ought to have appreciated that the tangential findings especially on the understanding of the judicial trend on the issue were not correct and not relevant while vitiating the decision to sustain the addition of share capital contribution received from the non resident company in the hands of the Appellant.
The CIT (Appeals) failed to appreciate that the misconstruction of the provisions of section 68 of the Act would vitiate the decision to tax share capital contribution in the hands of the appellant especially in para 55 of the impugned order on various grounds.
The CIT (Appeals) failed to appreciate that having taken on record the objections of the Appellant with regard to the issues emanating from the remand report of the Assessing Officer, the said objections were not disposed of properly.
12. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law.”
Brief facts of the case are that the assessee company is engaged in the business of operating and maintaining resorts and tourism in Andaman & Nicobar Islands. The assessee had filed its return of income for the assessment year 2008-09 to 2012-13 u/s.139(1) of the Income Tax Act, 1961. The assessment has been subsequently, reopened u/s.147 of the Act for the reasons recorded, as per which income chargeable to tax had been escaped assessment on account of under- assessment of share capital received by the assessee from non-resident shareholder, in view of approval denied by FIPB for post-facto approval of allotment of equity shares to non- resident shareholders. The assessment has been completed u/s.143(3) r.w.s.147 of the Income Tax Act, 1961 and determined total income by making additions towards share capital received from M/s. Fruition Resorts Ltd., Mauritius, as unexplained credit u/s.68 of the Income Tax Act, 1961 .
The first common issue that came up for our consideration from assessment years 2008-09 to 2012-13 is addition on account of cash credit u/s.68 of the Income Tax Act, 1961. The facts with regard to impugned dispute are that M/s. Fruition Resorts Ltd., a company incorporated under laws of Mauritius has invested in equity capital of the assessee company from the assessment year 2008-09 onwards. The assessee has received investment from M/s. Fruition Resorts Ltd., for allotment of equity shares and details of such amounts received is as under:- Assessment Received from Shares RBI Approval year Fruition Resorts Ltd allotted Rs. 2008-09 4,65,84,375 2150 Yes 2009-10 3,45,92,260 8353 Yes 2010-11 20,95,033 582 Yes 2010-11 6,96,61,386 No FIPB also 2011-12 1,71,65,849 14195 rejected appellant’s application for post- facto approval 2012-13 1,14,07,494
Total 18,15,06,397 The assessee has allotted 11,085 equity shares upto 21.01.2009 which were fully paid up shares under automatic route of approval from the RBI. The assessee had also issued 14,195 partly paid up shares in October, 2009 for which payments were made by Fruition Resorts Ltd. during the assessment years 2010-11, 2011-12 and 2012-13 and this allotment is not under automatic route approval from the RBI. The normal procedure in this regard is that after issue of shares, the assessee company shall file FC-GPR with the RBI and the RBI upon being satisfied acknowledges issue of shares of unique ID No. The assessee had filed form FC-GPR to the RBI in respect of allotment of fully paid up shares upto 2009 under automatic route and the RBI has also issued unique identification number for the same. However, for partly paid up shares issued after July, 2009, the RBI declined to acknowledge allotment of shares by the assessee company, contrary to the provisions of FEMA, as partly paid up shares cannot be issued to non-resident under automatic route without approval of the government. Therefore, the assessee applied to the FIPB for post-facto approval for regularizing issue of partly paid up shares through their application dated 13.03.2013. The FIPB in their letter dated 09.12.2013, rejected application filed by the assessee for post-facto approval of allotment of shares and regularization of allotment of partly paid up shares to a foreign company on the ground that the assessee had not made available details of beneficial ownership and source of funds that were invested by M/s. Fruition Resorts Ltd. The F.T&T.R division of the CBDT communicated details of proceedings between the assessee and the FIPB in the form of letter to the Assessing Officer. Based on the above communication, assessments were reopened in respect of assessment years 2008-09, 2009-10 and 2010-11 and assessments u/s.143(3) r.w.s 147 were completed for these assessment years. The regular assessments were completed for the assessment years 2011- 12 and 2012-13.
5. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has received share capital from M/s. Fruition Resorts Ltd., Mauritius, therefore, called upon the assessee to file necessary evidences, including name & address of persons from whom share capital is received and also establish genuineness of transactions and creditworthiness of parties. In response, the assessee submitted that it has received share capital from M/s. Fruition Resorts Ltd., Mauritius, right from assessment year 2008-09 onwards and upto assessment year 2012-13 for development of resort at Andaman & Nicobar Islands. The company had issued fully paid up shares under RBI automatic approval route for which necessary permission has been taken from the RBI. The assessee had also issued partly paid up shares, however , no approval has been taken from the RBI, because said allotment does not come under automatic approval route. The assessee had filed an application for approval before FIPB and the FIPB has denied permission for allotment of equity shares only on the ground that the assessee could not identify ultimate beneficiaries of the investor company and their source of income to invest in shareholder company. However, as regards identity of investor company, the assessee had filed complete details, including their name & address, financial statements and also filed necessary FIRC for having received funds through proper banking channel. The assessee had also filed necessary details to prove capacity of shareholder.
6. The Assessing Officer, after considering relevant submissions of the assessee and also taken note of certain judicial precedents, opined that the assessee could not establish genuine identity of the shareholder which is evident from fact that Foreign Investment Promotion Board (FIPB) has been clearly rejected application filed by the assessee only on the ground of non-furnishing identity of ultimate beneficiaries of the investor company. Therefore, it cannot be said that the assessee has discharged its onus of proving identity of the shareholder. The Assessing Officer had also rejected arguments of the assessee on the issue of genuineness of transaction and observed that mere transfer of money through proper banking channel is not sufficient to comply with requirement of section 68 of the Income Tax Act, 1961, but what is required to be proved is genuine nature of transactions between the assessee and shareholder. In this case, although money has come from proper banking channel, but on perusal of various details filed by the assessee, it was observed that M/s. Fruition Resorts Ltd., Mauritius is only pass through entity and a special purpose vehicle created to route investment to assessee company from various source which is evident from fact that shareholders of Mauritius company are living in various countries and amount has been transferred to Mauritius company, for which no proper proof was furnished by the assessee. Further, M/s. Fruition Resorts Ltd., Mauritius, does not have sufficient profit from business to establish huge investments made in assessee company. Further, on verification of shareholding pattern of M/s. Fruition Resorts Ltd., Mauritius, furnished by the assessee company before FIPB, it was understood that investor company was unable to furnish complete details of the shareholder and further, some of the shareholders of the investor company were not identifiable in terms of the country of ultimate beneficiary and no financial documents were filed by investor company regarding the same. The claim of the assessee company that having obtained FIRCs shall bring obligation to an end on the part of the investee company and need for further probe does not arise is not acceptable, because in order to come out of shadow of provisions of section 68 of the Act , the assessee must fulfill following criteria:- a) Identity of the party claimed as investor by assessee company, b) Genuineness of the transaction & c) Creditworthiness of the party/person claimed as investor.
7. In this case, the FIPB has rejected application filed by the assessee for regularization of allotment of shares itself goes to prove beyond doubt that assessee company is unable to furnish complete details of its shareholders and also unable to prove creditworthiness of person claimed as investor. Therefore, the Assessing Officer opined that the assessee could not satisfactorily discharged its onus to establish credits found in the name of M/s. Fruition Resorts Ltd., Mauritius, and thus, opined that share capital received from Mauritius based company is unexplained credit taxable u/s.68 of the Income Tax Act, 1961. The relevant findings of the Assessing Officer are as under:- “7. The submission of the assessee is carefully considered and it cannot be accepted for the reasons discussions in the ensuing paras. Further the same issue was raised during the assessment proceedings relevant to AY 2012-13 (completed on 30.03.2015) and during the assessment proceeding the assessee company preferred an application u/s 144A of the Income-tax Act before the Additional Commissioner of Income-tax, Corporate Range-l Chennai for giving direction / guidance with regard to completion of the assessment. In this regard, the Addl. Commissioner of Income-tax, Corporate Range-l has given his direction / guidelines and rejected the objection of the assessee.
7.1. The assessee has stated as "It is reiterated and confirmed that the issue of shares to Fruition are duly covered under the FDI Automatic Route and FIPB approval was not mandated. Accordingly for the allotment of shares such compliance have already been carried out on the form of filing and reporting through FC- GPR and connected documents with the RBI Regional Office, Chennai and these have been taken on record without any interference by RBI.
7.2. The statement of the assessee that issue of shares to Fruition is duly covered under FDI automatic route and FIPB approval was not mandatory is not acceptable because it was stated here that while furnishing the details regarding FC-GPR Annexure-l of Part-A in the proforma questionnaire, the assessee company was asked to file the details regarding 'registration number allotted by RBI for FDI' if any. But the column is left blank. But the assessee company relied on the application filed in FC-GPR and connected documents with the RBI regional office, Chennai as these have been taken on record without interference by RBI. The RBI in their letter dated 21.02.2012 stated that "post issue share holding pattern does not agree with the details available with us. Kindly reconcile the difference and submit the details of earlier RBI acknowledgements for the same.
7.3. Further the assessee company in its letter dated 24-05-2013 addressed to RBI has assured that "Regarding the second point, our representative will consult you as earlier possible and reconcile the post issue share holding pattern" But after that no documentary evidence is filed evidencing the reconciliation of post issue share holding pattern with RBI.
7.4. The argument of the assessee that money was transferred through banking channel is also not acceptable because of the assessee company merely enclosed bank statement and there is nothing to show that RBI or the recipient banks verified the source of the funds etc. The Foreign Investment Promotion Board (FIPB) rejected application of the assessee company holding that the assessee company while seeking post facto approval for regularizing the issue of shares to M/s. Fruition Resorts Ltd., Mauritius, did not file details substantiating the actual source of funds for the foreign investor.
7.5. On verification of the financial statement of M/s. Fruition Resorts Limited, Mauritius filed by the assessee company before FIBP, it was held by FIPB that the investor company was riot having sufficient profits from business to invest in the assessee company.
7.6. Further, on verification of share holding pattern of M/s. Fruition Resorts Limited, Mauritius furnished by the assessee company before FIBP, it was understood that the investor company i.e., M/s. Fruition Resorts Limited, Mauritius was unable to furnish the complete details of the share holders. Some of the share holders of the investor company were not identifiable in terms of the country of the ultimate beneficiary and no financial documents were filed by the investor company regarding the same and therefore FIPB has rejected the assessee company's proposal.
7.7. The assessee company's claim that ".... having obtained the FIRC's shall bring the obligations to ah end on the part of the Investee Company and the need for further probe didn't arise "is not acceptable. The assessee company should fulfill all the following criterion: a) identity of the party claimed as Investor by assessee company b) Genuineness of the transaction c)Creditworthiness of the party/person claimed as the Investor
7.8. In this case the rejection of the assessee's application for regularizing issue of shares by FIPB on the reason that Investor Company is unable to furnish complete details of its shareholders clearly shows that assessee is unable to prove the creditworthiness of the person claimed as investor.
The following case laws also support this point of view: • Mere proof of identity of creditor or that transaction was by cheque, is not sufficient Addition u/s 68 upheld Mangilal Jain vs ITO (Mad) 315 ITR 105 CIT vs Precision Finance P. Ltd.(Cal) 208 ITR 465 • Cash credit can be assessed even if transaction is through cheques. CIT vs Precision Finance P. Ltd.(Cal) 208 ITR 465 K.C.N.Chandrasekhar vs ACIT (ITAT, Bang) 66TTJ 355 CIT vs United Commercial & Industrial co.(P)Ltd.(Cal) 187 ITR 596
7.9. Since these are credits appearing in the books of accounts of the assessee company claimed to be the share capital received from a foreign investor, the onus is on the assessee company to prove it that these credits are not unexplained credits. Since assessee company failed to prove that same as discussed above, these credits are required to be assessed under sec.68 of the Income tax Act.
7.10. Further revised application before the FIPB, the status of rejection of assessee company's proposal by the FIPB as on date would not change the reality of the situation. The authentication of correspondence between the assessee company and FIPB is not supported by any documentary evidence, only the purported mail correspondence is produced. Assessee company or assessee's Representative did not produce any evidence that the documents required by FIPB were produced by the assessee Company. The fact remains that as on date FIPB rejected the assessee's application.
7.11. The contention of the assessee company that the investor company has sufficient fund to invest the same to the assessee company is not acceptable. It is seen from the submissions dated 26.11.2015 by the assessee company vide exhibit-6 of Page No 7 as on 31.03.2008, the investor company has interest income USD 2625 only and exchange gain to the tune of 80 LJSP and the net loss for the year 31.03.2008 amounts to 4227 USD. Even on perusal of the balance sheet in page No 8 of exhibit-6 the assets and liability shows that the retained earnings for the year ended 31.03.2008 shows a loss of 28386 USD and the translation reserve for the year ended 31.03.2008 is Nil. As the accumulated reserve and surplus of the investor company showed a negative figure for year ended 31.03.2008, the assessee company's contention that the investor company has sufficient fund for investing assessee's company is not acceptable.
7.12. Onus is upon the assessee to prove the identity and creditworthiness of subscribers and the genuineness of transactions under section 68.
• Under section 68 the onus is on the assessee to prove the three ingredients, i.e., identity and creditworthiness of the person from whom the monies were taken and the genuineness of the transaction.
7.13. It is pertinent to note that assessee company itself submits that M/s.Fruition Resorts Limited, Mauritius has insufficient profit to make the said investment. The said submission of the assessee compc;1ny is as under "We draw your kind attention to para 1 page 11 of the Audited financials of Fruition, wherein it has been clearly stated that Fruition is only Investment Holding Company which attracts share capital and invest in other companies. Thus the insufficiency of profits cannot affect the capacity to invest."
7.14. Further in material submitted during scrutiny proceedings for AY 2012-13 (completed on 30.03.2015), it is seen from the discussions in Paragraph 'F', it is clear that the assessee company's claim that the investor company has sufficient funds to invest is incorrect because the assesse company failed to prove the creditworthiness of the subscribers of share capital (ultimate beneficiaries) of the investor company.
7.15. During the assessment proceeding for AY 2012- 13, (completed on 30.03.2015), the Assessee Company also filed Assessment details of Investors in Fruition Mr.Chetan Shah and Mr.Rajan Shah as under:
S.No Name & Address Assessing I.D. Authority Number 1 Chetan Shah Kenya 200052 49874 Nairobi, Kenya Revenue Authority Postal Code -00100 2 Rajan Shah Kenya 197604 49874 Nairobi, Kenya Revenue Authority Postal Code- 00100
7.16. Though the assessee company furnished the addresses of the two share holder, no concrete evidence is furnished in respect of the Identity of the foreign investor. The ID No. gieiby the representative is not supported by any documentary evidence of any Competent authority. There is no evidence of creditworthiness of these persons produced. In respect of other shareholders the discrepancies found are as under: reveal the details of investment made by the entity in M/s. Fruition Resorts Ltd, Mauritius. 7.17. So from the above analysis of discrepancies, it can be clearly concluded that the assessee company is unable to furnish complete details/creditworthiness of the ultimate beneficiaries of the Investor Company i.e. M/s. Fruition Resorts Ltd, Mauritius. Also the assessee Company's claim that the Investor Company had sufficient funds to invest cannot be believed because the· creditworthiness of the subscribers of share capital
(ultimate beneficiaries) of the Investor company are not proved. 7.18. Thus the assessee company has failed to prove that the investor company's (M/s. Fruition Resorts Limited, Mauritius) creditworthiness as it neither had the profit nor the Reserves nor funds required for making such investments in the assesse company. Moreover in view of the above discussion it is amply clear that the cash credits as appearing in the books of the assessee company stands unexplained and needs to be considered as unexplained credits in the books of the assessee company attracting the provisions of sec.68 of the Income tax Act. 7.19. Also the relevant case laws supporting this point of view is produced as under: In the submission filed by the assessee company, the company has enclosed copy of the income tax returns filed by the share holders of the investor company ie., M/s.Fruition Resorts Ltd, Mauritius. In the case of CIT Vs. Nipun Builders & Developers P Ltd as reported in (2013) 30 taxman.com 292 Delhi,350 ITR 407 the Hon'ble High Court clarified the position for invoking section 68 of the Income-tax Act that "In an appropriate case, if the facts and circumstances justify, it would be open to the AO to seek information from the assessee as to the creditworthiness of the creditor/share subscriber which may include information as to the sources of the creditor/share subscriber. If proving the creditworthiness of the creditor/share subscriber is now judicially accepted as one of the ingredients of the onus cast on the assessee under Section 68, we do not see how proof of the resources of the creditor/share subscriber can be completely excluded from the sweep of the burden. It may not be required of the assessee to give in-depth particulars and details about the resources of the creditor or the share subscriber, but the minimum required of him would be, in our opinion, information that will prima face satisfy the AO about the creditworthiness. Mere furnishing of the bank statements of the share subscribers without any explanation for the deposits in the accounts may nm meet the requirements of Section 68. lt may be necessary to know the business activities of the share-subscribers in order to ascertain whether they are financially sound and are able to purchase shares for substantial amounts; if they have borrowed monies for making the investment, Whether they were capable of repaying them having regard to the nature of their business, volume of the business, etc. These are very relevant, in our opinion, to establish the creditworthiness of the investors. It is for this purpose that it is necessary for the assesssee, in appropriate cases where the facts and surrounding circumstances justify, to seek the assistance of the principal officer of the subscribing companies and present him before the AO so that he wit/ be in a position to explain in detail the source from which the shares were subscribed." 7.20. Since the assessee Company failed to prove the nature and source of the resources of the share subscriber of the investor, the credits shown as share capital received from M/s. Fruition Resorts Ltd, Mauritius are required to be treated as unexplained cash credits as Appearing in the books of the assessee company attracting provisions of sec.68 of the Income tax Act. 7.21 The assessee quoted Lovely Exports (216 CTR 195) case, however, the decision quoted by the assessee company delivered by Hon'ble Supreme Court is different from the present. In this case, the investor being the foreign entity, the assessment of the foreign entity may not be possible in India. The following case laws are in support of the stand that if the assessee company could not identify the source and identity of the investor, the amount invested can be treated as unexplained u/s 68 of the Income-tax Act. (i) CIT vs Nipun Builders & Developers P Ltd (2013) 350 ITR 407(Delhi) 7.22. In view of the averments made in preceding paragraphs, it is concluded that invoking provision u/s 68 for the investment received to the tune of Rs. 4,65,84,375/- is inevitable. Hence, the assessee's case clearly falls under the provisions of section 68 of the lncome tax Act. The credit of sum of Rs. 4,65,84,375/- in the books of the assessee company is therefore treated as "Unaccounted Cash Credit" u/s 68 of the IT Act as in my opinion, the explanation about the nature and source thereof or the explanation offered by the assessee is not satisfactory. The sum of Rs.4,65,84,375/- is therefore added to the total income of the assessee and the assessment is completed as under.”
8. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments made before the Assessing Officer. The assessee had also filed certain additional evidences in the form of details of shareholders / beneficiaries of investor company M/s. Fruition Resorts Ltd., Mauritius. The sum and substance of arguments of the assessee before the learned CIT(A) was that share capital received from M/s. Fruition Resorts Ltd., Mauritius is genuine transaction, which is supported by necessary evidences, including identity of the investors, genuineness of the transactions and creditworthiness of the party. The assessee further contended that out of total share capital received from the company, part of amount has been received under automatic approval route for which the assessee need not to file separate evidences, because KYC details furnished in respect of investors is itself sufficient to establish genuineness of the transactions. As regards partly paid up shares issued without approval from the RBI, the assessee has filed post-facto approval before the FIPB with all evidences. Although, FIPB has rejected application filed by the assessee, but such application has been rejected only on the basis of income tax assessment proceedings, where the Assessing Officer has raised certain doubts about genuineness of transaction, otherwise the assessee has filed all possible evidences and discharged its onus caste upon under section 68 of the Income Tax Act, 1961. The assessee had also filed certain additional evidences and same has been forwarded to the Assessing Officer for his comments. The Assessing Officer vide his remand report dated 21.04.2017 commented upon additional evidences filed by the assessee and their admissibility.
9. The learned CIT(A), after considering relevant submissions of the assessee and also taken note of certain judicial precedents, opined that onus to explain nature and source of credit appearing in the books of the assessee has not been discharged by the assessee. The onus can be discharged only by giving an explanation which is reasonable and satisfactory. Further, distinction has to be made between a case where preponderance of evidence indicates absence of culpability from a case where facts indicate transactions are not genuine or source of investment is not clearly explained. In the present case, facts and circumstances and surrounding evidences clearly indicates that transaction is not genuine and nature of source of the investment remains unexplained. The learned CIT(A) discussed the issue at length in light of various evidences filed by the assessee, including details of shareholders of investor company and concluded that the assessee could not file necessary evidence to identify ultimate beneficiary such as shareholders of investor company and also prove source of investments in Mauritius company. Therefore, the learned CIT(A) opined that there is no error in the reasons given by the Assessing Officer to make additions towards share capital u/s.68 of the Income Tax Act, 1961. The relevant findings of the learned CIT(A) are as under:-
“30. The above confirmation straightaway disproves the appellant's contention regarding the nature[and source of the share capital raised by them during the previous year. As narrated in para 20 earlier, the appellant has received foreign direct investment from Fruition Resorts Ltd during the relevant previous year in the month of July 2007, November 2007, January 2008 and February 2008. These amounts are explained by the appellant in the hands of Fruition Resorts Ltd as equity contribution from Hashit Meera Shah made in April 2007, December 2007 and January 2008 (para 27). However, Hashit Shah and Meera Shah have confirmed making the investment in Fruition; Resorts Ltd only from June 2009 onwards. Thus the amounts received during the financial year 2007-08 by the appellant cannot be explained on the basis of subsequent receipts by Fruition Resorts Ltd from its investors from June 2009 onwards. The assessee could give no explanation for this inconsistency. Therefore it is held that the investments made by Fruition Resorts Ltd in the appellant company is not out of the amounts received from Mr Hashit Shah and Meera Shah. Hashit Shah arid Meera Shah have not confirmed or explained any other investment in Fruition\ Resorts Ltd prior to June 2009. Therefore the amounts received by Fruition Resorts Ltd during the relevant previous year and which has been invested in the appellant company, is from some other source, the particulars of which are not disclosed by the appellant. For this reason alone the assessee's explanation is rejected in respect of Mr. Hashit Shah and Ms Meera Shah. It is further held that the appellant has failed to establish the capacity as well as the genuineness of the investment made by Hashit Shah and Meera Shah.
Though the appellant has furnished substantial documents indicating the flow of funds from different accounts· situated in banks in Switzerland and tracing the source for the same, the same are not being examined at this juncture as none of these· documents relate to the relevant previous year. The documents in respect of banks and the flow of funds are all in respect of periods subsequent to June 2009. Hence the detailed documents furnished by the appellant have been discussed in detail in the appeal proceedings relating to assessment year 2010-11. Even if those documents are taken into a9count,. the conclusion remains the same, that the appellant has failed to explain the source for the investment in Fruition Resorts Ltd claimed to have been made by Mr. Hashit and Meara Shah to the extent of USD 419,955.
Darren Boardman - In respect of Mr. Darren Boardman the tax return filed with HMRC has been furnished for the year 2012 which is not relevant for the investments made in Assessment year 2008-09. Even otherwise the return shows that as per column 8 of the form, Mr. Darren Boardman is not resident, not ordinarily resident or not domiciled in UK and is claiming Remittance basis: or duel resident in the UK and another Country. However the relent pages of the return applicable to a non resident has not been furnished. Thus even the income tax return of Mr Darren Boardman is incomplete. Further \the foreign income of a person not domiciled in UK is not taxable in UK unless remitted to UK. In this case no evidence is placed on record to show that the investment in Fruition Resorts Ltd is out of UK tax paid income. In fact no explanation or evidences regarding the source of the investment or the capacity of the party is furnished. It is hence held that the appellant has failed to establish the identity, creditworthiness as well as the genuineness of the transaction in respect of the investment made by Mr Darren Boardman in Fruition Resorts.
Neeva Dhanani - Ms.Neeva Dhanani is the sister of Meera Shah and holds 14.3% stake in fruition Ltd. After examining the evidences on record it is held that the appellant has failed to explain the nature and source of the investment made by her in fruition resorts for the following reasons: a. The investment made in her name has in fact been funded by Mr Hashit Shah as per the bank statement of Fruition Resorts Ltd submitted by the appellant. The said bank statement does not indicate any receipt from Ms Neeva Dhanani and the a part of the amounts received from Mr Hashit Mahendra Hemlaj Shah' has been treated as investment made by Ms Neeva Dhanani. b. Not even a confirmation from· her has been furnished in respect of the investment claimed to be made by her in Fruition Resorts Ltd. The appellant is relying on the confirmation given by Hashit Shah and Meera Shah, to explain the investment by Neeva Dhanani, which is not acceptable. c. Further even the confirmation of Hashit and Meera Shah and Mr. Dhirajlal Dhanani are for investments after June 2009 whereas the investment by Neeva Dhanani in Frution Resorts and by Fruition Resorts Ltd in the Appellant company is. in the current assessment year. d. In order to explain the source of income and the creditworthiness of the investment made by her, the appellant relied upon the same documents as relied upon in the case of Hashit and Meera Shah. It was submitted that the source for the investment was] the inheritance received by her from her father Mr. Dhirajlal Dhanani. However in all the bank documents furnished by the appellant, there is no mention of Ms Neeya Dhanani, at any place. e. The documents furnished by Mr Dhirajlal Dhanani in respect of movement of funds have been examined in detail in the appeal proceedings for assessment year 2010 level in respect of the investment made by Mr Hashit Shah. It has been concluded therein that the appellant has been unable to explain the source of the amounts invested as equity in Fruition Resorts Ltd. For the detailed reasons mentioned therein, it is held that the appellant has also failed to explain the source of investment made in the name of Ms Neeva Dhanani. It is hence held that the appellant has failed to establish the identity, creditworthiness as well as the genuineness of the transaction in respect of the investment made by Ms Neeva Dhanani.
Namandha Capital -In the case of Namandha Capital, the appellant has not submitted iany documentary evidence before the Assessing Officer or in the course of remand proceedings. In the absence of any documents, the identity and creditworthiness of the party and the genuineness of the transaction has not been established by the appellant.
Rajan Shah - In the case of Mr.Rajan Shah the appellant submitted a certificate from a chartered accountant (page 327, 328 & 330 of Vol.No.II) containing the details of income . The appellant also placed on record the tax return filed by him before the Kenya revenue authority. After examining the documents it is held that the appellant has failed to establish the creditworthiness of the party as well as the genuineness of the transaction for the following reasons:
(i) The appellant was unable to furnish even a confirmation from the party for having made the investment in Fruition Resorts Ltd. In the letter of the auditors submitted, the auditor merely states that Rajan Shah has capacity to invest up to USD 25,000 during the years 2009 to 2010.There is no specific confirmation for having made the investment in Fruition Resorts Ltd.
(ii) The specific source for the investment is not mentioned anywhere. A statement of the income as extracted by the auditor from the tax return furnished shows that he has income from director's fees, dividend and other employment. No evidence was placed on record to show that the said income was available in the form of savings and the same was utilized to make the investment in Fruition Resorts Ltd. (iii) The tax return for the year 2009 filed before Kenya Revenue Authority has been placed on record. However from the same there is nothing to show that the investments in Fruition Resorts Ltd have been disclosed with the tax authorities in Kenya.
Nimeet Dodhia- Not even a confirmation from the party has been furnished in support of the investment claimed to be made in Fruition
Resorts Ltd by him. The only document filed by the appellant for him is the tax return. It is observed that the income tax return is filed before the Kenya Revenue Authority for the year 2012 whereas the investment in Fruition Resorts is in 2007. As per the details in the return it appears that Nimeet Dodhia is an employee of Spinners and Spinners Ltd, a company in which Mr Dhirajlal M Dhanani is the chairman. The return does not bear any details of the investment in Fruition Resorts Ltd nor is it accompanied by any balance-sheet in which the same is declared as an investment before the Kenya Revenue Authority. The income tax return filed before the Kenya revenue authority can at best establish the 1denbi of the investor. However, in the absence of any document explaining the source of the investment, any confirmation from the party for having made the investment and the creditworthiness of the party and the genuineness of the transaction has not been established by the appellant.
Avtar Invest -The Appellant stated that Avtar Invest ltd., is entirely held by a trust, IMT Trust Services AG, acting as the trustee of Manimegh Trust. The appellant has· submitted a letter from the Director of this company (page No.219 & 220 of vol.ll) in which Director has given particulars of the settler of Manimegh Trust
From the letter on behalf of Avtar Invest and its Balance Sheet it is noted that: a. It is registered in British Virgin Islands. b. The balance sheet of Avtar Invest is for the year 2015, a period much after the investment was made in Fruition Resorts. c. The entire share capital of this company is held by a company by name IMT Trust Services AG. IMT Trust Services is registered as a company in Liechtenstein, which is also a tax haven. They are the trustees of Manimegh Trust and hold the shares of Avtar Invest for the beneficiaries of Manimegh trust. d. The settler of Manimegh trust is one Mr Binoy Meghraj but the beneficiaries are not disclosed. e. The company does not have any significant income and as per the balance sheet. It has only carried forward losses. f. The source for making investment in Fruition Resorts Ltd is a loan raised by this company from Manimegh Trust.
Thus the beneficial owners of the investment in Fruition Resorts Ltd are the beneficiaries of Manimegh Trust. The source for making the investment is a loan from Manimegh Trust. The assessee has neither disclosed the name of the beneficiaries nor the source of the investments in the hands of Manimegh Trust It is hence held that the appellant has failed to explain the nature and source of the investment by Avtar Invest.
Star Enterprises 2002 Ltd_- In the case of Star Enterprises 2002 Ltd,, a company registered in the lsle of Mann, the appellant has submitted a letter dated 29.6.2016 from the Directors stating sources of funds available with the company. It is explained that the source of fund for Star Enterprises 2000 Ltd. was from a sister company by name Safe Plans Consultants Ltd., a Bahama Company. The Balance Sheets for 2009, 2010, 2011 and 2012 of this Bahama company has been placed on record.
On examination of the balance sheet the following points emerge:
(i) This company is registered in Isle of Man and is subject to 0% tax on its income. There is no- requirement to get the accounts audited in this jurisdiction.
(ii) The source of funds for investment in Fruition Resorts is stated to be loans received to the extent of USD 52,635 on 24 September 2009 and USD 30,000 on 5th April 2011 partly from Safe Plan Consultants Ltd and partly from Bromley Properties Ltd. It is not stated how much is received from the parties individually.
(iii) The balance-sheet of this company has been provided for the year ending March 2009 and March 2010. The company has no income streams. The investment in Fruition Resorts Ltd has been financed through substantial shareholder loans and other payables.
(iv) A confirmation of Star Enterprises 2002 Ltd dated 29.6.2016 has been enclosed (page 259 of the PB) which states that the balance sheet and profit and loss account of Safeplan Consultants Ltd is enclosed to it. However the balance-sheet of Safeplan Consultants Ltd has not been provided to this office. (v) Bank account extract on certain dates in the year 2004, 2008 and 2010 in respect of Safeplan Consultants have been provided with the account number scratched out of the same. The extracts do not show any payment or loan being advanced to Star Enterprises 2002 Ltd. (vi) Star Enterprises is stated to be controlled by Cavendish Trustees Ltd also a company registered in Isle of Man. (vii) No documents in respect of Bromley properties have been provided except to state that it is also a company registered in Isle of Man. It is stated that Bromley properties ltd earned rental income from properties which was the source for the loan advanced by it to Star Enterprises 2002. The properties are stated to have been since sold off. (vii) The identity of the beneficial owners of Star Enterprises 2002 Ltd, Bromley Properties Ltd and Safeplan Consultants Ltd are not disclosed. (ix) Safeplan Consultants limited was a Bahamas company but as on 31 December 2015 the same has been struck off from the Bahamas registry.
From the above it can be concluded that though the investment in Fruition Resorts Ltd are stated to be made by Star Enterprises 2002 Ltd, the said company does not have any independent source of income. It has a total share capital of 2 GBP. It has no income streams and no asset base except for loans received and loans repayable. The entire investment in Fruition Resorts Ltd has been funded through loans received from two other group concerns namely Bromley properties Ltd and Safeplan consultants Ltd. The source of funds in the hands of these concerns is not explained. All the entities are located in low tax jurisdictions such as Isle of Man where it is specifically stated that 0% tax is levied. The accounts available in the case of Star Enterprises 2002 Ltd are not audited. The beneficial owners of Star Enterprises 2002 Ltd, Bromley properties Ltd and Safeplan consultants Ltd are not disclosed. Therefore the only conclusion that can be made is that the identity of the ultimate investors, the source of funds in their hands and the genuineness of the transaction in respect of Star Enterprises 2002 Ltd are not established by the appellant.
The Lilly MaeTrust- This investor had contributed in the earlier years to Fruition Resorts Which was utilized to make investments in the appellant company. The Appellant filed the financial statement for the same. a. The financial accounts of this trust for the year ended 31.3.2009 has been provided in support of. the investment made in fruition resorts. The financial statements are not audited. b. This is a trust and its trustees are Caversham Trustees Ltd located in Jersey. c. Further it is indicated that it is a discretionary trust with its bankers being Barclays Bank pie located in Jersey. d. The protectors of the trust are stated Manish V Khiroya and Parul V Scampion. e. The main source of funds for this trust is a loan received from Manish V Khiroya. f. The Trust does not have any independent sources of income and the investments are funded only through loans and capital. The contributors t wards the capital are not indicated in the financial statements furnished.
From the details furnished the ultimate beneficiaries of these investments held by The Lilly Mae Trust is not ascertainable. The appellant has therefore failed to furnish the capacity and creditworthiness of the investor.
Conclusions on Identity, capacity and genuineness of investors in Fruition Resorts Ltd From the above discussion pertaining to the identity and capacity of the investors in Fruition \ Resorts Ltd and the genuineness of these investments, the following conclusions may be drawn. I (i) in the case of the investments made by Avtar Investments, Star Enterprise 2002 Ltd and The Lilly Mae Trust, the ultimate beneficiaries of these companies/trust and the real investors are not disclosed by the appellant. All the entities are located in Tax Havens and from the documents furnished neither the identity nor the capacity or their genuineness of their investment in Fruition Resorts has been established.
(ii) In the case of Nimeet Dhodhia, Rajan Shah and Darren Boardman, the appellant has not provided adequate documents to establish their capacity and genuineness of the investments. The IT returns filed by these persons are for other periods and do not disclose the investment made in Fruition Resorts. In respect of Daren Broadman, even the country of residence is not known as he is not domiciled in UK as per the return furnished.
(iii) In the case of Namandha Capital, and Ms.Neeva Dhanani, no document whatsoever has been furnished.
(iv) In the case of Hashit and Meera Shah, the confirmation obtained from the party itself clearly show that no investments have been made by them in Fruition Resorts Ltd during the relevant assessment year. Further even as per the confirmation furnished; the investments are funded out of bank account in respect of which name of the account holder, name of the branch and address of the branch are not disclosed. No nexus is established between these unnamed bank accounts and the stated source of money for the investments.
For all these reasons, it is held that the appellant has failed to establish, the identity, capacity and genuineness of the investment made by Fruition resorts Ltd as share capital, share premium and share application aggregating to Rs.4.,65 crores during the year.
LEGAL ARGUMENTS:
The appellant's main contention is that in respect of the A.Ys 2008- 09 & 2009-10, there was no violation of FIPB norms as the shares were fully paid up. For these two years, the appellant submitted that, the FC- GPR furnished by the appellant and the acknowledgement of the transaction by the RBI was enough to establish the nature and the source of the cash credits. The appellant further relied upon the decision of the apex court in the case of CIT vs Lovely Exports Private Limited 216 CTR 195 and submitted that if the share application money received by company is alleged to be from bogus shareholders, then the Department is free to proceed against such bogus shareholders and such income cannot be taxed as undisclosed income under section 68 of the Income Tax Act. The appellant submitted that merely because the investor in this case was a foreign entity whose assessment was not possible in India, the decision of the Supreme Court in the case of Lovely Exports (supra) cannot be disregarded. Thus the appellant submitted that in view of the decision of the Supreme Court in the case of Lovely Exports Ltd, no addition on account of bogus shareholders can be mad in the hands of the appellant company. It is further submitted that as the FDI has been duly approved by the Reserve Bank of India during the relevant assessment year, there is no arrant to make any addition under section 68 of the Income Tax Act.
The appellant's contentions are considered. In this connection reference is made to the decisii n of the Supreme Court in the case of CIT vs P. Mohanakala (2007) 291 ITR 27 wherein the honorable Supreme Court has decided the scope of the term 'explanation' and heId that it is not adequate to merely provide some token explanation but the explanation should also be found to be reasonable and acceptable by the assessing officer In this connection the following paragraph of the decision is relevant: 14. The question is what is the true nature and scope of section 68 of the Act? When and in 'hat circumstances section 68 of the Act would come into play? That a bare reading of section 68 suggests that there has to be credit of amounts in the books maintained by an assessees; such credit has to be of a sum during the previous year; and the assessees offer no explanation about the nature and source of such credit found in the boots: or the explanation offered by the assessees in the opinion of the Assessing Officer is not satisfactory, it is only then the sum so credited may be charged to income tax as the income of the assessees of that previous year. The expression "the assessees offer no explanation" means where the assessees offer no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessees. It is true the opinion of the Assessing Officer for not accepting the explanation offered by the assessees as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on record. The opinion of the Assessing Officer is required to be formed objectively with reference to the material available on record. Application of mind is the sine qua non for forming the opinion.
The Honourable Supreme Court in the above-mentioned decision has categorically held that the assessee should offer an explanation for each cash credit that can be regarded as proper, reasonable and acceptable. Therefore the initial onus cast on the assessee has to be necessarily discharged by the appellant.
The appellant claims to have discharged this onus because the issue of shares is approved by the RBI during these two years. The appellant relies upon the documents with respect to the investors in Fruition Resorts Ltd that was filed by them before the RBI. The assessing officer after evaluation of these documents concluded that the nature and source of cash credit is not explained by these documents. The appellant's contention that the RBI approval to issue of shares precludes the assessing officer from examining the adequacy and reasonableness of the appellant's explanation is contrary to the unambiguous language of section 68 and also the interpretation of the scope of the said section by the Honourable Supreme Court in the case of P. MohanKala (supra).
In this connection reference is made to the decision of the Delhi High Court in the case vs Velocient technologies Ltd (2015) 60 taxman.com 353. In this decision the Hon’ble Delhi High Court was considering an identical situation wherein certain loans were received by an Indian company after the approval of RBI/FIPB to the loan transaction. The appellant relied upon this approval to contend that the same cannot be added as income under section 68. However the assessing officer in that case found that the appellant had not discharged the onus of explaining the nature and source of these amounts advanced as loans. Accordingly the said amounts, which were subsequently also forfeited by the lenders, were treated as the income of the Indian company under section 68. In this connection the following observations of the Delhi High Court are relevant:
“26. The Supreme Court's ruling in CIT v. Lovely Exports [2010] 14 SCC 761 affirms the ruling of this Court that to pass the test of Section 68 which empowers the 'income tax authorities to add back amounts as receipts from undisclosed sources, the assessee is under the initial onus of proving the genuineness of the transaction and the creditworthiness of the individual/entity advancing the amount. In the present case, the facts reveal that the assessee no doubt was able to secure the clearances of the Department of Economic Affairs as well as the Reserve Bank of India (RBI) towards its software technology project. These were based upon its assertion that Russian joint venture partners were involved. Likewise, the Department of Economic Affairs appear to have approved the setting-up of the project. Nevertheless, such clearances did not in any way undermine or displace the onus which it continued to labour under, to primarily satisfy the revenue that the amounts came from a genuine party. There were no particulars with respect to SFT or COPL, the documents incorporating these entities or even describing their identities (especially important since the assessee argued that SFT was a Govt. of USSR enterprise) was ever revealed. Those two companies' shareholding pattern, trading or manufacturing activities, decision of Board of Directors was kept in the dark. In short, the assessee made no attempt to reveal the true identity of these two concerns. Furthermore, the credibility of these transactions too stood undermined from the very beginning considering that COPL's role vis-a-vis SFT was never explained. It was not SFT which gave the money to the assessee. Therefore, the onus to prove that the amounts came from credible sources and creditworthiness of the entity or the source, was never discharged.
27 . In view of the above reasons, this Court is of the opinion that the findings recorded by the AO and the CIT(A) were sound and based upon a correct appraisal of the entirety of the circumstances. The ITAT fell into error in not following the established principles governing the law of Section 68 of the Act. The findings in the impugned order are accordingly set- aside. The sole question of law in is answered in favour of the revenue and against the assessee. Thus, it is concluded that initial onus of the assessee is not displaced merely because the transaction has been approved by the RBI/FIPB when the surrounding facts and circumstances indicate that the appellant has not explained the nature and source of the amount.
The next question is whether the various documents submitted by the appellant in the course of assessment proceedings as well as the additional evidences when construed together can be regarded to have discharged the initial onus imposed upon the appellant.. The investment is through a Mauritius company which the appellant itself admits is only a investment vehicle and as requested that the capacity and the genuineness of the ultimate investors should be seen and not of the Mauritius company. As already explained, the ultimate investor's identity and the capacity is not established in this case. Substantial funds have come from bank accounts without name of the account holder, name of the bank and address of the branch. Further the various Trusts and other companies through which investment is made in Fruition Resorts Ltd are located in Tax Havens and the ultimate beneficiaries of these Trusts are not disclosed. Onus can be said to have been discharged when the appellant produces evidences and relies upon documents that are open to verification and enquiry by the assessing officer to arrive at the satisfaction. In this case substantial funds have been routed through Switzerland and other tax havens. Switzerland has consented to provide administrative assistance in terms of article 26 of India-Switzerland DTAA under exchange of information only in pursuance to Swiss Federal administrative Court decision A-423/2013 dated 17.12.2013. The information is shared by the Swiss authorities only in respect of periods from 2012 onwards. Tax havens by definition do not have mechanism for exchange of information. It is only after the year 2013 when many of the tax heavens have slowly entered into agreement for exchange of information, Therefore there was no mechanism available to the assessing officer to further verify the contentions of the appellant regarding the source. In fact the attra1tiveness of routing transactions through such tax Havens was · due to the opaqueness of these tax jurisdictions. The appellant by producing unverifiable information cannot be said to have discharged the initial onus. Therefore neither the identity nor the capacity of the ultimate investors is disclosed by the appellant because of which the investors in Fruition Resorts Ltd, the special purpose vehicle, remains unexplained. The analogy of the decision in the case of Lovely Exports as rightly held by the Assessing Officer cannot be extended to this case.
The Calcutta High Court has considered a similar issue in the case of Rajmandir Estates Ltd Vs PCJT (2016) 70 Taxman.com 124 where after considering the decision of the Delhi High Court in the case of lovely exports Private Limited, the Calcutta High Court has held that examining the source of the source is justified particularly in the case Where the appellant company issues shares at substantial premium. In such a case the court held that it was essential to make an enquiry and ascertain whether share capital is genuine or not. For arriving at this conclusion, the Court held that one had to distinguish between the situation prevailing in the case of Lovely Exports (Supra) were was a preponderance of evidence indicating the absence of culpability as against the present case of issue of shares at substantial premium which according to the court could be a case of money laundering. The High Court went on to hold that in such cases ah enquiry into the source of the source is permissible. This decision of the Calcutta l High Court has been upheld by the Honourable Supreme Court in Rajmandir Estates Ltd Vs PCIT(2017) 77 taxman.com 285.
Subsequent to the decision of the Supreme Court in the case of Lovely Exports, the Hon Delhi High Court has considered the addition of share capital u/s.68 in the case of CIT Vs. Nipum Builders and Developers (2013) 350 /TR 407 and concluded that where the subscriber company is not available at the address indicated and the appellant could not produce the principal officers of the subscriber companies, addition of share capital was warranted. The fact that monies were received through banking channel was not found to be enough. The High Court held that the credit worthiness of the subscribers may be difficult to establish by the appellant but even then merely furnishing the bank account copies of the subscribers is not sufficient. The Court held that there must be positive evidence to show the nature and source of the shareholder himseIf.
Similar views have been expressed by the Delhi High Court in CIT Vs NR Portfolio Pvt Ltd (2013) 29 Taxmanm.com 291. In this case also, the shareholders did not attend before the tax authorities, the court held that merely furnishing the name and address or the PAN particulars and entries in the Registrar of Companies Website is not sufficien1 to explain the nature and source, particularly when the shares are issued on private placement basis or on request basis. The Court held that an assessee is not discharged of all its obligations once it provides some basic information. If on verification of the basic information by the Department, the Assessing Officer finds certain information to be unverifiable or there are certain doubts in respect of some details, the onus is on the assessee to explain the same.
Similar view have been expressed in the following cases by different High Courts after taking into account the decision of the Supreme Court in the case of Lovely Exports. i) Beutix India Pvt Ltd Vs CIT (2012) 18 Taxman.com 9(Delhi) ii) Aravalli Infra Power Ltd Vs. DCIT (2017) 77 Taxmann.com 322,(Delhi) iii Pragati Financial Management Pvt Ltd Vs. CIT (2017) 82 Taxman. 12 (Calcutta) iv. Riddhi Promoter (P) Ltd Vs. CIT (2015) 58 taxmnn. com 367 (Delhi), v) Focus Exports (P) Ltd Vs. CIT, New Delhi (2014) 51 Taxmann.com 46 (Delhi) vi. Youth Construction (P) Ltd. Vs. CIT (2014) 44 Taxmann.com 364 (Delhi) vii. Onassis Axies {P) Ltd Vs CIT (2014) 44 Taxmann.com 408 (Delhi) viii. Mangilal Jain Vs. ITO (2009) 315 JTR 105 (Madras) ix. Power Drugs Ltd Vs. CIT (2011) 13 Taxmann.com 56 (Punjab & Haryana)
On the basis of these decisions it can be concluded that the onus to explain the nature and source of the credit appearing the books of an assessee has not been discharged by the appellant. This onus can be discharged only by giving an explanation which is reasonable and satisfactory. Further distinction has to be made between a case where the preponderance of evidence indicates absence of culpability from a case where the facts indicate that the transactions are not genuine or the source of the investment is not clearly explained. In the present case the facts and circumstances surrounding the investment clearly indicates that the transaction is not genuine and the nature and source of the investment remains unexplained. For all these reasons this ground of appeal is dismissed.”
10. The learned A.R for the assessee submitted that the learned CIT(A) erred in confirming additions made towards share capital received from M/s. Fruition Resorts Ltd., Mauritius, as unexplained cash credit u/s.68 of the Income Tax Act, 1961, without appreciating fact that the assessee has discharged its onus and proved identity of the creditor, genuineness of transactions and creditworthiness of the party. The learned AR further submitted that the learned CIT(A) failed to appreciate fact that M/s. Fruition Resorts Ltd., Mauritius, is special purpose vehicle created for making investment in assessee company and money has been transferred through proper banking channel. In fact, out of total investments received from shareholder, investments received upto assessment year 2010- 11 under automatic approval route has been approved by the RBI and to this extent, there is no question of doubting genuineness of transactions. As regards, balance amount of share capital received after October, 2009 under non-automatic approval route, the assessee has filed all evidences before the FIPB . However, the FIPB has rejected application filed by the assessee only on the basis of assessment framed by the income-tax department and additions made u/s.68 of the Income Tax Act, 1961, otherwise, the assessee has filed all details to prove identity of the investors, genuineness of transactions and creditworthiness of the party. The assessee had also filed FIRC certificate to prove remittances of money through proper banking channel. The assessee had also filed financial statement of investor company. The assessee had also filed details of shareholders of investor company and their source of income to establish capital contribution into Mauritius company. Although, the assessee need not to prove source of source, but the assessee had filed all evidences to even prove source of source in the hands of investor company. The learned CIT(A) without appreciating above facts has simply sustained additions made by the Assessing Officer. In this regard, the learned AR relied upon following judicial precedents:- 1. CIT Vs. M/s.Lovely Exports P.Ltd. 216 CTR 195 (SC) 2. CIT Vs.ElectroPolychem Ltd 294 ITR 161 (Mad) 3. CIT Vs. Pranav Foundations Ltd. TCA No.262 of 2014 (Mad) 4. CIT Vs Victory Spinning Mills Ltd 50 taxmann.com 416 5. PCIT Vs. ApeakInfotech 397 ITR 148 (Bom) 6. CIT Vs Orchid Industries P.Ltd. 397 ITR 136 (Bom)
7. CIT Vs.Gagandeep Infrastructure P.Ltd 394 ITR 680 (Bom) 8. ACIT Vs. Swiftsol India P.Ltd. 95 taxmann.com (Nagpur Trib) 9. Mridul Commodities P.Ltd Vs. DCIT (KolTrib) 78 taxmann.com 337. 10.BabaBhootnath Trade & Commerce Ltd. Vs.ITO in (KolTrib).
11. The learned DR, on the other hand, supporting order of the learned CIT(A) submitted that facts brought out by the Assessing Officer as well as learned CIT(A) in light of observations of FIPB clearly indicate that share capital received by the assessee company from Mauritius company is not genuine transaction. Further, the Assessing Officer has carried out independent inquiry in light of various evidences filed by the assessee and observed that the assessee could not establish genuine identity of the investor company in light of fact that M/s. Fruition Resorts Ltd., Mauritius, is only a pass through entity created for the purpose of making investments in the assessee company. The Assessing Officer had also brought out clear facts to the effect that ultimate beneficiary / shareholders identity is not established. Further, they do not have sufficient source of income to establish amount transferred to investor company. From the above, it is very clear that the assessee could not discharge its onus of establishing identity, genuineness of transaction and credit worthiness of parties. The learned CIT(A), after considering relevant facts has rightly confirmed additions made by the Assessing Officer and their orders should be upheld.
We have heard both the parties, perused material available on record and gone through orders of the authorities below. We have also carefully considered plethora of case laws cited by the assessee. The solitary issue that needs to be resolved in the given facts and circumstances of this case is whether share capital received by the assessee from M/s. Fruition Resorts Ltd., Mauritius, is genuine investment or which is unexplained cash credit as held by the Assessing Officer. The Assessing Officer has made additions towards share capital received from M/s. Fruition Resorts Ltd., Mauritius, u/s.68 of the Income Tax Act, 1961, as unexplained cash credit on the ground that the assessee has failed to prove real identity of the investor company and also genuineness of transaction. The Assessing Officer had also doubted creditworthiness of the parties. The sole basis for the Assessing Officer to make additions towards share capital u/s.68 of the Income Tax Act, 1961 is rejection of post-facto application filed by the assessee for regularization of share capital received from M/s. Fruition Resorts Ltd., Mauritius, by Foreign Investment Promotion Board (FIPB). In fact, the assessment for the assessment year 2008-09 to 2010-11 have been reopened only on the basis of inputs received from FT & TR division of CBDT, which is once again based on proceedings of FIPB in rejection of application filed by the assessee for post-facto approval. According to the Assessing Officer, although, the assessee has filed necessary evidences to prove identity of the investors, but failed to prove ultimate beneficiary / shareholder of M/s. Fruition Resorts Ltd., Mauritius, and also their source of income to explain capital contribution in Mauritius company. In fact, the Assessing Officer never doubted existence of Mauritius company, because the assessee has filed all possible evidences to prove identity of Mauritius company and also filed necessary evidences to prove genuineness of transaction, including FIRC certificate issued by banks for remittance of money through proper banking channel. The assessee had also filed approval received from the RBI under automatic approval route in respect of fully paid up equity shares allotted to shareholders. The assessee had also filed necessary financial statements of shareholders to prove their capacity to make investments in assessee company. According to the Assessing Officer, there is no dispute with regard to identity of the shareholder, however, real identity of the shareholder should be ascertained from existence of ultimate beneficiary of shareholder company, because shareholder company is only special purpose vehicle created to make investment through Mauritius company, because of certain tax advantages. Therefore, the Assessing Officer opined that the assessee could not establish real identity of ultimate beneficiary / shareholder of Mauritius company and thus, the Assessing Officer opined that the assessee has failed to prove identity of shareholder to come out of provisions of section 68 of the Income Tax Act, 1961.
The provisions of section 68 of the Income Tax Act, 1961, deals with a case, 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 the assessee, in the opinion of the AO is not satisfactory, then sum found credited may be treated as income of the assessee of that previous year. A plain reading of section 68 of the Act, makes it very clear that in order to bring any credit within the ambit of section 68 of the Act, the AO has to examine three ingredients, i.e., identity, genuineness of transaction and creditworthiness of the parties. Further, as per law, under section 68, it is the assessee who is required to offer an explanation about the nature and the source of credit, for which an entry is found in his books and such explanation has to be to the satisfaction of the Assessing Officer. Therefore, it is for the assessee to explain credit with necessary evidences to the satisfaction of the Assessing Officer. Such proof includes proof of the identity of the creditor, the capacity of such creditor to advance the money and lastly, the genuineness of the transaction. Only when the assessee has proper evidence to establish prima facie the aforesaid facts, the onus shifts on to the Department. Once the source of the credit, the genuineness of the remittance and the identity of the creditor are established, it would be for the Department to show that the amount in question is not a loan but constitutes income assessable to tax. In such a case the Departmental authorities are entitled to probe further into the matter and investigate the materials available to them to come to an independent and unbiased finding as to the genuineness of the transaction though they should not reject the assessee's explanation summarily or arbitrarily or without sufficient reason. The duty of the Assessing Officer is to examine all materials carefully and objectively. Therefore, from above discussion what is clear is that as per the provisions of section 68 of the Act, both parties shall discharge their onus one after the other.
The question whether such onus has been duly discharged by the assessee or has been shifted to the Revenue can only be determined after the evaluation of all the surrounding circumstances. There cannot be one general or universal proposition of law which could be the guiding yardstick in the matter. Each case has got to be decided on the facts and circumstances of that case. In holding a particular receipt as income from undisclosed source, the fate of the assessee cannot be decided by the Revenue on the basis of surmises, suspicions or probabilities. Where the assessee furnished the names and addresses and IT file numbers of the creditor and filed a confirmatory letter from them, it is for the Assessing Officer to prove that the cash credit is not genuine. The A.O. cannot arbitrarily reject the evidence on the ground that the creditor confessed that he had not invested in any firm without issuing summons under section 131 or taking any other steps in that regard. The, AO while deciding the issue, shall consider evidences on record placed by the assessee and also must consider surrounding circumstances, but he cannot simply reject evidences on summary basis on the basis of surrounding circumstances. As per the well settled principles of law by the decision of various courts, the initial onus is on the assessee. Once, assessee discharges its onus, and then onus shifts to the Assessing Officer. Therefore, in our considered view, first the assessee must file necessary evidences to prove identity, genuineness of transaction and credit worthiness of the parties.
The question of proving identity does not mean, just filing certain documentary evidences, but it is establishing real identity of the creditor. Similarly, proving genuineness of transaction does not mean payment/receipt by cheque, but it is establishing real intention of the parties to enter into transactions. Likewise, real meaning of creditworthiness of creditor means, their capacity to establish source for investments. This aspect has been explained in judgments of various courts, as per which, the courts had interpreted provisions of section 68 of the Act, and its implications on the assessee as well as the Assessing Officer. The Hon’ble Supreme court in the case of CIT v. Lovely Exports P Ltd (SC) – 216 CTR 195, has very clearly held that If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income u/s.68 of the assessee company. Therefore, from the above discussion what is clear is that the assessee shall first discharge its onus by filing necessary evidences and once, the assessee files all details, then it is for the AO to disprove what is claimed is not real and sum credited in the books is income from undisclosed sources of the assessee.
In light of the above settled legal position, if you examine facts of the present case, there is no doubt that the assessee has discharged burden caste upon it u/s.68 of the Income Tax Act, 1961 in respect of share capital received from Mauritius company. The Assessing Officer has never disputed fact that the assessee has furnished various evidences to prove identity of the shareholder, their financial statements and also related bank accounts along with FIRC certificate issued by the banks for remittance of money through proper banking channel. The assessee had also filed approval granted by the RBI under automatic route for fully paid up shares issued to Mauritius company. The evidences filed by the assessee clearly satisfy conditions prescribed u/s.68 of the Act. The assessee has not only proved identity of the shareholder, but also proved identity of ultimate beneficiaries of shareholder company. As per information, M/s. Fruition Resorts Ltd., Mauritius, is floated by various individuals and company who are non-residents residing in different parts of the world. The assessee had also filed details of ultimate beneficiary /shareholders of Mauritius company and their sources of income along with tax returns filed in respective tax jurisdiction. The assessee had also filed their source of income to explain amounts invested in Mauritius company. In fact, the Assessing Officer as well as the learned CIT(A) have accepted fact that the assessee has filed all details about ultimate beneficiaries of Mauritius company. The assessee explained before the Assessing Officer that Mauritius company has received investments from Harshit and Meera Shah, Pradip Kumar Shah, Darren Timothy Boardman, Vipool Shah, Neeva Dhanani, Avatar Invest Ltd., Namadna Capital and Star Enterprises 2002 Ltd. The assessee had filed relevant documents pertain to above beneficiaries, including their tax returns filed in respective jurisdiction, their bank statements and also source of income. The Assessing Officer as well as the learned CIT(A) never disputed above facts, however, they have rejected evidences filed by the assessee only for the reason that there are some mismatch between dates of investment made by Mauritius company in assessee company and dates of investment made by shareholders in Mauritius company. Therefore, they opined that investments made by Mauritius company in share capital of assessee company is not out of investments received from those investors. Further, the Assessing Officer as well as the learned CIT(A) has doubted investments received from ultimate beneficiary shareholders of Mauritius company for one more reason that those companies are registered in tax heavens. In our considered view, once, the assessee has discharged its onus of proving identity of the shareholder, then the assessee need not to prove identity of ultimate beneficiary / shareholders of shareholder company, because shareholder itself is non-resident company and further, ultimate beneficiary / shareholders are also non-residents. The assessee is nobody to ask details about shareholders of investor company and their capacity to make investments in the company. At best, the assessee can ask details about identity of the shareholder and genuineness of transaction and creditworthiness of investors. In this case, the Assessing Officer as well as the learned CIT(A) went ahead beyond scope of their investigation to ascertain real beneficiaries of investor company, even though, provisions of section 68 does not mandate the assessee to prove source of source for these impugned assessment years. At this juncture, it is relevant to understand proviso to section 68 of the Income Tax Act, 1961 inserted by the Finance Act, 2012 w.e.f. 01.04.2013, as per which, 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:
From the newly inserted proviso of section 68 of the Income Tax Act, 1961, what is clear is that from assessment year 2013-14 onwards if sum found credited in books of account of the assessee is share capital / share premium, then the assessee needs to prove source of source, in case, the person being a resident in whose name, such credit is recorded in the books of such company. First of all, proviso inserted to section 68 by the Finance Act, 2012 w.e.f. 01.04.2013 considered to be prospective in nature, which is applicable from assessment year 2013-14 onwards and this legal principle is supported by the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Gagandeep Infrastructure P.Ltd. 394 ITR 860 (Bom), where the Hon’ble High Court has clearly held that proviso to section 68 of the Income Tax Act, 1961 has been introduced by the Finance Act, 2012 w.e.f. 01.04.2013, and thus, it would be effective only from assessment year 2013-14 onwards. In this case, the assessment year involved is before the proviso inserted to section 68 of the Income Tax Act, 1961 by the Finance Act, 2012 with effect from assessment year 2013-14. Therefore, the proviso to section 68 cannot be applicable to impugned assessment years in question. Therefore, in our considered view, the Assessing Officer cannot question source of source of investor company, more particularly, when the assessee has already discharged its burden by filing enormous details about identity of shareholder, genuineness of transaction and creditworthiness of parties. Further, first proviso to section 68 inserted by the Finance Act, 2012 with effect from assessment year 2013-14 is applicable to a company which has received share capital from another company and such company has credit in the name of resident, but not applicable to a case where credit was found in name of non-resident shareholders. In this case, the assessee has received share capital from M/s. Fruition Resorts Ltd., Mauritius, which is non- resident. We further noted that shareholder / ultimate beneficiaries of Mauritius company are also non-residents. Therefore, in our considered view proviso to section 68 of the Income Tax Act, 1961 cannot be applied to facts of the present case at all, because shareholder itself is non-resident and further, ultimate beneficiaries / shareholders of said company are also non-residents. Therefore, we are of the considered view that the Assessing Officer as well as learned CIT(A) were completely erred in going beyond scope of their verification to ascertain source of source for the investor company.
The sole basis for the Assessing Officer to draw adverse inference against investments received by the assessee company from M/s. Fruition Resorts Ltd., Mauritius, is proceedings of FIPB and rejection of post-facto approval filed by the assessee for regularizing allotment of equity shares to non-resident shareholder. The assessee has received share capital in two stage. The first lot of investments came under automatic approval route from the RBI and for this, the RBI has issued necessary approval for allotment of equity shares. Therefore, for allotment of 11,085 equity shares for consideration of Rs.4,90,24,668/- under automatic approval route by the RBI, question of doubting genuineness does not arise at all. As far as allotment of 14,195 partly paid up shares for consideration of Rs.13,24,81,729/- received from assessment year 2010-11 to 2012-13 onwards, said allotment does not come under automatic route. Therefore, the assessee has gone for post-facto approval before FIPB. The FIPB has rejected application filed by the assessee on the ground that the assessee could not satisfactorily explain identity of ultimate beneficiaries / beneficiaries of Mauritius company. The Assessing Officer on the basis of rejection of approval by the FIPB draw adverse inference against the assessee and made additions towards share capital received from Mauritius company u/s.68 of the Income Tax Act, 1961.
Having considered relevant materials, we do find any merit in reasons given by the Assessing Officer to draw adverse inference against the assessee only on the basis of FIPB proceedings, because FIPB works under different set of standards and income-tax provisions are different in the context of assessing income of a person. The standard set by FIPB to term a transaction as genuine or not may not be applicable to income tax proceedings to assess particular receipt as income or not. Further, on what ground the FIPB opined that the assessee could not satisfy identity of ultimate beneficiaries of Mauritius company is not known to the Assessing Officer as well as for us. Therefore, on the basis of proceedings of some other department which works under different context and different laws, no adverse inference can be drawn against the assessee on the issue of assessment of income, more particularly, when assessing credit u/s.68 of the Income Tax Act, 1961. As we have already stated in earlier part of this order, provisions of section 68 of the Act, operates in different field, as per which any sum found credited in the books of account can be treated as income of the assessee, if the assessee does not offer any explanation about nature and source of such credit. If the assessee offers nature and source of credit found in books of account, then said credit is definitely out of scope of provisions of section 68 of the Income Tax Act, 1961. In this case, there is no dispute whatsoever with regard to onus discharged by the assessee. In fact, the assessee has discharged its onus by filing enormous details, including various documents to prove identity of shareholder and also filed various documents to prove genuineness of transaction. The assessee has also filed documents to prove creditworthiness of investor company. Therefore, in our considered view, the Assessing Officer as well as the learned CIT(A) have completely erred in making additions towards share capital u/s.68 of the Act only on the basis of proceedings of FIPB.
During the course of hearing, when the Bench posed a specific query to the learned counsel for the assessee as to what is status of approval pending before the FIPB, the learned counsel replied that ultimately the FIPB has rejected application filed by the assessee and directed the assessee to return share capital received from Mauritius company to the shareholder on the ground that the assessee could not satisfactorily discharge real identity of ultimate beneficiaries of Mauritius company and such finding is solely based on income-tax proceedings and additions made by the Assessing Officer towards share capital received from Mauritius company. In our considered view, it is just like a circle, because the Assessing Officer has initiated reassessment proceedings on the basis of the FIPB proceedings and concluded that sum received by the assessee from Mauritius company is unexplained income and other side, the FIPB has rejected post-facto approval application filed by the assessee on the basis of income-tax proceedings and additions made by the Assessing Officer towards share capital received from Mauritius company. From the above, it is very clear that both the authorities have gone on the basis of suspicion and surmises without going into ascertain real nature of transaction between the parties. In our considered view, the assessee has filed all evidences to prove identity of the shareholder and also proved genuineness of transaction and creditworthiness of parties. The assessee had also filed necessary evidences to identify ultimate beneficiaries of shareholders of Mauritius company. Therefore, we are of the considered view that the Assessing Officer has completely erred in making additions towards share capital u/s.68 of the Income Tax Act, 1961.
The learned A.R for the assessee has relied upon plethora of decisions in support of his arguments. The Hon'ble Supreme Court in the case of CIT Vs. Lovely Exports Pvt.Ltd. 216 CTR 195 held as under:- “The share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee company.”
The learned A.R for the assessee had also relied upon decision of the Hon'ble High Court of Madras in the case of CIT Vs. Electro Polychem Ltd. 294 ITR 661, where the Hon’ble High Court of Madras in the context of addition made u/s.68 of the Act held as under:- “Section 68 of the Income-tax Act, 1961 - Cash credits
Even if it be assumed that subscribers to increased share capital of assessee company were not genuine, under no circumstances amount of share capital could be regarded as undisclosed income of company [Assessment years 1998-99 & 1999-2000]
The Assessing Officer made additions in respect of the share application money under section 68, finding that the assessee had brought the undisclosed income by way of share application in fictitious names and passed orders accordingly. The Tribunal allowed the appeal preferred by the assessee.
Held that in CIT v. Stellar Investment Ltd. [1991] 192 ITR 287 (Delhi) it was held that even if it be assumed that the subscribers to the increased share capital were not genuine, under no circumstances the amount of share capital could be regarded as undisclosed income of the company. Applying the ratio laid down in the said decision, no substantial question of law arose for consideration”
The learned A.R for the assessee has also relied upon decision of the Hon'ble High Court of Madras in the case of CIT Vs. Pranav Foundations Ltd. (Mad) in T.C.A No.262 of 2014 dated 12.08.2014 and the Hon’ble High Court had considered an identical issue and held as under:-
“3. We have heard the learned Senior Standing Counsel appearing for the appellant and perused the order passed by the Tribunal and the authorities below.
4. Before adverting to the merits of the case, it would be relevant to refer to Section 68 of the Act, which reads as under:
"Section 68. Cash credits.-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."
A bare reading of Section 68 of the Act makes it clear that in a case where any sum is found credited in the books of account and the assessee has not given satisfactory explanation in respect of the same, the Assessing Officer can treat the same as undisclosed income and add it to the income of the assessee. All that the said provision contemplates is that the assessee has to give satisfactory explanation about the "nature and source" of such sum found credited in the books of account.
From the facts as enumerated above, we are of the view that the decision of the Supreme Court in Lovely Exports (P) Ltd. case, referred supra, applies on all fours to the present case, in view of the fact that all the four parties, who are subscribers of the shares, are limited companies and enquiries were made and received from the four companies and all the companies accepted their investment. Thus, the assessee has categorically established the nature and source of the said sum and discharged the onus that lies on it in terms of Section 68 of the Act. When the nature and source of the amount so invested is known, it cannot be said to be undisclosed income. Therefore, the addition of such subscriptions as unexplained credit under Section 68 of the Act is unwarranted.
That apart, a reading of the decision of the Supreme Court in Lovely Exports (P) Ltd. case, referred supra, makes it clear that the department has a right to reopen the individual assessment if the allegation of bogus shareholding is proved. This is not a case of investment by bogus shareholders. The four limited companies have made investment and that is borne out by records. The Commissioner of Income Tax (Appeals) and the Tribunal, on facts, have found that the transaction in this case is beyond the pale of controversy and the assessee has explained in no uncertain terms the nature and source of the income.
We find that the decision of the Delhi High Court in Sophia Finance Ltd., referred supra, does not get attracted to the facts of the present case, as rightly held by the Tribunal. That apart, the decision of the Calcutta High Court in Commissioner of Income Tax v. Ruby Traders and Exporters Ltd., [2003] 263 ITR 300, relied upon by the learned Senior Standing Counsel for the Revenue, also does not support the case of the Revenue, as all that the assessee is required to establish is the nature and source of the subscriber, the creditworthiness and genuineness of the transaction. That proof has already been submitted by the assessee and it has discharged its burden in terms of Section 68 of the Act. It is always open to the department to proceed against such investors, if so advised, in view of the decision in Lovely Exports (P) Ltd. case, referred supra.”
The Hon'ble High Court of Madras in the case of CIT Vs.Victory Spinning Mills Ltd. 50 taxmann.com 416 had considered identical issue and held as under:- “A bare reading of section 68 makes it clear that in a case where any sum is found credited in books of account and the assessee has not given satisfactory explanation in respect of the same, the Assessing Officer can treat the same as undisclosed income and add it to the income of the assessee. All that the said provision contemplates is that the assessee has to give satisfactory explanation about the "nature and source ‘ of such sum found credited in the books of account.
In view of the fact that out of 181 share applicants, 129 share applicants had appeared when summons were issued and they had accepted the investment and that apart, the names and identity of the share applicants was also available on record. When the nature and the source of the amount invested was known, it cannot be said undisclosed income in hands of assessee.
Furthermore, the burden is on the Department to show that the investment made by the share applicants actually emanated from the coffers of the assessee, so as to enable it to be treated as the undisclosed income of the assessee. In the case on hand, the department except making a vague statement that the managing directors have advanced monies to the alleged share applicants, did not substantiate the same with concrete evidence. Such finding based on a priori consideration cannot be a ground to make addition towards unexplained cash credit. Therefore, the addition of such subscriptions as unexplained credit under section 68 is unwarranted. Moreover, since the share applicants in all these cases are one and the same and they have confirmed the transactions, it cannot be treated as the unexplained investment of the managing directors of the company and on that score, no addition can be made in the hands of the managing directors. [Para 6] The Commissioner (Appeals) and the Tribunal, on facts, have found that the transaction in this case is beyond the pale of controversy and the assessee have explained in no uncertain terms the nature and source of the income. There was no reason to differ with the said findings of the Commissioner (Appeals) and the Tribunal, based on facts.”
The Hon'ble High Court of Bombay in the case of CIT Vs. Orchid Industries P.Ltd. 397 ITR 136 (Bom), had considered an identical issue of share application money u/s.68 of the Income Tax Act, 1961 and held as under:- “The Assessing Officer added certain amount as income under section 68 only on the ground that the parties to whom the share certificates were issued and who had paid the share money had not appeared before the Assessing Officer and the summons could not be served on the addresses given as they were not traced and in respect of some of the parties who had appeared, it was observed that just before issuance of cheques, the amount was deposited in their account.
Held that the assessee had produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money. The assessee had also produced the entire record regarding issuance of shares, i.e., allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account. The balance-sheet and profit and loss account of those persons disclosed that they had sufficient funds in their accounts for investing in the shares of the assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the assessee. Therefore, the addition was liable to be deleted .”
The Hon'ble High Court of Bombay in the case of CIT Vs. Gagandeep Infrastructure Pvt. Ltd. (2017) 80 taxmann.com 272 (Bom), had considered an identical issue and after considering proviso to section 68 introduced by the Finance Act, 2012 w.e.f. 01.04.2013, held as under:- “The proviso to section 68 has been introduced by the Finance Act, 2012 with effect from 1-4-2013. Thus, it would be effective only from the assessment year 2013-14 onwards and not for the subject assessment year. In fact, before the Tribunal, it was not even the case of the Revenue that section 68 as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1-4-2013 was its normal meaning. The Parliament did not introduced to proviso of section 68, with retrospective effect nor does the proviso to introduced states that it was introduced 'for removal of doubts' or that it is 'declaratory'. Therefore, it is not open to give it retrospective effect, by proceeding on the basis that the addition of the proviso to section 68 is immaterial and does not change the interpretation of section 68 both before and after the adding of the proviso.
In view of the matter the three essential tests while confirming the section 68 laid down by the Court namely the genuineness of the transaction, identity and the capacity of the investor have all been examined by the impugned order of the Tribunal and on fact it was found satisfied. Further it was a submission on behalf of the Revenue that such large amount of share premium gives rise to suspicion on the genuineness (identity) of the shareholders, i.e., they are bogus. The Apex Court in a case in this context to the pre-amended section 68 has held that where the revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income-tax Officer to proceed by reopening the assessment of such shareholder and assessing them to tax in accordance with law. It does not entitle the revenue to add the same to the assessee's income as unexplained cash credit.
Coming back to case laws relied upon by the Assessing Officer as well as learned CIT(A). The learned CIT(A) has relied upon certain judicial precedents, including decision of the Hon’ble Calcutta High Court in the case of Rajmandir Estates Ltd Vs. PCIT (2016) 386 ITR 162. We find that case law relied upon by the learned CIT(A) are not applicable, because, in this case, the subscribers to the share capital did not establish their financial capacity to subscribe share capital in the assessee company. The bank account of all the applicants have been found credited from other sources immediately before transfer of funds to the assessee company. The companies did not have any business activity to establish their financial capacity. Under those facts and circumstances, the Hon’ble Calcutta High Court came to the conclusion that the assessee has failed to establish genuineness of transactions and creditworthiness of the parties and hence confirmed addition made by the AO u/s 68 of the Income-tax Act, 1961. As regards the decision of Hon’ble Delhi High Court, we find that although Hon’ble High Court held that furnishing certificate of incorporation, PAN etc is not sufficient to prove identification of subscriber when there was enough materials to show subscriber is a paper company, but in the present case, the assessee has filed all possible evidences to establish the transactions in light of provisions of section 68 of the Act, and thus, in our considered view, the assessee has satisfactorily, discharged its onus to come out of shadow of section 68 of the Act. Therefore, the case laws relied upon by the learned CIT(A) cannot be applied to facts of present case.
In this view of the matter and considering the facts and circumstances of this case and also taking into consideration various case laws as discussed hereinabove, we are of the considered view that the assessee, by filing enormous details, has discharged its initial onus to prove identity, genuineness of transactions and creditworthiness of the shareholders. The A.O., without carrying out further inquiries in order to ascertain the claim of the assessee, jumped into conclusion on the basis of adverse comments of FIPB. Therefore, we are of the considered view that the AO was erred in making additions towards share capital, including share premium u/s 68 of the Income Tax Act, 1961. The learned CIT(A) also without appreciating facts in right perspective has simply held that onus to explain nature and source of credit appearing in books of account of the assessee has not been discharged, transaction is not genuine and nature & source of investment remains unexplained and thus, sustained additions made by the Assessing Officer. Hence, we set aside the findings of the Assessing Officer as well as learned CIT(A) and direct the AO to delete addition made towards share capital as unexplained cash credit u/s 68 of the Income Tax Act, 1961 for the assessment years 2008-09 to 2012-13.
The next issue that came up for our consideration for the assessment years 2008-09, 2009-10, 2010-11, & 2011-12 is validity of reopening of assessment u/s.147 of the Income Tax Act, 1961.
The learned A.R for the assessee, at the time of hearing submitted that the assessee does not want to press legal grounds taken for challenging validity of reopening of assessment and thus, grounds taken by the assessee challenging reopening of assessment are dismissed as not pressed.
In the result, appeals filed by the assessee for the assessment years 2008-09, 2009-10, 2010-11, & 2011-12 are partly allowed and the appeal filed by the assessee for the assessment year 2012-13 is allowed.
Order pronounced in the open court on 12th October, 2022