ITO, KOTA vs. S.S. POLY CHEMICALS PVT. LTD., KOTA

PER BHAGCHAND, AM

The Revenue has filed an appeal against the order of the ld. CIT(A)

, Kota dated 5-08-2016 for the Assessment Year 2007-08 while the assessee has filed the C.O., raising grounds of appeal by the Revenue and

the assessee as under:-

ITA No. No.947/JP/2016 – Revenue

‘’On the facts and in the circumstances of the case, the ld. CIT(A) has erred in:- 1. deleting the addition of Rs. 48 lacs made u/s 68 of the I.T. Act, 1961 on account of bogus share capital raised. 2. deleting addition of Rs. 1.44 lacs made on account of commission paid out of undisclosed income.

C.O. No. 01/JP/2017 – Assessee

Particular s Expenses claimed (in Expenses disallowed Rs.) (in Rs.) Car/Motorcycle 99,039/- (including 19,908/- expenses depreciation of Rs. 39,787/- Telephone & Mobile 43,662/- 12,694/- expenses Travelling expenses 34,256/- 6,851/-

He has further erred in confirming this disallowance ignoring that the disallowance made is not in the nature of income escaping the assessment 2.1 First of all, we take up the grounds of appeal of the Revenue for

adjudication.

3.1 In Ground No. 1, the Revenue is aggrieved that the ld. CIT(A) has

erred in deleting the addition of Rs. 48 lacs made u/s 68 of the Act on

account of bogus share capital raised by the assessee. Brief facts of the

case are that the AO during the course of assessment proceeding noted

that the return for A.Y. 2007-08 was filed by the assessee on 29-11-2007

declaring income of Rs. 1,37,230/-. The AO subsequently noticed that the

assessee had indulged in taking accommodation entries from a racket

operating in Delhi. The AO further noted that as per the material gathered

by the Department during the course of search conducted in the case of

Shri Surendra Kumar Jain Group by the Investigation Wing, New Delhi,

the assessee company had taken accommodation entry of Rs. 48.00 lacs

from the said racket in Delhi through M/s. Parisudh Finance Company (P)

Ltd. and M/s. Vogue Leasing and Finance Pvt Ltd. dummy companies of

the racket of entry providers in Delhi. The AO further observed that after

recording the reasons to the belief of the AO the income of the amounting

to Rs. 48.00 lacs had escaped assessment. Thus after approval of the

JCIT, Range-1, Jaipur on 22-03-2013, the case of the assessee was reopened u/s 148 of the I.T. Act, 1961. Accordingly, the notice u/s 148 of

the Act was issued and served upon the assessee on 22-03-2013. The AO

in this case noted that the assessee was one of the beneficiaries of the

accommodation entry provided by M/s. Parisudh Finance Company (P)

Ltd and M/s. Vogue Leasing and Finance (P) Ltd, dummy companies

operated by Shri Surendra Kumar Jain and & others who operated racket

of accepting cash from the beneficiaries and after introducing cash

through various banks accounts in the names of various proprietary

concerns, issued cheques from one of their intermediary company after

routing the funds through several intermediaries. The AO further noted

that during search operations the evidences found on record established

that Shri Surendra Kumar Jain & others were entry providers and number

of companies were running from the residential as well as business

addressed related to Shri Surendra Kumar Jain & Others. All the books of

accounts and other relevant papers of the firms/ companies were found

the residence of these persons. The AO further noted that all these

companies were run and controlled by Shri Surendra Kumar jain and Shri

Virendra Kumar Jain. The seized material included bank unsigned as well

as blank sighned cheque books, acknowledgement of filing of return of these companies, user of IDs and password of all companies for e-filing

their returns, bank account opening and closing letters, authorization

letters for attending the assessment proceeding, books of account in tally

format as well as in the format required for filing a return, proof of the

use of mobile nos. of Shri Surendera Kumar Jain and Shri Virendera

Kumar Jain in bank opening forms having option of mobile banking.

According to the AO, all these companies are tools in their business of

providing accommodation entries. The AO during the course of re-

assessment proceeding noted that the company had issued 3000 shares of

Rs. 100/- each amounting to Rs. 3.00 lacs at premium of Rs. 21 lacs to

M/s. Parisudh Finance Company Pvt Ltd. and 3000 shares of Rs. 100/-

each amounting to Rs. 3.00 lacs at premium of Rs. 21 lacs to M/s. Vogue

Leasing & Finance Pvt Ltd. totaling to Rs. 48,00,000/- (i.e. 6,00,000 +

42,00,000/-) which were held as bogus companies and were indulged in

business of providing accommodation entries to various beneficiaries

companies/ entities/ persons throuch chequqes in lieu of cash. From the

document found during the course of search/ survey action 132/133A of

the Act, it was admitted that these companies were maintained datewise

cheque books which were managed by Shri S.K. Jain and his brother over a long period of time i.e around 6 years. In these cheque books and cash

books details of cheques provided to the beneficiary companies and

receipt of cash books were recorded by Shri Surendra Kumar Jain. These

said bogus transactions are clearly reflected / verifiable from the

following pages.

S.N. Exhibit No. Page No. Item Narration Clearance dt. Remarks 1. A-66 P-13, Cheque book Parisudh P Ltd Cheque of Rs. Name of Rishi to SS Policy 24 lacs was Singhal was Pvt Ltd. Ch. cleared in a/c mentioned. No. 079962 dt of assessee on 11-2-2007 Rs. 8-3-2007 i.e. 24,00,000/- very next dayof cash mentioned to be cash received in the cash book of S.K. Jain 2. A-70 P-6 Cash book Cash received from Rishi Singhal of Rs.24 lacs on 7-3-2007 3. A-65 P-48 Cheque book Vogue Pvt.Ltd Cheque of Rs. Name of Rishi to SS Poly Pvt. 24 lacs was Singhal was Ltd Ch. No. cleared in a/c mentioned 080213 dt 27- of assessee on 07-07 & 27-2-2007 i.e. 080214 dt very same day 11.2.07 of cash mentioned to be received in the cash book of S.K. Jain 3. A-78 P-22 Cash book Cash received from Rishi Singhal of Rs.24 lacs on 27-2-2007

From these seized documents, the AO observed that the assessee

company had received payment of 3000 shares allotted to M/s.

Paruishudh Fiance Company and Vogue Leasing and Finance Pvt Ltd (dummy companies) in consideration of Rs. 24 lacs each through cheque

no. 080213 dated 26-02-2007 and through cheque no. 079962 dated 27-

02-2007 and thereafter it had received back in cash Rs. 24 lacs from

dummy companies respectively through Shri Rishi Singhal as per copy of

seized documents which are in the handwriting of Shri Surendra Kumar

Jain. This fact was corroborated by obtaining the confirmations for share

transactions from the assessee. It is noted that the cash received from

beneficiary is introduced in the bank account of persons/firms /

companies floated by the racket and cheque/DD/POs in the name of

beneficiary was issued either from the same account or through other

accounts in which the funds were transferred by clearing in two or more

stages. In order to find out the originating bank account and the mode of

deposit therein, an attempt was made to obtain the bank accounts of the

so called companies from where funds were transferred to the account of

M/s. Parishudh Finance Company and M/s. Vogue Leasing and Finance

(P) Ltd, just prior to issue of cheque/ pay orders to the assessee. The AO

noted that the share applicant company in this case i.e. M/s. Parishudh

Finance Company and M/s. Vogue Leasing and Finance (P) Ltd had

provided entries to more than 100 beneficiaries during the F.Y. 2006-07 spreading all over the country. For verification of the said companies,

summon notices u/s 131 of the I.T. Act, 1961 were issued 21-03-2014

by the Department for which the Inspector was deputed to serve the

notices to the Companies through its Directors. However, the Inspector

failed to serve the notice as on the mentioned address the companies of

the assessee company were established and the companies were not

situated at the given address which clearly established that these

companies were floated for providing accommodation entries by Shri

Surendra Kumar Jain and others. The AO noted that it had no resources,

manpower, infrastructure etc. to carry out regular business activities. The

statement of Shri Sachin Jha who is son of the Director of the assessee

company were recorded on 28-03-2014 wherein he has stated vide reply

of question 4,5 & 6. The same are reproduced at para 5 of the assessment

order. The AO noted that the assessee company had issued 6000 shares

on 7-03-2007 at premium of Rs. 700/- each share while it had issued 500

shares to the son of Directors within almost one year period on 22-04-

2008 from the shares issued at premium of Rs. 700/- each share on 7/9-

03-2007 at par without premium. Further 6000 shares which were issued

by assessee company to M/s. Parishudh Finance Company and M/s.

Vogue Leasing and Finance (P) Ltd. ultimately acquired back by Shri

Sachin Jha son of directors during F.Y. 2011-12 without any premium.

The AO further noted that the assessee company could not produce any

documentary evidence that how this unlisted company allotted shares to

above said dummy companies at premium of Rs. 700/- each share. It is

also pertinent to note that these 6000 shares allotted to M/s. Parishudh

Finance Company and M/s. Vogue Leasing and Finance (P) Ltd. were

bought back by the son of the Director namely Shri Sachin Jha (who also

become Director during F.Y. 2012-12) at face value without paying any

premium. The AO noted that it is beyond the understanding that why any

person/company had borne loss of Rs. 42 lacs by purchasing the same on

premium of Rs. 700/- each and thereafter sold the same without premium

to the family members of Directors of said impugned assessee company.

The AO further noted that this was only an effort of assessee to convert

its undisclosed income into enhanced capital in the form of sale of shares

at premium of Rs. 42 lacs to such dummy companies which according to

the AO showed that the assessee had deliberately tried to evade the

payment of due taxes. The AO looking into the above facts and circumstances of the case made the addition of Rs. 48 lacs by observing

as under:-

‘’3.11 After considering the entirety of the facts and circumstances of the case, it has been established that the assessee company had introduced its unaccounted cash amounting to Rs. 48,00,000/- in the form of share capital through the racket of entry providers operated in Delhi. Therefore, the amount of Rs. 48,00,000/-, the source of which could not be satisfactorily explained by the assessee, is being treated as the unexplained cash u/s 68 of the I.T. Act, 1961 and accordingly added to the total income of the assessee.’’

3.2 The assessee's carried the matter before the ld. CIT(A) who had

deleted the addition of Rs. 48 lacs made by the AO by observing as

under:-

‘Based on the background facts available and the legal as discussed above, it is seen that the investor companies weer having creditworthiness to pay share premium as on 31-03-2007. Further, name of Shri S.K. Jain is not appearing in the list of Directors of M/s. Parishudh Finance Company and M/s. Vogue Leasing and Finance (P) Ltd. who were the lenders of the appellant assessee so as to establish a direct nexus as per the allegation in the Investigation Directorate Report. Further in the assessment framed u/s 153C in the case of M/s. Parishudh Finance Company and M/s. Vogue Leasing and Finance (P) Ltd. by the Income Tax Department pursuant to search of the AO has not given any adverse inference and assessed the same at returned income which strengthens the claim of the assessee regarding genuineness of the transaction.

Since the addition has been made u/s 68, it may be noted that the initial burden of proving the genuineness of the transaction lies upon the assessee alongwith the identity of lender/investor and his creditworthiness. Having done so, the assessee in the instant case has discharged the onus cast upon it. Beyond this, for the charge of unexplained cash credit to stick, the onus lies upon the AO to disprove the claim of the assessee by establishing that the evidences filed by the assessee was false and by bringing new material on record and failure to do so would vitiate the addition made on this count.

In the light of the above discussion, it can be concluded that as regars the share capital subscribed by M/s. Parishudh Finance Company and M/s. Vogue Leasing and Finance (P) Ltd. since the AO did not bring any independent findings on record to disprove the assessee's documents submitted to support introduction of capital from the above entity, the addition of Rs. 48,00,000/- made regarding premium on share capital introduced these two entities cannot be sustained as it is based upon superficial findings and ignorance of basic requirements of law and natural justice making the addition devoid of merits especially in the absence of proper enquiries and independent findings by the AO to controvert the evidences furnished by the assessee to prove the genuineness of the capital introduced as discussed above.

The addition of Rs. 48,00,000/-is accordingly not justified and is directed to be deleted.’’

3.3 During the course of hearing, the ld. DR supported the order of the

AO.

3.4 On the other hand, the ld.AR of the assessee prayed that the ld.

CIT(A) has rightly deleted the addition made by the AO and thus the

ground of the department be dismissed. The ld.AR of the assessee has filed the written submission and relied upon the case laws which have

been taken into consideration.

3.5 After hearing both the sides and considering the relevant material

available on record and factual aspects and legal proposition decided by

various Courts with regard to such issue, we hold that Shri Surendra

Kumar Jain and various entities floated to provide accommodation entries

and assessee is one of the beneficiaries of such entry providers through

these companies from whom assessee has shown the receipt of share

application money. The modus operandi is that these shares are issued at

a high premium and thereafter these shares are acquired back by any of

the group persons at nominal price. The shares were issued at a premium

of 700/- each and after sometime shown as acquired back by some of the

Director of Company at face value of shares. This modus operandi is also

established by the seized material. The diary maintained by the entry

provider shows that cash was given to the entry providers through Shri

Rishi Singhal. The cheque has been issued in lieu of cash which has been

credited in the books of assessee. The seized material also establishes that

the cheque towards share capital were also obtained through Shri Rishi

Singhal. Thus the modus operandi of issuing cheques after receiving the cash is fully established in this case. In this view of the matter, we do not

concur with the views of the ld. CIT(A) on the issue in question. We

reverse the findings of the ld. CIT(A) and confirm the findings of AO.

Thus Ground No. 1 of the Revenue is allowed.

4.1 In Ground No. 2, the Revenue is aggrieved that the ld. CIT(A) has

erred in deleting the addition of Rs. 1.44 lacs made on account of

commission paid out of undisclosed income. Brief facts of the case are

that during the course of post search enquiries it is established that Shri

S.K. Jain and Shri Virendra Jain were established in the business of

providing accommodation entries by issuing cheques in lieu of cash

through several papers companies controlled by them by charging a

certain amount of commission. The AO noted from the facts available on

record that the assessee company had obtained entry of Rs. 48,00,000/-

on which the assessee might have paid commission @ 3% amounting to

Rs. 1,44,000/-. The AO noted that this commission amount was met by

the assessee from its undisclosed sources. Therefore, the AO added this

amount of Rs. 1,44,000/- u/s 68 of the I.T. Act, 1961 to the total income

of the assessee company.

4.2 In first appeal, the ld. CIT(A) has deleted the addition of Rs.

1,44,000/- by observing as under:-

‘’I have gone through assessee's submissions and AO’s findings. In view of the findings in Ground No. 2 to 6 above, the addition of Rs. 1,44,000/- was made on account of commission which was presumed to have been paid by the assessee for obtaining accommodation entry in dispute, since the Assessing Officer was not able to bring anything on record that it was the assessee's own money and used the words like ‘’might have paid’’ which itself shows that the addition is based on presumption and also since I have held the share capital to be explained, consequently, the A.O.’s addition on account of commission payment for such transaction to the purchaser companies at a rate of 3.00% amounting to Rs. 1,44,000/- also cannot sustain and the same is directed to be deleted.

4.3 During the course of hearing, the ld. DR supported the order of the

AO and prayed that the ld. CIT(A) has erred in deleting the addition of

Rs. 1.44 lacs made on account of commission paid out of undisclosed

income.

4.4 On the other hand, the ld.AR of the assessee supported the order of

the ld. CIT(A). In support of it, the ld.AR of the assessee filed the written

submission which has been taken into consideration.

4.5 We have heard the rival contentions and perused the materials

available on record. In this case, the AO observed that the assessee company had obtained accommodation entry of Rs. 48 lacs and the

assessee might have paid commission @ 3% amounting to Rs. 1,44,000/-.

This commission amount has been paid from undisclosed sources and

thus the AO made the addition of Rs. 1,44,000/- u/s 68 of the Act. In first

appeal, the ld. CIT(A) has deleted the addition of Rs. 1.44,000/- made by

the AO. From the available records, it appears that the assessee company

had obtained accommodation entry of Rs. 48.00 lacs and such

accommodation entry are provided on payment of commission. Hence,

we hold that the AO is justified in holding that assessee had paid 3%

commission of Rs. 1,44,000/- on the accommodation entry of Rs. 48.00

lacs. Thus Ground No. 2 of the Revenue is allowed.

5.1 In Ground No. 1 of the C.O., the assessee is aggrieved that the ld.

CIT(A) has confirmed the disallowance of Rs. 45,904/- out of interest

paid on loan taken from the directors. Brief facts of the case that the

assessee had claimed interest payment @ 15% amounting to Rs.

1,14,760/- to its Directors while it had maintained deposits with HFDC

Bank of Rs. 30,14,981/- and deposits with Bank of India of Rs.15 lacs @

9% per annum interest. The AO noted that the assessee company had

sufficient funds to run business smoothly but to suppress its income for the intention not to pay the due taxes, it had to claim that some money

was borrowed by the Directors and paid interest to them. The AO further

noted that if the contention of assessee seemed to be justified there was

no requirement to borrow the money from the directors. The assessee

company should have taken payment of immature FDR and it could save

the payment of interest @ 6%. The AO thus disallowed the difference of

interest rate of 6% on loans taken from the Directors which comes to Rs.

45,904/- and added the same to the total income of the assessee.

5.2 In first appeal, the ld. CIT(A) has confirmed the action of the AO

by observing as under:-

‘’I have gone through the assessee's submission and AO’s findings. Since the assessee has not been able to prove either the necessity or the logic behind the higher effective payment of interest to Directors nor any commercial expediency has been brought out, the action of the AO appears justified and no interference is required in the same. The disallowance of Rs. 45,904/- is confirmed.’’

5.3 During the course of hearing, the ld.AR of the assessee prayed for

deletion of addition of Rs. 45,904/- for which the ld.AR of the assessee

filed the written submission.

5.4 On the other hand, the ld. DR supported the order of the lower

authorities.

5.5 We have heard the rival contentions and perused the materials

available on record. It is noted that the ld.AR of the assessee could not

controvert the findings of the lower authorities as to the disallowance of

interest amount of Rs. 45,904/- paid to the Directors by the assessee. In

this view of the matter, we concur with the findings of the ld. CIT(A).

Thus Ground No. 1 of the C.O. of the assessee is dismissed.

6.1 In Ground No. 2 of the C.O., the assessee is aggrieved in

confirming the disallowance @ 20% out of the following expenses by the

ld. CIT(A).

Particular s Expenses claimed (in Expenses disallowed Rs.) (in Rs.) Car/Motorcycle 99,039/- (including 19,908/- expenses depreciation of Rs. 39,787/- Telephone & Mobile 43,662/- 12,694/- expenses Travelling expenses 34,256/- 6,851/-

6.2 The facts as emerges from the order of the ld. CIT(A) on the above

expenses are as under:-

‘’6. Disallowance out of car/motor cycle expenses: The assessee company has claimed expenses on account of car/motorcycle at Rs. 99,039/- (petrol & diesel expense Rs. 34,256+insurance Rs. 12,231and depreciation Rs. 39,787/-, Rs. 12,485/- under the head repair & maintenance expenses which were paid to Chambal Motors Pvt. Ltd on account of servicing and repairing of Safari Car on 7-07- 2007 and Rs. 190/-on account of wheel balancing expenses paid to M/s. Tyre Shoppe on 08-06-2006) have also been claimed under this head.

During the period under consideration, the assessee company has maintained a Safar car and a motorcycle. The Directors of the company have not maintained another cars/motorcycles for their personal use as well as use of their family members. The Directors and their family members have utilized these vehicles for their personal affairs also. Log book has also not been maintained. Hence, considering all the facts and circumstances of the an adhoc disallowance @ 20% out of these expenses is made i.e. Rs. 19,808/- and added to total income of assessee company treating personal expenditure of the Directors with regard to these vehicles.

I have gone through assessee's submissions and AO findings.

Personal use of car/motorcycle cannot be ruled out. However, the disallowance has to be reasonable. Considering the facts of the case, in my opinion the disallowance of 20% of the Vehicle expenses is considered reasonable. Therefore, the disallowance of Rs. 19,808/- is upheld. This ground of appeal is therefore, dismissed.

I have gone through the assessee's submissions and AO findings. Personal use of telephone / mobile cannot be ruled out. However, the disallowance has to be reasonable. Considering the facts of the case, in my opinion the disallowance is considered reasonable. Therefore, the disallowance of Rs. 12,964/- is upheld. This ground of appeal is therefore, dismissed.

6.3 We have heard the rival contentions and perused the materials

available on record. It is not imperative to repeat the disallowances

confirmed by the ld. CIT(A) on account of car/motorcycle expenses,

telephone & mobile expenses and travelling expenses. We find that the ld.

CIT(A) taking into consideration all the facts and circumstances of the

case confirmed the above disallowances and we concur with his findings.

Thus the Ground No. 2 of the C.O. of the assessee is dismissed.

7.0 In the result, the appeal of the Revenue is allowed and the C.O. of the assessee is dismissed. Order pronounced in the open Court on 11 -04-2018. Sd/- Sd/- ¼ fot; iky jko ½ ¼HkkxpUn½ (Vijay Pal Rao) (Bhagchand) U;kf;d lnL; /Judicial Member ys[kk lnL;@Accountant Member

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