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Facts
The Revenue filed an appeal against the CIT(A)'s order deleting additions related to unexplained share application money, royalty payments, and allowing depreciation on fixed assets. The core issue revolves around the genuineness of share application money received by the assessee.
Held
The Tribunal held that the assessee failed to establish the creditworthiness and genuineness of the share application transactions. It found that the CIT(A) erred in deleting the addition, and therefore, the appeal filed by the Revenue was allowed in part.
Key Issues
Whether the assessee discharged the onus to prove the genuineness and creditworthiness of share application money received, and whether the CIT(A) was justified in deleting the additions made by the AO on this count.
Sections Cited
143(3), 254, 153A, 133A, 35D, 68
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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI SS VISWANETHRA RAVI & SHRI JAGADISH
आदेश / O R D E R
PER JAGADISH, A.M : Aforesaid appeal filed by the Revenue for Assessment Year (AY) 2004-05 arises out of the order of Learned Commissioner of Income Tax (Appeals), Chennai [hereinafter “CIT(A)”] dated 08.08.2017 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s 254 of the Income-tax Act, 1961 (hereinafter “the Act”) dated 30.12.2011.
The grounds of appeal raised by the Revenue are as under:
“1. The Order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The Id. CIT (A) erred in deleting the addition of Rs. 15,15,00,000/- made by the Assessing Officer towards unexplained share application money received, in the assessment passed u/s.143(3) r.w. Sec 254 of the IT Act, 1961 for the A.Y 2013-14.
1. 2.1. The Id CIT(A) has failed to appreciate that mere identification of contributors is not sufficient to hold that the share capital is genuine without appreciating the whole gamut of investigation and evidences gathered at the time of search as well as at the time of assessment.
2.2. The Id. CIT(A) has erred in not noting that the findings of the Assessing Officer(AO) that he enquiries made with regard to the sources of funds with the Directors of the said companies revealed that they were not at all involved in these transactions and that they had no knowledge of the real transactions and the sources of funds involved therein.
2.3. The Id CIT(A) ought to have appreciated that the ultimate investors had not explained the sources of funds introduced by way of cash/D.D's satisfactorily which has been clearly brought out by the AO in the assessment. Therefore, without considering the entirety of surrounding circumstances, the genuineness of cash credits in the form of share application money ought not to have been accepted by the Id. CIT(A) as having been explained satisfactorily, especially when there is material to show that the transactions were not genuine.
2.4 The Id. CIT(A) ought to have relied on the decision rendered by the Hon'ble Supreme Court of India in the case of Sumati Dayal Vs CIT 214 ITR 801(SC) and held that even if identity of the creditor is established, addition can be made if the transactions are not found to be genuine..
2.5 Having relied on the decision of the Hon'ble Supreme Court in the case of Lovely Exports luvt Ltd, 319 ITR 005(SC) ought to have taken cognizance of the fact that the said decision was also distinguished by the Hon'ble ITAT, Mumbai in the case of Pratiksha Mercantile P Ltd Vs Department of Income-tax in vide order dt 16 July 2012 and also by the Hon'ble Delhi High Court in the case of CIT Vs Ultra Modern Exports (P) Ltd [2013] 40 Taxmann.com 458(Del), CIT Vs Youth Constructions P Ltd (2013) 357 ITR 97 (Del), Onassis Axles P.Ltd Vs CIT (2014)364 ITR 53 (Del) (HC), Riddhi Promoters P Ltd Vs CIT [2015] 58 Taxmann.com 367(Del) and by the Hon'ble High Court of Bombay in the case of Major Metals Ltd Vs Union of India & Others (2012) 251 CTR 385 on facts similar to the case of the assessee company, wherein the AO had conducted enquiries and established that there were cash deposits prior to the issue of cheques, the sources of which were not explained/established, the Id CIT(A) ought to have upheld the addition made by the AO towards unexplained share application money by distinguishing the facts of assessee's case from that of Lovely Exports Pvt Ltd case cited supra.
3. The Id CIT(A) erred in directing the AO to arrive at the depreciation for the invoices/bills available on record amounting to Rs.2,20,42,544/- and to disallow the balance for the Α.Υ 2004-05.
3.1 The Ld. CIT(A) is not justified in allowing relief to the assessee by entertaining additional evidences such as bills and vouchers produced by the assessee before him during the appeal proceedings, without giving any opportunity to the AO to examine the same, in contravention of Rule 46A(3) of the I.T. Rules, 1962 as evident from Para 9.3 in page No.26 of the of the Id CIT(A)'s orders.
4. The Ld CIT(A) erred in allowing the assessee's appeal by deleting the addition towards the difference in the amount of Royalty payments made to M/s. Mcdowells & Co td & M/s. Herbertston Ltd., to the tune of Rs.16,14,525/- & Rs.12,14,200/- resply in summing up to Rs.28,28,725/- made by the AO for the AY 2004-05 in the assessment u/s.143(3) r.w.s.254 of the IT Act, 1961.
4.1. The Id CIT(A) is not justified in allowing relief to the assessee merely on the basis that the Royalty has been disbursed through account payee cheques and therefore that the genuineness of payment is not in doubt.
4.2. The Id CIT(A) ought to have appreciated the observation of the AO that the need for making provision by the assessee was not explained as the difference brought to tax by the AO was noticed to have arisen only while comparing the figures claimed in the return with the figures as was available in the materials impounded from the Chartered Accountant's premises during the course of survey proceedings u/s. 133A of the IT Act.
5. The Id CIT(A) erred in deleting the disallowance of preliminary expenses of Rs.92,246/-for the reason that 1/5th of the same mandated u/s.35 of the IT Act was allowed in the subsequent year and therefore, there is no reason to disallow in the earlier year, i.e., the year under consideration.
For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal
proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored.”
Ground No.1 is general in nature, therefore, no adjudication is required for the same.
Ground No.2 is against deletion of the addition made towards unexplained share application money of Rs.15.15 Crores in the assessment order passed u/s. 143(3) r.w.s 254 of the Act.
4.1 The assessee-company is engaged in the business of manufacturing of Indian Made Foreign Liquor (hereinafter “IMFL”). A search was conducted in the case of assessee on 18.01.2006.
Consequently, assessment order was passed u/s. 153A of the Act.
The A.O in the assessment order has made addition of unexplained share application money Rs.15.15 Crore along with certain other disallowances. Aggrieved, the assessee filed an appeal before Ld. CIT(A), which was dismissed. The assessee then filed an appeal before ITAT. The ITAT vide order in dated 30.06.2009, restored the matter to the file of A.O for considering the issue afresh. The A.O in the fresh assessment, again made the addition of share application money of Rs. 15.15 Crore, as under:
Satiate Finance Investments P. Ltd. (Rs. In lakhs) 755.00 Aswatha Distileries Ltd. 560.00 Dhanwanthi Investments 200.00 1515.00 4.2 The A.O after examining the statement of promoter director Shri Anbukkarasu and other associated persons, Shri Kittappa and Shri S .
Vaikundrajan and examining the affairs of M/s. Satiate Finance Investments Pvt. Ltd, M/s Aswadha Distilleries (P) Ltd. and M/s Dhanwanti Investments Ltd. held the transfer of fund through share application money as sham transaction made with the purpose of accommodating the sources . The A.O has relied on the findings and enquiries for the A.Y 2003-04 in which similar addition of share application money has been made. On appeal, the Ld. CIT(A) has deleted the addition relying on the assessee’s case in A.Y 2003-04, wherein the Tribunal in dated 30.06.2009 after relying on the decision of Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd. 216 CTR 195 (SC) has deleted the addition.
4.3 The Ld. DR before us has submitted that the assessee-company was authorized by the Memorandum of Association to have authorised share capital of Rs. 7 Crores divided into 70,00,000 equity shares of Rs. 10 each. However, for the AY 2004-05, the assessee has admitted share application money of Rs. 15.15 crores. Thus, statements were recorded from purported Directors and partners of the erstwhile company to know more about the source of funds, share capital management and day to day affairs of the company. The Ld. DR has submitted that the Ld. CIT(A) has deleted the addition on the basis of order of ITAT for A.Y 2003-04, where share application money received from M/s Satiate Finance Investment P. Ltd. of Rs.3.45 Cr. and from M/s Aswatha Distilleries Ltd of Rs 7.45 Cr. added has been deleted, relying on the decision of Hon’ble Apex Court in the case of CIT vs. Lovely Exports Pvt. Ltd., supra. The Ld. DR further submitted that subsequently, the Hon’ble Madras High Court in its order dated 25.08.2021 in [2021] 130 taxmann.com 206 (Mad), the appeal filed by the Department has set aside the order of Tribunal and confirmed the addition made by the A.O.
4.4 The Ld. AR, on the other hand, supported the order of Ld. CIT(A) and submitted that Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd., supra, has held that if the share application money has been received by assessee-company , Department is free to proceed to retain individual assessments and addition is not to be made in the assessee-company. The Ld AR , as regard to decision of Hon’ble Madras High Court in assessee’s case for A.Y 2003-04, where decision of Hon’ble ITAT relied by Ld CIT(A) has been reversed has submitted that the assessee has filed Miscellaneous Petition before Hon’ble High Court to recall the order.
4.5 We have heard the rival submissions, and perused the materials available on record. The A.O has made the addition on share application money of Rs. 7.5 Crore from M/s. Satiate Finance Inv. Pvt. Ltd., Rs. 5.6 crore from M/s. Aswadha Distilleries Ltd., and Rs. 2 crore from M/s. Dhanwanthi Investments Ltd. The Ld. CIT(A) has deleted the addition relying on the order of Hon’ble ITAT in in the case of assessee in A.Y 2003-04 where it has received share application money of Rs. 3.4 Crore from Satiate Finance Investment (P) Ltd. and Rs. 7.45 crores from Aswatha Distilleries Ltd. has deleted the addition of share capital relying on the decision of Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd., supra. However, we find that the order of Hon’ble ITAT for A.Y 2003-04 relied by the Ld CIT(A) has been reversed by the Hon’ble jurisdictional High Court upholding the addition on share application money. The Hon’ble High Court has considered the decision of Hon’ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd., supra. and held as under as under:
“34. On going through the factual position as recorded by the Assessing Officer and re-appreciated by the CIT(A), we have no hesitation to hold that the assessee has not established the creditworthiness and genuineness of the transaction to the satisfaction of the Assessing Officer. In fact, the Tribunal agreed that the Assessing Officer made an in-depth enquiry, which was well within his powers. Yet, by a cryptic order, the Tribunal reversed the well considered order passed by both the Assessing Officer as well as the CIT(A).
The decision in the case of M/s.Lovely Exports Pvt. Ltd., can hardly help the case of the assessee because, on facts, in the said case, it was found that the assessee furnished full information thereby discharging the onus cast upon them and once the onus is discharged, it was for the Assessing Officer, who has to prove the contrary.
In the case on hand, the assessee miserably failed to discharge the primary onus cast upon them. In fact, the Assessing Officer conducted a detailed enquiry, issued summons, recorded statements, permitted the authorized representative of the assessee to peruse the seized records and in fact, came to a provisional conclusion as to how he intends to proceed and gave further opportunity to the authorized representative of the assessee, who had filed a written submission on 03.12.2007 raising certain factual issues and relying upon certain decisions. Those factual issues were considered and held to be not sustainable and the decisions, which were relied upon by the assessee, were also distinguished and in our considered view, are rightly so.
The case of the Revenue stands substantiated and supported by the decision of the Delhi High Court in the case of PCIT Vs. NDR Promoters P. Ltd. [reported in (2019) 102 Taxmann.com 182] wherein it has been held that when the Assessing Officer made additions to the assessee's income under Section 68 of the Act in respect of the amounts received as share capital from several companies, which was, in fact, maintained by one person, the additions were held to be justified. The special leave petition filed against this decision was dismissed by the Hon'ble Supreme Court in the decision reported in NDR Promoters P. Ltd. Vs. PCIT [reported in (2019) 109 Taxmann.com 53].
In the decision of this Court in the case of B.R.Petrochem P. Ltd. Vs. ITO, Ward I(1), Chennai [reported in (2017) 81 Taxmann.com 424], it was held that where assessee received share capital from various contributors, in view of fact that those contributors were persons of insignificant means and their creditworthiness to have made contributions had not been established, impugned addition made by authorities below in respect of amount in question under Section 68 was to be confirmed.
In the decision of a Division Bench of this Court, to which, one of us (TSSJ) was a party, in the case of PCIT Vs. M/s.SRM Systems and Software P. Ltd. [TCA.No.875 of 2018 dated 17.2.2021], more or less an identical issue was considered and after taking note of the provisions of Section 68 of the Act, it was held as follows :
“8. In terms of the above provision, if the assessee offers no explanation about the nature and source of the amounts found credited in their books or the explanation offered by the assessee is not in the opinion of the Assessing Officer, satisfactory, the same so credited, may be charged to income tax, as the income of the assessee of that previous year. Therefore, to establish, the assessee was required to produce the creditworthiness of various persons, who are said to have made the share capital advance. Therefore, what is required to be established is the identity of the person, who has made the share capital advance, his creditworthiness and genuineness of the transaction. The onus is on the assessee to establish these factors and mere furnishing of the list of persons, who have claimed to have advanced towards share capital, will not constitute sufficient compliance of the onus placed on the assessee.
9.The CIT(A) has brushed aside the remand report submitted by the Assessing Officer, which would clearly indicate that the assessee failed to establish the genuineness of the amounts received as advance towards share capital. The CIT(A) has made an observation that the assessee has produced Form No.2, which is under the provisions of the Companies Act and as rightly submitted by the learned Senior Standing Counsel, the same will not contain the PAN numbers of the persons, who are said to have advanced monies.
In principal Commissioner of Income Tax, Central I v. NRA Iron & Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC), the issue, which feel for consideration, was whether the share capital/premium credited in the books of accounts of the assessee-company, the onus of proof is on the assessee to establish by cogent and reliable evidence of the identity of the investor companies, the creditworthiness of the investors and genuineness of the transaction to the satisfaction of the Assessing Officer. While answering the said issue, the Hon'ble Supreme Court held that it is for the assessee to prove by cogent and credible evidence that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee's knowledge. After referring to several decisions, the principles, which emerged
there from, were summed up in paragraph 11 of the judgment on the following terms:-
“11. The principles which emerge where sums of money are credited as Share Capital/Premium are : i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.
The Review application filed against the above decision was dismissed by a speaking order as reported in (2020) 117 taxmann.com 752 (SC). 12.From the facts of the case, which we have set out in the preceding paragraphs, it is clear that the assessee has not discharged the legal obligation cast upon them to prove the genuineness of the transaction, the identity of the creditors and creditworthiness of the investors, who should have the financial capacity to make the investment in question to the satisfaction of the Assessing Officer so as to discharge the primary onus. Since the assessee did not discharge the primary onus cast upon them, the question of the Assessing Officer to investigate the creditworthiness of the creditors/subscribers would not arise in the case on hand. Therefore, the above decision is a clear answer to the assessee's case, which would necessitate us to decide the same in favour of the Revenue.
13.We may also refer to the decision of the High Court of Calcutta in J.J.Development Private Ltd., vs. CIT, Calcutta IV [(2018) 100 taxmann.com 101 (Cal.)] wherein, it was held that when there was no plausible explanation that was furnished by the assessee to discharge the onus cast upon them and the identities of the alleged share applicants having not been established and the documents of the alleged share applicants carried by the assessee before the Assessing Officer did not reveal that the assessee claimed such alleged applicants had made in the assessee, there was no reason to interfere with the order of the Assessing Officer. The Special Leave Petition filed by the assessee therein was dismissed by the Hon'ble Supreme Court in the taxmann.com 102. 14.In the decisions referred to by Ms.G.Baskar in the case of CIT vs. Gopi Textiles Ltd., [(2007) 294 ITR 663 (Madras)] and the decision of the Hon'ble Supreme Court in CIT vs. Lovely Exports (P.) Ltd., [(2008) 216 CTR 195 (SC)], the stand taken by the assessee was accepted as the Court found that the assessee had furnished full information thereby discharging the onus cast upon him and once the onus is discharged by the assessee, it is for the Assessing Officer, who has to prove the contrary. In the case on hand, we find that the initial onus, which has been cast on the assessee has not be discharged by them.Reference to a statutory form prescribed under the Companies Act is of little avail, as it does not reveal the PAN numbers of the alleged investors.
In the light of the above facts, we have no hesitation to conclude that the Tribunal erred in confirming the order passed by the CIT(A) by observing that merely because the share applicants are from Andhra Pradesh that cannot be a reason to disallow the claim of the assessee. The factual position being, the Assessing Officer did not do so, but disallowed the same on the ground that the assessee has not furnished any details, viz., the names and addresses of the persons, who paid the share capital advances, the cheque numbers, the name of the bank, PAN numbers etc. Thus, the order passed by the Tribunal calls for interference.”
For the above reasons, we have no hesitation to hold that the impugned order passed by the Tribunal calls for interference.
In the result, the above tax case appeal is allowed, the impugned order passed by the Tribunal is set aside and the order passed by the Assessing Officer dated 27.12.2007 as confirmed by the CIT(A) is restored. The substantial questions of law framed are answered in favour of the Revenue.”
4.6 The A.O, in the case of M/s. Dhanwanthi Investments Ltd. has clearly brought out that company had no business income and had received a loan of Rs. 2 crore from M/s. Octopus Enterprises Pvt. Ltd., whose identity remains unverified. The A.O has also brought out material that the loan transaction of Rs. 2 crore was not genuine. The Hon’ble Supreme Court in the case of PCIT vs. NRA Iron & Steel Pvt. Ltd. has clearly held that it is the assessee to prove, through cogent and reliable evidence, that the transactions in question are genuine, as the relevant facts are exclusively within the assessee’s knowledge. In view of the above facts and respectfully following the order of Hon’ble High Court in assessee’s own case on identical transactions, we reverse the order of Ld. CIT(A) and sustain the addition of share application money of Rs 15.15 Cr made by the A.O .
Ground No.3 is relating to disallowance of depreciation of Rs.88,22,014/- on account of non production of bills in support of addition of fixed asset.
5.1 The assessee has claimed depreciation of Rs. 13,14,78,870/- on plant and machinery during the relevant financial year. The A.O has disallowed depreciation on machinery of Rs.2,20,55,035/- on the ground that the assessee has failed to produce invoices or bills for the machinery installed. However, before the Ld. CIT(A), the assessee has submitted copies of invoice bills in support of the installation of fixed assets and contended that the A.O had summarily disallowed the depreciation claim despite the fact that the relevant bills were available in the impounded material, specifically in a box file captioned “Fixed assets” as per Annexure ANN/MPM/B7D/5. The Ld. CIT(A), therefore has directed the A.O to arrive at the depreciation for the invoices/bills available on record, amounting to Rs. 2,20,42,544/-. The Revenue is in appeal on the ground that the Ld. CIT(A) admitted addition evidences without affording the A.O an opportunity to examine the same.
5.2 We have heard the rival submissions, and perused the materials available on record. The A.O has made the disallowances of depreciation for the reason that the assessee failed to furnish invoices and bills for the machinery installed. However, the assessee has produced the relevant bills before the Ld. CIT(A) and the Ld CIT(A) has also noted that the details of fixed assets were also available in the impounded box file. The Ld. CIT(A) has merely directed the A.O to compute the depreciation on the basis of the invoices/bills already available on record, amounting to Rs. 2,20,42,544/-. We do not find any infirmity in the order passed by the Ld. CIT(A). In view of this the ground of appeal is dismissed.
6. Ground No.4 is relating to deletion of addition towards the difference in the amount of royalty payments to M/s. Mcdowells & Co. amounting to Rs.16,14,525/- and M/s. Herbertson Ltd., amounting to Rs.12,14,200/-.
6.1 The A.O has made the addition of differences in royalty payments made to M/s. Mcdowells & Co. & M/s. Herbertson Ltd., as there was difference in the figures recorded in the books of accounts and the impounded material. The assessee has explained that the discrepancies arose because the figures in the impounded material were based on rough working and that certain items expenses had been rebooked and reclassified. However, the A.O has rejected the assessee’s explanation and reconciliation, and added sum of Rs. 28,28,725/- in the assessment order. On appeal, the Ld. CIT(A), after examining the ledger folio of M/s. Mcdowells & Co. & M/s. Herbertson Ltd., noted that royalty payment has been made of Rs. 43,92,350/- and Rs. 2,58,65,425/- respectively and have been paid through account payee cheques and the genuineness of payments could not be doubted. The Ld. CIT(A) thus found that the royalty figures recorded in the books of accounts were correct and deleted the addition.
6.2 We have heard the rival submissions, and perused the materials available on record. We observe that the A.O has made the addition of the difference in royalty amounts recorded in the books of account and those found in the impounded material. The assessee provided a reconciliation and explained the reason for the discrepancy. The Ld. CIT(A) after examining the ledger folios, concluded that the payments of Rs.43,92,350/- to M/s. Mcdowells & Co. and Rs.2,58,65,425/- to M/s. Herbertson Ltd., were made by the assessee-company through account payee cheque. Therefore, the Ld. CIT(A) deleted the addition. We find no infirmity in the order of Ld. CIT(A) and accordingly, we uphold the same.
Ground No. is relating to disallowance of preliminary expenses of Rs. 92,246/- being 1/5th of the expenses claimed u/s. 35D of the Act.
7.1 The A.O has made the disallowance of preliminary expenses of Rs. 4,61,229/-. On appeal, the Ld. CIT(A) has allowed 1/5th of preliminary expenses u/s. 35D of the Act, as the A.O has allowed 1/5th of such expenses in the subsequent year. The Revenue is in appeal against the allowance of 1/5th portion of the preliminary expenses.
7.2 We have heard the rival submissions, and perused the materials available on record. The A.O has disallowed preliminary expenses of Rs. 4,61,229/-. However, the Ld. CIT(A) has allowed deduction of 1/5th of the amount, as allowable u/s. 35D of the Act. The Ld. CIT(A) has also considered the fact that similar expenses were allowed by the A.O in the subsequent year. We find no infirmity in the order of Ld. CIT(A) and therefore, we uphold the same.
In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced on 25th April, 2025.