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Income Tax Appellate Tribunal, AHMEDABAD “C” BENCH
Before: SHRI N.K. BILLAIYA & SHRI MAHAVIR PRASAD
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:
This appeal by the Assessee is preferred against the order of the Ld. CIT(A)-2, Ahmedabad dated 18.02.2014 pertaining to A.Y. 2010-11.
ITA No. 411/Ahd/2015 2 . A.Y. 2010-11 2. The solitary grievance of the assessee is that the ld. CIT(A) erred in confirming the addition of unexplained cash credit of Rs. 15 lacs made by the A.O. on the ground that the appellant had failed to prove the bona fide and genuineness of transaction in respect of the company named as “Gurukul Vinimay Pvt. Ltd”.
Representatives of both sides were heard at length. Case records carefully perused and with the assistance of the ld. counsel relevant documentary evidences brought on record in the form of a paper book were considered in the light of Rule 18(6) of the ITAT Rules.
The appellant company was incorporated during the year under consideration with authorized capital of Rs. 10 lacs equity shares of Rs. 10 each amounting to Rs. 1 crore. The appellant company issued 338250 equity shares of Rs. 10 each at a premium of Rs. 30 per equity shares. The shares were allotted to the following persons:-
MAP Steels (India 1 Private Limited Details of Share Holding Patterns,
S.No Date of Name of the Address & Occuption of Allotee No. of Total Share Allotment Shareholder Equity Capital (Rs.) Shares of Rs10/-
1 26/03/2010 Manoj Nemani 13/383 (3-A) Parmat Road 35750 357,500.00
Civil Line, Kanpur-208001
Occ. Business
2 26/03/2010 Prashant Nemani 13/383 (3-A) Parmat Road 27750 277,500.00
Civil Line, Kanpur-208001
Occ. Business
ITA No. 411/Ahd/2015 3 . A.Y. 2010-11 3 26/03/2010 Praveen Nemani 13/383 (3-A) Parmat Road 15375 153,750.00
Civil Line, Kanpur-208001
Occ. Business
4 26/03/2010 Rakesh Kumar Dhurka H-81, Shastri Nagar 118750 1,187,500.00
Jodhour ( Rajasthan)
Occ. Business
5 26/03/2010 Siddharth Dhurka H-81, Shastri Nagar 25375 253,750.00
Jodhour ( Rajasthan)
Occ. Business
6 26/03/2010 Kushum Dhurka H-81, Shastri Nagar 25000 250,000.00
Jodhour ( Rajasthan)
Occ. Business
7 ' 26/03/2010 Laxmmi Narayan A 86, Part 1 20210 202,100.00
Gujarwal Town, Delhi
8 26/03/2010 Shakuntala Agrawal A 86, Part 1 3750 37,500.00
Gujarwal Town, Delhi
9 26/03/2010 Yakti Agrawal A 86, Parti 3750 37,500.00
Gujarwal Town, Delhi
10 26/03/2010 Sunil Goyal s-473 greater kailash 10 100.00
Delhi-11048
11 26/03/2010 Sharmila Goyai s-473 greater kailash 10 100.00
Delhi-11048
12 26/03/2010 Shitij Goyal s-473 greater kailash 10 100.00
Delhi-11048
13 26/03/2010 Shivani Goyal s-473 greater kailash 10 100.00
Delhi-11048 ,
ITA No. 411/Ahd/2015 4 . A.Y. 2010-11
14 26/03/2010 Gurukul vinimay 123, Cotton Street 37500 375,000.00 Private Limited Kolkata 700007 Occ. Business 15 26/03/2010 Winter-fresh Foods 1, English Cinema Bldg. 25000 250,000.00 Pvt Ltd Inside Panchkuva Gate, Khadia, Ahmedabad TOTAL 338250 3,382,500.00
During the course of the scrutiny assessment proceedings, the assessee was asked to furnish the complete details of the subscribers. We are pained to find that the Assessing Officer never questioned the appellant company how it could offer shares to complete strangers in violation of the specific provisions of the Companies Act by which a Private Limited Company is prohibited from inviting the public to subscribe for any securities of the company. Out of the 15 subscribers, 3 are from Kanpur, 3 are from Jodhpur, 6 are from Delhi, 1 from Kolkatta and 1 from Ahmedabad. The appellant company is based in Ahmedabad. There is nothing on record to show that the shares applicants are related to the promoters of the appellant company. Moreover, why would these persons (presumably strangers) purchase shares of a Private Limited Company which are not freely transferrable nor traded in the stock exchange.
We are further pained by the fact that the Assessing Officer in his wisdom has accepted the genuineness of the transaction in respect of 14 subscribers out of total 15 subscribers. The powers of the First Appellate Authority are co- terminus to that of the A.O. which means that the First Appellate Authority
ITA No. 411/Ahd/2015 5 . A.Y. 2010-11 can enhance the assessment after giving notice but we find that the FAA in his wisdom confirmed the assessment. The addition has been made only in respect of share allotment to Gurukul Vinimay Pvt. Ltd. We cannot and should not comment on the wisdom of the Assessing Officer and therefore, we will restrict our findings in respect of share allotment transaction to Gurukul Vinimay Pvt. Ltd.
The addition has been made on the ground that notices issued u/s. 133(6) of the Act to Gurukul Vinimay Pvt. Ltd. returned unserved. The financial statements of Gurukul Vinimay Pvt. Ltd. are exhibited at pages 42 to 51 of the paper book. The balance sheet of this company is as under:- GURUKUL VINIMAY PRIVATE LIMITED BALANCE SHEET AS AT 31ST MARCH, 2010
SOURCES OF FUNDS SCHEDULE AS AT 31.03.2010 AS AT 31.03.2009 AMOUNT (RS.) AMOUNT (RS.) Shareholders Fund Share Capital A 3120000.00 3120000.00 Reserve & Surplus B 147980000.00 149800000.00 151100000.00 151100000.00 II. APPLICATION OF FUNDS Investments C 150970000.00 150700000.00 Current assets, Loans & Advances Cash and Bank Balance D 86787.51 107802.61 Loans & Advances E 0.00 533753.00 86787.51 641555.61 Less: Current Liabilities & provisions F 2920.00 303498.00 NET CURRENT ASSETS 83867.51 338057.61 Miscellaneous Expenditure Preliminary Expenses 44.604.00 59472.00 Profit & Loss A/c 1528.49 2470.39 151100000.00 151100000.00
III. NOTES ON ACCOUNTS AND G SIGNIFICANT ACCOUNTING POLICIES
In terms of our separate report of even date
ITA No. 411/Ahd/2015 6 . A.Y. 2010-11
For PANSARI MUKESH & ASSOCIATES GURUKUL VINIMAY (P) Ltd. MUKESH PANSARI GURUKUL VINIMAY (P) Ltd Proprietor
Place: Kolkata Date: The 31st day of August, 2010
A cursory look at the balance sheet of this company shows that it does not have any asset; the assets consist of only cash and cash equivalents.
The Profit and Loss account of this company is as under:-
GURUKUL VINIMAY PRIVATE LIMITED ST MARCH, 2010 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31
I. INCOME SCHEDULE AS AT 31.03.2010 AS AT 31.03.2009 AMOUNT (RS.) AMOUNT (RS.) Interest Income 0.00 33753.00 Service Charges 26000.00 0.00 26000.00 33753.00 II. EXPENDITURE Administrative Expenses Audit Fees 1500.00 1500.00 Bank Charges 1875.10 1994.39 Compliance Fees 1000.00 1000.00 Filing Fees 4000.00 4500.00 General Expenses 670.00 5210.00 Preliminary Expenses W/Off 14868.00 14868.00 Postage & Courier 175.00 210.00 Printing & Stationery 550.00 1240.00 24638.10 30522.39
Profit/(Loss) Before Taxation Less: Provision for Taxation 1361.90 3230.61 Provision for Income Tax 420.00 998.00 Profit/(Loss) After Taxation 941.90 2232.61 Add: Brought forward from previous year (2470.39) (4703.00) Balance Carried to Balance Sheet 1528.49 2470.39
III. NOTES ON ACCOUNTS AND G SIGNIFICANT ACCOUNTING POLICIES
In terms of our separate report of even date
For PANSARI MUKESH & ASSOCIATES GURUKUL VINIMAY (P) Ltd.
MUKESH PANSARI GURUKUL VINIMAY (P) Ltd Proprietor
ITA No. 411/Ahd/2015 7 . A.Y. 2010-11
Place: Kolkata Date: The 31st day of August, 2010
A cursory look at the Profit and Loss account of this company shows that it has a nominal receipt of Rs. 26,000/- and the profit is a meager Rs. 1362 only. Yet this company has a reserve and surplus of Rs. 14,79,80,000/-.
Sadly, there is no clear definition of Shell Company in India. However, Securities Act enacted in the USA has defined Shell Company as follows.: “Securities Act Rule 405 and Exchange Act Rule 12b-2 define a Shell Company as a company, other than an asset-backed issuer, with no or nominal operations; and either:
• no or nominal assets; • assets consisting of cash and cash equivalents; or • assets consisting of any amount of cash and cash equivalents and nominal other assets.” In India, Shell companies haven't in law
Though, there is no definition of Shell Company but anything that throws light on this global menace cannot be brushed aside lightly. The financial statements of Gurukul Vinimay Pvt. Ltd. show that it has all the ingredients of a Shell Company . The appellant company has done transaction with this company and the transaction cannot be accepted as genuine by any stretch of imagination.
As mentioned elsewhere, a Private Limited Company cannot offer its share to general public because of the following provisions in the Companies Act.:
ITA No. 411/Ahd/2015 8 . A.Y. 2010-11 "Private Company" means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles, —
• Restricts the right to transfer its shares; • Except in a case of One Person Company, limits the number of its members to two hundred: Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member: Provided further that —
(A) persons who are in the employment of the company; and (B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and (iii) prohibits any invitation to the public to subscribe for any securities of the company."
(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members;
• Prohibits any invitation to the public to subscribe for any securities of the company.
We fail to understand how a Kolkata based company come to know that one Ahmedabad based company is offering shares at a premium. It appears that the appellant company has allotted shares to a complete stranger and in our understanding shares offered to a complete stranger is as good as offering to general public.
The share allotment contract in violation of a specific provision of a legislated law of the land is clearly hit by Section 23 of the Contract Act.:- S. 23. What considerations and objects are lawful, and what not.- The consideration or object of an agreement is lawful, unless-
ITA No. 411/Ahd/2015 9 . A.Y. 2010-11 It is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent ; or Involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful, is void.
In short three principles arises from the section: (i) an agreement or contract is void, if its purpose is the commission of an illegal act; (i) an agreement or contract is void, if it is expressly or impliedly prohibited by any law; (iii) an agreement or contract is void, it its performance is not possible without disobedience of any law.
Since shares have been allotted in contravention to the provisions of the Companies Act, the transaction is void and cannot be accepted as genuine.
The ld. counsel vehemently stated that full details were furnished which included the PAN number of the share applicant company. Insofar as such details are concerned, the Hon’ble High Court of Delhi in the case of N. Tarika Property Invest Pvt. Ltd. 51 Taxman.com 387 has made the following observations:-
“24. Recently in the case of CIT v. NR Portfolio (P.) Ltd [IT Appeal No. 1018 of 2011 and 1019 of 2011] vide Judgment dated 22nd November, 2013 we have held that mere production of PAN Number or assessment particulars does not establish the identity of a person. The identification of a person includes the place of work, the stall and the fact that it was actually carrying on business and further recognition of the said company/individual in the eyes of public. We have
ITA No. 411/Ahd/2015 10 . A.Y. 2010-11 further noticed that PAN Numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertainment of the active nature of business activity. PAN Number is allotted as a facility to revenue to keep track of transactions. The PAN Number cannot be blindly and without consideration of surrounding circumstances treated as sufficiently disclosing the identity of the individual. 25. Following CIT v. Nova Promoters & Fin/ease (P.) Ltd. [2012] 342 ITR 169/206 Taxman 207/18 taxmann.com 217 (Delhi)) we have held that in view of the link between the entry providers and incriminating evidence, mere filing of PAN Number, acknowledgement of Income Tax Returns of the entry providers, bank account statement is not sufficient to discharge the onus on the Assessee. 26. We have further held that the Court or Tribunal should be convinced about the identity, creditworthiness and genuineness of the transactions. The onus to prove the three factum is on the Assessee as the facts arc within the personal knowledge of the Assessee. Mere production of incorporation details, PAN Numbers or income tax returns may not be sufficient when surrounding and attending facts predicate a cover up. The production of incorporation details, PAN numbers or income tax details may indicate towards completion of paper work or documentation but genuineness, creditworthiness and identity of investment and the investors are deeper and obtrusive than mere completion of paper work or documentation. 27. As we have held that PAN Numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertainment of the active nature of business activity. PAN Number is allotted as a facility to revenue to keep track of transactions. The PAN Number cannot be blindly and without consideration of surrounding circumstances treated as sufficiently disclosing the identity of the individual. The mere filing of share application is not enough as the said application is not an unimpeachable document and does not on its own prove the genuineness or authenticity of the transaction. It can at best be treated as a corroborative document. Since the share application form is not an unimpeachable document, it cannot on its own be treated as sufficient for cross- verification of the transaction. We have already held that that mere production of PAN Number or assessment particulars does not establish the identity of a person. The identification of a person includes the place of work, the staff and the fact that it was actually carrying on business and further recognition of the said company/individual in the eyes of public.”
ITA No. 411/Ahd/2015 11 . A.Y. 2010-11 19. In the light of the aforementioned observations of the Hon’ble High Court of Delhi, PAN details would not prove the genuineness or authenticity of the transaction.
Considering the facts of the case in hand in totality in the light of the relevant provisions of the Compaies Act and the relevant provisions of the Contract Act, we have no hesitation in upholding the addition of Rs. 15 lacs. Appeal filed by the Assessee is accordingly dismissed.
Before parting, the time is ripe for our legislators to provide a suitable definition of Shell companies in the Companies Act and further provide that financial transactions with such Shell Companies shall be void ab initio.
Further, the least that is expected from the Assessing Officer is that when handling such cases (as the case in hand) they should go into the basic question as to how a Private Limited Company can allot shares to complete strangers when there is a specific prohibition in the Companies Act. The Taxing Authorities are entitled to look into the surrounding circumstances to find out the reality of such transactions as held by the Hon’ble Supreme Court in the case of Durga Prasad More 82 ITR 540. The Hon’ble Supreme Court in the case of Sumati Dayal 214 ITR 801 has further laid down that test of human probabilities has to be applied when considering the surrounding circumstances. Order pronounced in Open Court on 08 - 02- 2018 Sd/- Sd/- (MAHAVIR PRASAD) (N. K. BILLAIYA) JUDICIAL MEMBER True Copy ACCOUNTANT MEMBER Ahmedabad: Dated 08 /02/2018