ACIT CC-3(2), CHENNAI vs. BMP STEELS P LTD, THIRUVALLUR

2 to 1751, 1981, 1982 & 1788/Chny/2017 आयकर अपील सं./ITA Nos.:1744, 1745 & 1981/CHNY/2017 िनधा�रण वष� / Assessment Years: 2011-12, 2012-13 & 2013-14 The ACIT, M/s. BMP Steels Pvt. Ltd., Central Circle – 3(2), S.No.297/IDI & 297/ID3, v. Chennai – 600 034. New Gummidipoondi, Gummidipoondi Taluk, Thiruvallur Dist – 601 201. PAN: AAECB 1213B (अपीलाथ�/Appellant) (��यथ�/Respondent) राज�व क� ओर से /Revenue by : Shri S. Bharat, CIT-DR �नधा�रती क� ओर से/Assessee by : Shri S. Sridhar, Advocate सुनवाई क� तार�ख/Date of Hearing : 26.10.2021 घोषणा क� तार�ख/Date of Pronouncement : 17.12.2021 आदेश /O R D E R Per BENCH: These appeals filed by the Revenue in ITA Nos.1746 to 1751/CHNY/2017 are directed against common order of the learned Commissioner of Income Tax (Appeals) – 19, Chennai, dated 21.04.2017 and pertains to assessment years 2007-08 to 2012-13 and ITA Nos.1744, 1745 & 1981/CHNY/2017 are directed against orders of the learned Commissioner of Income Tax (Appeals) – 19, Chennai, dated 21.04.2017 & 22.05.2017 and pertains to assessment years 2011-12 to 2013-14. The cross appeals filed by the assessee and Revenue in ITA Nos.1982 & 1788/CHNY/2017 are directed against order of learned Commissioner of Income Tax 3 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 (Appeals) – 19, Chennai, dated 22.05.2017 and pertains to assessment year 2013-14. Since, facts are identical and issues are common, for the sake of convenience, these appeals are heard together and are being disposed off, by this consolidated order.

“1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.

2. The learned CIT(A) erred in deleting the addition of Rs. 11,00,00,000/- made by the Assessing Officer towards unexplained cash credit u/s 68 of the Income Tax Act, 1961, in the assessment for A.Y 2007-08 passed u/s 113 (3) r.w.s 153A & Explanation (viii) to section 153B of the IT Act, 1961 in the case of the assessee. 2.1 The ld. CIT(A) ought to have appreciated that from the enquiry conducted at Kolkata and the documentary evidence brought on record by the Assessing Officer during the assessment proceedings clearly showed that the alleged share holders were only paper companies whose credit worthiness and the genuineness of the transactions were not established by the assessee. 2.2 Having regard to the documentary evidences gathered during the assessment proceedings indicating that the alleged shareholder companies were only paper companies having no credit worthiness, the ld. CIT(A) is justified in allowing relief to 2.3 The Ld. CIT(A) ought to have appreciated that mere production of documents such as PAN, Income Tax assessment particulars, financial statements and Annual returns filed before ROC is not sufficient to establish credit worthiness and genuineness of the transactions under consideration when surrounding and attending facts which were brought on record indicated a cover up and that the documents produced by the assessee at best reflect proper paper work and documentation but genuineness and credit worthiness are deeper and obstrusive aspects.

2.4 The ld. CI”F(A) ought to have appreciated that the decisions of Hon’ble Supreme Court in the case of M/s Lovely Exports Pvt Ltd (216 CTR 195 - January 2008) and M/s Steller Investments Ltd (251 ITR 263 - July 2000) are distinguishable one to the facts of the case of the assessee in that, in the present case, the investing companies were non-existent and as such the question of reopening of assessment in the hands of the non-existent investors does not arise.

2.5 The ld.CIT(A) ought to have appreciated that the decision of Hon’ble High Court of Delhi in the in the case of M/s Navodaya Castle ( P) Ltd. reported as (2014) 367 ITR 306, that certificate of incorporation, PAN, etc., were not sufficient for the purpose of identification of subscriber company, when there was material to show that subscriber was a paper company and not a genuine investor was upheld by the Hon’ble Supreme Court in (2015) 56 taxmann.com 18 (SC) and since the facts are identical in the assessee’s case, the ld.CIT(A) ought to have confirmed the addition.

2.6 The ld.CIT(A) ought to have appreciated the decision of Hon’ble Calcutta High Court in the case of Rajmandir Estates Pvt. Ltd. vs. Pr.CIT, Kolkatta III (2016) 70 taxmann.com 124, which, though rendered in the context of application of section 263 with respect to introduction of Share capital / Share premium, held that money allegedly received on account of share application 2.7 Having regard to the documentary evidence gathered during search and assessment proceedings establishing that the alleged share holders were only paper companies whose credit worthiness and the genuineness of the transactions were not established, the ld.CIT(A) ought to have confirmed the addition made by the Assessing Officer u/s.68 of the IT Act, towards unproved share capital investment in the assessment passed u/s 143(3) r.w.s. 153A & Explanation (viii) to section 153B of the IT Act, 1961 in the case of the assessee, for A.Y. 2007-08.

3. 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.”

2. The CIT(Appeals) erred in not considering the grounds challenging the validity of the search assessment framed for the Assessment year under consideration without assigning proper reasons and justification and ought to have appreciated that the search assessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.

3. The CIT(Appeals) erred in partly sustaining the share capital/premium received as unexplained cash credit in so far as the five companies had tabulated in para 28 of the impugned order on the application of section 68 of the Act and consequently erred in sustaining the addition aggregating to Rs.4,85,99,568/- in the computation of taxable total income 6 to 1751, 1981, 1982 & 1788/Chny/2017 without assigning proper reasons and justification.

4. The CIT(Appeals) failed to appreciate that the provisions of section 68 of the Act had no application to the facts of the case and ought to have appreciated that the conditions prescribed for discharging initial onus to establish the cash credit entries were fully satisfied and discharged, thereby vitiating the findings in para 30 of the impugned order. 5. The CIT(Appeals) failed to appreciate that the cross verification referred to was not put to the appellant and ought to have appreciated that the sustenance of the said addition even after noticing the gross violation of the principles of natural justice was wrong, erroneous, unjustified, incorrect and not sustainable in law. 6. The CIT(Appeals) failed to appreciate that the details with regard to the share capital/premium received from the said five companies were fully furnished and hence ought to have appreciated that the non consideration of relevant materials would vitiate the decision rendered in para 30 of the impugned order. 7. The Appellant craves leave to file additional grounds / arguments at the time of hearing.”

10 to 1751, 1981, 1982 & 1788/Chny/2017 6. In response to show cause notice, the assessee had filed detailed written submission on 27.03.2015 and claimed that share capital received from various companies in India and Abroad and from individuals is genuine which is supported by necessary evidences including identity of subscribers to the share capital, genuineness of transaction and their credit worthiness. The assessee further submitted that it has filed details of names, addresses, PAN of the share applicants and amount received & allotments made to them along with their company master data as available on Ministry of Corporate Affairs website, certificate of incorporation of share subscribers, Memorandum and Articles of Association, ITR acknowledgement copy filed for the relevant assessment year, audited financial statements, copy of relevant bank statements and confirmation letters from share applicants along with source of funds for investment in assessee company. The assessee further submitted that the shareholders of Assessee Company were also directors in some of investor companies and thus, the identity of subscriber companies is not doubtful. The directors of certain companies were available for cross-examination as and when called for. The assessee further submitted that your proposed addition towards share capital and share premium on the basis of report of Investigation Department, Kolkata, more 11 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 particularly, on the basis of statement of certain individuals is incorrect because the purported statement recorded from some individuals claimed to have been the directors of subscriber companies were not provided to us. The assessee further submitted that out of 18 companies named in Investigation report, the assessee had received share capital from only 2 companies namely M/s. Khaitan Udyog Private Ltd., and M/s. Dimension Holding Private Ltd., except this, the assessee is not aware about their association with other companies. The assessee had also submitted that out of certain subscriber companies, the Department has assessed M/s. Kaner Investment Pvt. Ltd., and M/s. Josan Deposit and Advances Pvt. Ltd., and added back the amount of investment made in their company. The said two companies have challenged their assessments before Appellate Authorities and ITAT and the ITAT after considering facts has held that those two companies have explained source for investment made in our company and thus, it is very clear that source of source has been explained by our subscriber companies and hence, no addition can be made u/s.68 of the Act.

7. The AO after considering relevant submissions of the assessee and has also taken note of various facts including report of (FT&TR)

12 to 1751, 1981, 1982 & 1788/Chny/2017 division of Ministry of Finance, Govt. of India, has accepted the explanation of the assessee with regard to share capital received from foreign companies. Insofar as, share capital received from companies situated at Kolkata, the ld.AO on analysis of various facts including evidences filed by the assessee to prove identity of subscribers and other evidences including bank statements opined that the assessee has failed to establish genuineness of transactions of share capital receipt from companies situated at Kolkata. The AO further noted that the assessee’s inability to present itself for cross- examination or to produce directors of the investor companies is ample proof that the assessee company has indulged in routing its unaccounted money through different channels and layers provided by the accommodation entry operators with the help of employees, who act as dummy directors of Jama kharchi/shell/paper companies. The AO had discussed the issue at length in light of statements of Shri Jogendra Pradhan, director of certain companies and Shri Navneet Singhania, purported entry provider in light of financial statement of investor companies and their bank statements, came to the conclusion that share capital including share premium received from certain companies is an accommodation entry for converting the assessee’s unaccounted income into share capital. According to the AO, the investor 13 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 company bank statement reveals fact that they have deposited cheque or other transfer entries before transferring funds to beneficiary accounts leaving behind minimum balance, which clearly shows their inability to establish source for investment in assessee- company. The AO had also discussed financial strength of investor companies, more particularly M/s. Umra Properties & Finance Pvt. Ltd., and M/s. Sourabh Venture Capital Trust and observed that although two companies had total assets running into several crores, had hardly earned any net profit which shows the low profit viability of such Jama kharchi/shell/paper companies with no intention to do any prudent business and sufficiently evident that these were only created for providing accommodation entries. The AO had also discussed the issue in light of statement recorded from Shri Pankaj Agarwal, director of assessee-company in light of his denial of knowing certain individuals who claim to be directors of investor Company and observed that Shri Pankaj Agarwal had contacted Shri Ramkishan Ajitsaria, who is employee of Shri Anand Singhania, one of the entry provider. Therefore, he opined that share capital including share premium received from companies situated at Kolkata is nothing but accommodation entries to route unaccounted income of the assessee through various layers and 14 to 1751, 1981, 1982 & 1788/Chny/2017 thus, made additions u/s.68 of the Act, as unexplained credit. The relevant findings of the AO are as under: “6. To conclude, the following points are put forth: a. During the relevant assessment year the assessee received Rs. 11,00,00,000/- as share capital including share premium from various Jama Kharchi / Shell /paper Companies based in Kolkata. b. On the basis of information received from Investigation wing that assessee was involved in taking accommodation entries, the assessee was asked to produce the investors. Even after sufficient time was accorded, the assessee had failed to do so. c. The assessee has failed to prove the identity, creditworthiness and genuineness of the transactions beyond reasonable doubt. As these criteria are to be proven collectively, failure of even one of the criterion, renders the transaction as not genuine. The onus to prove the three factum is on the assessee as the facts are within the personal knowledge of the assessee. d. 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 mostly 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. e. The fact that assessee failed to produce the Directors of Jama Kharchi / Shell /paper Companies who had invested in the form of share capital & premium even after ample time was given, shows that these were people who were completely unrelated to the assessee and as such, all the entries were merely accommodation entries. f. The equity shares of the company have been allotted at a very high premium upto Rs.90 per share, only on the basis of Discounted Cash Flow Method and no other report has 15 to 1751, 1981, 1982 & 1788/Chny/2017 been filed to substantiate the basis for fixing such a high price for the equity shares of a private limited company. g. The assessee company, being a private limited company has received Rs.12,86,92,720/- of share premium and Rs. 3,21,73,180/- of share capital, during the year from persons / entries other than Directors and their family members. Out of this, Rs. 12,86,92,720/- is received as share premium from entities based at Kolkata. It is pertinent to note that the assessee company had not placed any advertisement for issuance of share capital. A substantial portion of share capital & premium has been received from parties, totally unrelated to the assessee company or its directors. In private limited companies, it is normally the directors / family members of Directors who invest in the shares of the company. h. The analysis of the bank statements of the investor companies show that for every issue of cheque, there is a deposit of cheque on the same on previous day. This clearly show, that transaction was a camouflage transaction and to create a semblance of legitimate transaction. The receipt of money through banking transactions does not reflect genuine business activity. I-he said investor does not reflect genuine business activity. The said investor companies did not have their own profit-making apparatus and were not involved in business activity. They merely rotated the money through bank accounts which does not reflect their creditworthiness or genuineness of the transaction. i. The assessee has clearly attempted to camouflage the accommodation entries with the colour of share premium / share capital investment, j. The report of the Income Tax Inspectors sent to the addresses of these entities reveal that the said premise was either locked or not used for a longtime. k. The assessee company has not paid any dividend / interest to the said investor companies. The profit motive, normally present in any investment company / investor is clearly absent in these cases. l. On a closer look into the surrounding circumstances of this case, it is appropriate to mention that the reality of the transactions do not seem credible and the test of human

It is seen that the word/phrase ‘any sum credited’ in the books of assessee maintained for any previous year. The expression ‘any sum credited’ has not been specifically defined in the provision. Thus, it would extend to all the amounts credited in the books of account. Any sum credited in the books of account, either find its place either on the income side of profit and loss account or in the liability side of the balance sheet. Items credited to the profit and 17 to 1751, 1981, 1982 & 1788/Chny/2017 loss account are themselves income and hence there can be no reason to make addition once again for them. Items appear on the liability side of the balance sheet can be loans or share capital etc. Once there is specific reference section 68 for applying it to ‘any sum credited’, there can be no reason to restrict its application only to loss and not to ‘share capital’. The burden of proof under section 68 can be no different in respect of issue of share capital by closely held companies vis-â-vis loans or gifts.

It was held by various high Courts including apex court in numerous cases that that the burden under this section is discharged by the assessee only when the assessee proves three things to the satisfaction of the Assessing Officer, viz., identity of the creditor, capacity of the creditor and genuineness of the transaction. Onus under section 68 can be said to have been discharged only when the assessee proves identity and capacity of the creditor along with the genuineness of transaction to the satisfaction of the Assessing Officer. All the three constituents are required to be cumulatively satisfied. If one or more of them is absent, then the Assessing Officer can lawfully make addition. In the instant case the assessee failed to satisfactorily explain above mentioned three constituents cumulatively.

In the instant case the assessee is a closely held company where the shares are issued to one family members or close friends/ relatives, the burden of proof rests on the company to properly explain the Identity and capacity of shareholders along with the genuineness of the transact ions. The argument of the assessee that he was not obliged to explain the genuineness of share capital after having furnished preliminary details about the shareholders etc., is not capable of acceptance and hence rejected. As the assessee-company failed to cumulatively prove to the satisfaction of the Assessing Officer, the identity and capacity of the shareholders along smith the genuineness of the transactions there can be no escape from section 68.

Further with the insertion of proviso to section 68 by the Finance Act, 2012 with effect from 01-04-2023 empowers the Assessing Officer to examine the genuineness of the share capital in the case of a company in which public are not substantially interested. As per this proviso where any share capital etc. is 18 to 1751, 1981, 1982 & 1788/Chny/2017 credited in the case of closely held company, the explanation given by such company shall be deemed to be not satisfactory, unless the resident shareholder offers an explanation about the nature and source of such sum so credited and such explanation found to be satisfactory by the Assessing Office. The essence of this amendment is that a closely held company is required to satisfy The Assessing Officer about the share capital etc. Issued by it, in the absence of which, addition under section 68 can be made in the hands of the company. Therefore, the amendment to section 68 by insertion of proviso is clarifictory and hence retrospective. The assessee’s case is clearly covered by this proviso. Hence, it is concluded that Rs. 11,00,00,000/- is the unexplained credit recorded in the books of assessee, and is deemed to be not explained satisfactorily and is brought to tax u/s 68 of the Income tax Act.”

8. Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the ld. CIT(A), the assessee has reiterated its arguments taken before the AO in light of certain judicial precedents. The sum and substance of arguments taken by the assessee before the CIT(A) are that share capital received from certain companies situated at Kolkata is genuine investment between two parties and supported by necessary evidences including documents to show true identity of subscriber of share capital and further documents establishing genuineness of transactions and creditworthiness of parties. The assessee further submitted that it has furnished complete details of identity of subscribers including their name, addresses, PAN number, their 19 to 1751, 1981, 1982 & 1788/Chny/2017 financial statements, bank statements and master data of companies obtained from the website of Ministry of Corporate Affairs, Govt. of India and further, confirmation letters from the investor companies which clearly establishes identity of creditors. The assessee had also proved genuineness of transactions by filing bank statements of creditors which proves the fact that share capital received from those companies is routed through proper banking channel. The assessee had also filed their financial statement to prove capacity of the subscriber to explain source for investments made in Assessee Company. The assessee further submitted that once initial burden cast upon the assessee was satisfactorily explained then the burden shifts to the AO to prove otherwise. In this case, the AO by disregarding all evidences filed by the assessee has made additions only on the basis of investigation report of Income Tax Department, Kolkata that too without providing copy of said report and purported statement of certain individuals relied upon by the AO to the assessee for cross- examination of those witnesses in contravention of rules of natural justice. The assessee further submitted that it is a well settled principle of law by the decisions of various High Courts and Hon’ble Supreme Court, more particularly, in the case of CIT vs. Lovely Exports (P) Ltd., 216 CTR 195, that once name and address of 20 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 subscriber are given to the AO then 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 Act.

21 to 1751, 1981, 1982 & 1788/Chny/2017 The assessee company directors have been directors in some of the investor companies and they are very much available for any examination by the AO. The AO had accepted investment received from foreign companies as genuine after considering the report of foreign tax division. Therefore, he opined that the assessee has satisfactorily discharged its onus of providing identity, genuineness of transaction and credit worthiness of parties and hence, there is no reason for the AO to make addition towards share capital including share premium u/s.68 of the Act. The relevant findings of the CIT(A) are as under:- 23. The justification submitted by the assessee is examined. Assessee has been able to establish the identity of the companies investing in the shareholding of the assessee company by means of RoC incorporation details, PAN and other identifications, IT returns, RoC returns filed, audited financial statements, bank account ledger extracts, share application forms, share holding registers and confirmation letters fromshare applicants with explanation for source of funds for investments etc. The investments have come through baking channels. Most importantly, the share capital subscribers have continued to hold the shares till day and have claimed the said shareholding in their respective balance sheets. Assessments have been done in the cases of these investment companies and addition of “unexplained investments” has also been those in some of these companies. The assessee company directors have been directors in some of the investment companies and they have been very much available for any examination by the AO or by the Investigation Directorate. The foreign company investments have been duly verified by the AO through Foreign Tax Division and have been accepted as validly explained investments. The assessee has also pointed out that it has not

24. There have been a few orders favoring the stand of the Revenue on this issue of bringing the share application money and share premium received for taxation in the hands of the recipient company. In the case of M/s.Frostair Pvt. Ltd. (46 Taxmann.com 11), the Hon’ble Delhi High Court has held that where the PAN/GIR no. of share holders was not correct and when they were not available at addresses given and when they were not filing the IT returns with concerned officers, then the addition u/s.68 and consequent initiation of penalty proceedings were justified. In the case of M/s. Hindon Forge Pvt Ltd. (25 Taxmann.com 239), the Hon’ble Allahabad High Court had noted that the method and manner adopted by the assessee had clearly established that it was playing fraudwith revenue and since genuineness of transactions were not established, there was no question of shifting burden u/s.68 on revenue and that the addition of unsecured loans to income of assessee was justified. In the case of M/s. Nova Promoters and Finlease Pvt. Ltd. (18 Taxmann.com 217), the Hon’ble Delhi High Court has held that no addition u/s.68 can be made unless the AO verifies that there was a specific involvement of assessee company in the modus operandi followed by the entry providers and that the particulars of entry providers is wrong. Further in the case of M/s.NR Portfolios Pvt Ltd. (ITA No.134 of 2012), the Hon’ble Delhi High Court has held that the assessee was duty bound to provide the whereabouts of the share applicants and if the said whereabouts become unverifiable, the onus shifts back to the assessee. In the case of M/s. Vaibhav Cotton Pvt. Ltd (26 Taxmann.com 352) the Hon’ble Indore Bench ITAT, has held that the stand of the AO in taking a view that the share transactions were not genuine is correct when the money was routed by the said investors and cash was deposited immediately prior to issue of cheques to the assessee and accounts of those companies were closed immediately after transfer of funds. In these cases, the Hon’ble courts have reiterated the onus cast upon the assessee to prove the identity of the share applicants and the genuineness of the share subscription transactions.

23 to 1751, 1981, 1982 & 1788/Chny/2017 25. There have been a plethora of cases on this issue. However, the decision of the Hon’ble apex court in the cases of M/s. Steller Investments Ltd (Supra) and M/s. Lovely Exports Ltd (supra) have been the watershed cases on this issue. Almost all the decisions thereafter have discussed the above decisions of the apex court. The three decisions of the jurisdictional Madras High Court in the cases of M/s. Electro Polychem Ltd. (supra), M/s. Pranav Foundations Ltd. (supra) and M/s. Victory Spinning Mills Ltd. (supra) have also clearly held that the share application monies and share premium received are liable to be taxed in the hands of the share applicants / share holders as long as their identity is proven and they are known assessees filing regular returns of income. The Hon’ble Jurisdictional ITAT Benches in Chennai have also held similar view in the given facts and circumstances. In the instant case, the identity and the regularity of income-tax returns filing is proved in the hands of the share holders. The said share holders continue to be the share holders in the assessee company eligible for all the rights and privileges associated with the respective share holding. The Department has in fact preceded against some of the share holders and brought the investment transactions for taxation in the hands of the said share holders. Considering the totality of reasons as above, and the compelling decisions of apex court, jurisdiction of High Court and jurisdictional ITAT on this issue, I am of the considered view that the investments made by respective share holders are liable to be taxed in the hands of respective share holders only. In view of the same, the issue is decided in favour of the assessee and the grounds of appeal are allowed. The amounts brought to taxation u/s.68 in the hands of the assessee on account of share application / share premium monies received stand deleted for all the years.”

10.1 The ld.DR further referring to various case laws including the decision of Hon’ble Supreme Court in the case of Lovely Exports Pvt. Ltd.,(supra) and Stellar Investments Pvt. Ltd., (supra) and argued that facts of those two cases are distinguishable to the facts of the present case because in the present case, the investor companies were not existent and thus, the findings recorded by the Hon’ble Supreme Court that the Department is free to reopen the assessment of subscribers once identity of the subscriber is proved 26 to 1751, 1981, 1982 & 1788/Chny/2017 is not applicable to the present case. The ld.DR further referring to the decision of Hon’ble Delhi High Court in the case of Navodaya Castle (P) Ltd., report in (2014) 367 ITR 306 argued that mere furnishing of certificate of incorporation, PAN, etc., is not sufficient for the purpose of identification of subscriber company, more particularly when other material evidences show that subscriber company were paper company and not a genuine investor. The Hon’ble Kolkata High Court in the case of Rajmandir Estates Pvt. Ltd., vs. PCIT, (2016) 70 taxmann.com 124 had considered an identical issue of unexplained cash credit in light of accommodation entry provider case and held that money allegedly received on account of share application can be roped in u/s.68 of the Act, if the source of receipt is not satisfactorily established by the assessee company. The sum and substance of ratio laid down by above judgments are that mere furnishing of certain documentary evidences to prove identity, genuineness of transactions and credit worthiness is not sufficient enough to come out of the shadow of provisions of Section 68 of the Act. But, what is required to be proved is genuine identity of subscriber of share capital, genuineness of transaction and capacity of subscriber to establish source for investment. In this case, the AO has brought out various facts to dispel the arguments of the assessee in light of their 27 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 financial statements as per which none of the subscriber companies have sufficient source of income to establish capacity for huge investments made in Assessee Company. The ld.CIT (A) without appreciating these facts simply deleted additions made by the AO. Hence, his order should be reversed and additions made by the AO should be sustained.

11.1 The ld.AR for the assessee further referring to three charts filed during the course of hearing submitted that the first chart shows companies with common management which has established source for deposits as per which 4 companies from whom assessee has received share capital did not find place in the investigation report. Therefore, amount received from these companies cannot be considered as unexplained cash credit only on the basis of investigation report of Income Tax Department. Further, in two companies namely M/s. Umra Properties & Finance Pvt. Ltd., and 30 to 1751, 1981, 1982 & 1788/Chny/2017 M/s. Josan Deposits and Advances Ltd., the director of Assessee Company is also directors. Therefore, it is highly inappropriate to allege that director of the assessee company themselves involved in getting accommodation entries from their own companies to the assessee company. Insofar as M/s. Kamadhenu Fincap Ltd. and M/s. Kaner Investment Ltd., those two companies are not in the list of entry providers prepared by the investigation department and these two companies cannot be considered in light of report of the Department. He further submitted that the second chart shows share capital received from certain companies who have established sources for such subscription. In this chart, there are 56 companies and out of this 56 companies only 11 companies which find place in investigation report prepared by the Income Tax Department, Kolkata. Therefore, unless the AO brought on record evidences to prove that all those companies are in the list of entry providers prepared by the Department, a generalized opinion cannot be a basis for making addition towards share capital received from said companies, when the assessee has filed enormous details to prove the identity of those companies. He further submitted that out of 56 companies, 11 companies are in the list of investigation report and from those companies, the assessee has received share capital from assessment years 2008-09 to 2012-13. Further, the assessee 31 to 1751, 1981, 1982 & 1788/Chny/2017 has placed on records their financial statements to prove genuineness of transactions and capacity of the subscribers. As per the details filed by the assessee, those 11 companies are having sufficient source to explain investments made in share capital of Assessee Company. It is a well settled principle of law by the decision of Hon’ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure P Ltd., 394 ITR 680, that before insertion of proviso to Section 68 of the Act by the Finance Act, 2012 w.e.f. 01.04.2013 i.e., assessment year 2013-14, the source of sources need not to be explained by the assessee. Therefore, once assessee files necessary documentary evidence to prove the availability of sources in their books of accounts to explain investments made in Assessee Company, then the assessee does not required to establish source of sources in the subscriber company. The CIT(A) after considering relevant facts and has also by following judicial precedents has rightly held that the AO has erred in making addition towards share capital including share premium u/s.68 of the Act.

11.2 The ld.AR for the assessee further referring to paper-book filed by the assessee submitted that the assessee has received major portion of share capital from M/s. Josan Deposit and Advances Pvt. Ltd., a company based at Kolkata. The AO of M/s. Josan Deposit 32 to 1751, 1981, 1982 & 1788/Chny/2017 and Advances Pvt. Ltd., has assessed the investment made by the company in the share capital of the assessee company as unexplained investment. M/s. Josan Deposit and Advances Pvt. Ltd., has challenged the assessment order before the appellate authorities. The ITAT, Kolkata Benches in ITA No.2096/KOL/2017 for assessment year 2008-09 has considered additions made by the AO u/s.68 of the Act and held that the assessee is a genuine company and not an entry provider and further, deleted additions made by the AO towards unexplained cash credit u/s.68 of the Act. Similarly, the AO has made additions towards share capital received from M/s. Kaner Investment Ltd., and M/s. Kaner Investment Ltd., has challenged the additions made by the AO. The ITAT, Kolkata Benches in ITA No.2095/KOL/2017 has deleted additions made by the AO. From the above, what is clear is that those two companies are not accommodation entry providers but genuine investors who had established sources of investments made in Assessee Company. The CIT(A) after taking note of all these facts and also by following certain judicial precedents has rightly held that additions made by the AO towards share capital including share premium cannot be sustained. Hence the order of CIT(A) should be upheld.

11.3 In this regard, the assessee has relied upon the following judicial precedents in support of its arguments.

37 to 1751, 1981, 1982 & 1788/Chny/2017 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 sender 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.

40 to 1751, 1981, 1982 & 1788/Chny/2017 15. In light of above settled legal position, if we examine facts of present case, there is no doubt, the assessee has discharged burden cast upon it under section 68 of the Income-tax Act, 1961 in respect of share capital received from share capital subscribers. The AO has not disputed the fact that the assessee has furnished various evidences to prove identity of the subscribers. The assessee has filed name and address of subscribers, their PAN numbers, details of amount received and allotment made to them, return of allotment filed with Registrar of companies, company master data as available on website of Ministry of Corporate Affairs, Certification of Incorporation along with Memorandum and Articles of Association, ITR acknowledgement, audited financial statements, copies of relevant bank statements and confirmation letters from share applicants along with source of funds for investment in assessee’s company. The evidences filed by the assessee clearly satisfy the condition prescribed u/s.68 of the Act. The assessee not only proved identity, but also established credit worthiness of the parties which is evident from the fact that all subscriber companies financial statement shows source of income to explain investments made in Assessee Company which is further supported from the fact that all transfer of funds was through proper bank accounts. It is a well established legal principle of law by the decisions of various courts 41 I.T.A. Nos.1744 to 1751, 1981, 1982 & 1788/Chny/2017 including the Hon’ble Supreme Court in the case of CIT vs. Stellar Investments Pvt. Ltd., supra, where it was clearly held that once alleged bogus shareholders details are provided to the AO then the AO is free to proceed to reopen the assessments of alleged bogus shareholders but sum received by the assessee cannot be treated as unexplained credit u/s.68 of the Act. In this case, although the assessee has filed various details, but the AO disregarded all evidences filed by the assessee and has made additions solely on the basis of investigation report without confronting those reports and statements recorded from those individuals to the assessee for rebuttal.

23.1 The Hon’ble Supreme Court in the case of CIT vs Lovely Exports Pvt Ltd (2008) 216 CTR 195 (SC) has considered an identical issue. The relevant findings of the court are as follows:- “If share application money is received by assessee- company from alleged bogus shareholders, whose names are given to Assessing Officer, then 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 assessee company 23.2 In the case of M/s.Steller Investments Ltd. (2000) 251 ITR 263 (SC), the Hon’ble Supreme Court has agreed with the lower courts in holding that the share capital subscribed needs to be brought to taxation in the hands of the subscriber. The gist of the decision of the Hon’ble Supreme Court in this case has been as under. “The subscribed capital of the assessee company had been increase. The ITO assessed the company accepting the increase in the subscribed capital. The Commissioner concluded, in section 263 proceedings, that the ITO, did not carry out detailed investigation in as much as there was a device of converting 55 to 1751, 1981, 1982 & 1788/Chny/2017 black money by issuing shares with the help of formation of investment company. Holding that there was failure on the part of the ITO to enquire into the genuineness of subscribers of the share capital, the commissioner set aside the assessment order. The Tribunal reversed the order of the Commissioner and also rejected the reference application. On an application u/s. 256(2), the High Court held that no question of law arose from the Tribunal Order. The High Court also observed that it was evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, could the amount of share capital be regarded as undisclosed income of the assessee. It held that it might be that there were some bogus shareholders in whose names shared had been issued and the money might have been provided by some other persons and if the assessment of the persons who were alleged to have really advanced the money was sought to be reopened, that would have made sense but there was no reason why this amount of increased share capital could be assessed in the hands of the company itself. On appeal to the Supreme Court, the SC was in agreement with the High Court. Plainly, the Tribunal came to a conclusion on facts and on interference was called for”.

23.3. The Hon’ble Madras High Court has also considered this issue on many occasions. In the case of M/s. Electro Polychem Ltd. (2007) 294 ITR 661(Mad-), the Hon’ble Madras High Court has held as under:

“The assessee filed its returns for the AYrs 1998-99 and 1999- 2000. The AO made additions in respect of the share application money u/s.68 of the Act, finding that the assessee had brought the undisclosed income by way of share applications in fictitious names and passed order accordingly. Hence, the assessee preferred appeals to the Commissioner of Income Tax (Appeals). The Commissioner deleted the addition made by the Assessing 56 to 1751, 1981, 1982 & 1788/Chny/2017 Officer for the assessment year 1998-99 and upheld the addition made for the assessment year 1999-2000. Against the said order, the Revenue as well as the assessee preferred appeals before the Income Tax Appellate Tribunal. The Tribunal allowed the appeal preferred by the assessee and dismissed the appeal preferred by the Revenue hence, the above appeals.

In CIT v. Stellar Investment Ltd.(1991) 192 ITR 287 (Delhi), where the increase in subscribed capital of the respondent- Company, accepted by the Income Tax Officer and rejected by the Commissioner on the ground that a detailed investigation was required regarding the genuineness of subscribers to share capital, as there was a device of converting black money by issuing shares, with the help of formation of an investment, which was reversed by the Tribunal, the Delhi High Court 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.

The view taken by the Delhi High Court in CIT v. Stellar Investment Ltd. (1991) 192 ITR 287 was confirmed by the Apex Court and the same was reported in CIT v. Stellar Investment Ltd. (2001) 251 ITR 263. Applying the ratio laid down in the decision cited supra, we do not find any substantial question of law arises for our consideration. Accordingly, these appeals are dismissed. Consequently, M.P.No.1 of 2007 is also dismissed.”

23.4. In the case of M/s.Pranav Foundations Ltd. (2014) 229 Taxmann 58, the Hon'b1e Madras High Court has passed a judgment on similar issue as under.

“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 57 to 1751, 1981, 1982 & 1788/Chny/2017 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 CIT 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.

Resultantly, we find no merits in the appeal. Hence, no substantial question of law arises for consideration. In the result, the appeal is dismissed. No costs.”

58 to 1751, 1981, 1982 & 1788/Chny/2017 23.5. In the case of M/s.Victory Spinning Mills Ltd., (2014) 228 Taxmann 69, the Hon’ble Madras High Court has further held as under:- “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 AO 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 have accepted their investment. That apart, the names and identity of the share applicants is also available on record. When the nature and source of the amount so invested is known, it cannot be said to be undisclosed income in the hands of the Spinning Mill. 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 considerations cannot be a ground to make addition towards unexplained cash credit. Therefore, the addition of such subscriptions as unexplained credit under Section 68 of the Act 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.

59 to 1751, 1981, 1982 & 1788/Chny/2017 The CIT(A) and the Tribunal, on facts, have found that the transaction in this case is beyond the pale of controversy and the assessees have explained in no uncertain terms the nature and source of the income. We find no reason to differ with the said findings of the Commissioner of Income Tax (Appeals) and the Tribunal, based on facts. 23.6. Similar issue has been considered by the Hon’ble Delhi High Court. In the case of M/ s.Value Capital Services Pvt Ltd.(2008)307 ITR 334. The gist of said decision is as under:

The assessee had received an amount of Rs.51 lakhs as share application money from 33 persons. The AO required the assessee to produce all these persons. It appeared that some of them did appear. The AO accepted the explanation and the statement given by the three of these persons but found that the response from the others was either not available or was inadequate. On this basis, the AO added an amount of Rs.46 lakhs pertaining to 30 of the persons to the income of the assessee. Held that it is quite obvious that is very difficult for the assessee to show the creditworthiness of strangers. If the revenue had any doubt with regard to their ability to make the investment, their returns might be reopened by the department. In any case, what was clinching was the additional burden on the revenue. It must show that even if the assessee did not have the means to make the investment, the investment made by the assessee actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. As this had not been done in so far as the present case was concerned, addition made was to be deleted.

60 to 1751, 1981, 1982 & 1788/Chny/2017 23.7. Further, in the case of M/s. Goodview Trading Pvt. Ltd.(2016) 77 Taxmann.com 204, the Hon’ble High Court of Delhi has held as under on the facts explained below:

The assessee was engaged in investment business with capital markets. It received share application money from different companies. The AO added the amount received by the assessee from share applicant companies u/s.68 opining that the genuineness of the identity of the share applicants, genuineness of the transactions and the investor’s creditworthiness had not been established. On appeal, the CIT(A) based upon detailed analysis concluded that the share applicants had sufficient net worth and finances to invest in the assessee’s offering with the premium of Rs.23 crores. The Tribunal also concurred with the view of the CIT(A). On appeal to the High Court: As against the AO tabular appreciation of the facts, the CIT(A) found that the net worth of the companies that had invested in the course of the share offerings of the applicant was sustained. It is quite evident from the CIT (A)’s reasoning in paragraph 4.3, that the materials clearly pointed to the share applicants’ possessing substantial means to invest in the assessee’s company. The AO seized certain material to say that minimal or insubstantial amounts was paid as tax by such share applicants and did not carry out a deeper analysis or rather chose to ignore it. In these circumstances, the inferences drawn by the CIT (A) are not only factual but facially accurate. Having regards to these circumstances, no question of law, least a substantial question arose.

61 to 1751, 1981, 1982 & 1788/Chny/2017 23.8 In a recent decision, the Hon,ble High Court of Bombay in the case of M/s. Gagandeep Infrastructure Pvt Ltd.(2017) 394 ITR 680, has held that the share capital and share premium received by the assessee company from alleged bogus share holders is liable to be taxed in the hands of the said share folders by the revenue. The order of the Hon’ble High Court is as under:

“We find that the proviso to Section 68 of the Act has been introduced by the Finance Act 2012 with effect from 1st April, 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 of the Act as in force during the subject years has to be read/understood as though the proviso added subsequently effective only from 1st April, 2013 was its normal meaning. The Parliament did not introduce to proviso to Section 68 of the Act with retrospective effect nor does the proviso so 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 of the Act is immaterial and does not change the interpretation of Section 68 of the Act both before and after the adding of the proviso. In any view of the matter the three essential tests while confirming the pre proviso Section 68 of the Act laid down by the Courts 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 facts 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 CIT v/s. Lovely Exports (P)Ltd. (Supra) in the context to the pre- amended Section 68 of the Act has held that where the Revenue 62 to 1751, 1981, 1982 & 1788/Chny/2017 urges that the amount of share application money has been received from bogus shareholders then it is for the ITO to proceed by reopening the assessment of such shareholders 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. In the above circumstance and particularly in view of the concurrent finding of fact arrived at by the CIT(A) and the Tribunal, the proposed question of law does not give rise to any substantial question of law. Thus not entertained.” 23.9 The Hon’ble Bombay High Court in the case of CIT Vs. Orchid Industries (P) Ltd. (2017) 387 ITR 136 (Bom) had considered an identical issue in light of additions made by the Assessing Officer towards share application money u/s.68 of the Income Tax Act, 1961, and after considering relevant facts has 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, 63 to 1751, 1981, 1982 & 1788/Chny/2017 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.

23.10 The ITAT., Nagpur Bench in the case of ACIT Vs. Swiftsol (I) Pvt.Ltd. (2018) 171 ITD 577 (Nag) had considered an identical issue of additions made towards share capital u/s.68 of the Income Tax Act, 1961, and after considering relevant submissions held that merely because the assessee failed to produce directors of investing company personally for confirmation, amount in question could not be added as assessee’s income u/s.68 of the Act. The relevant findings of the Tribunal are reproduced as under:-

The assessee in this case has duly submitted all the necessary details in respect of the share application received which included name, address, company incorporation details, share application details, balance sheets, PAN, bank statements, acknowledgment of return filed and confirmation from the parties. The Assessing Officer has not found any fault in these submissions except that he wanted to verify the details by asking the assessee to produce the promoter/director of those companies. The assessee has duly discharged its onus and no onus was cast on the assessee in the impugned assessment year to produce the persons or the books from the investing companies. The requirements of enquiry and obtaining explanation from the person making the investment in these circumstances have been brought into the statute books by amendment to section 68. These have been clearly held prospective as they were effective only from 1-4-2013. Admittedly, the present assessment year being assessment year 2010-11, the Assessing Officer was not justified to take 64 to 1751, 1981, 1982 & 1788/Chny/2017 up the issue of obtaining explanation from the Directors/promoters of the investing companies. [Para 14] Thus, the deletion of addition by the Commissioner (Appeals) is justified. Accordingly, there is no infirmity in the order of the Commissioner (Appeals) and hence the same is upheld. [Para 15] 23.11. The Chennai ITAT, has also considered similar issue in a host of cases. In the case of M/s.Midas Golden Distilleries Pvt.Ltd. (2009) 124 TTJ 25, the Hon’b1e ITAT has held, inter- alia, as under: “The assessee raised share capital and received share application money from seven persons aggregating Rs.1394.15 lakhs. The assessee had brought on record complete identity of shareholders by providing their addresses and confirmations to the effect that they had contributed to the share capital of the assessee company. The money received were through banking channel. They all were shown to be regularly assessed to income-tax. Assessment particulars with respect to each of them were made available to the assessing authority. Two companies which had made contributions of Rs.340 lakhs and Rs.745 lakhs respectively were assessed with the same AO who assessed the assessee. The Assessing Authority himself had found that both these applicants in their respective accounts had disclosed investment made with the assessee. However, the share application money was treated as cash credits and added to the assessee’s income.

Held that dispute all the material available with the assessing authority and discreet enquiries as were made within the scope of his powers, the assessing authority found that there remained a mystery as to whom the money really belonged. Even though there were circumstances leading to suspicion, yet having taken an action u/s.132 and enquiries made in the assessment proceedings, the assessing authority had not brought any positive material or evidence to indicate that the share 65 to 1751, 1981, 1982 & 1788/Chny/2017 application money as such represented assessee’s own undisclosed money brought back in the garb of share capital. Merely because of his subjective satisfaction that the source of availability of money with the shareholder or their creditworthiness were not established, the AO could not treat the genuinely raised share capital as deemed income u/s.68.

In the even the intermediary companies were to be taken as conduits or persons without requisite creditworthiness and even if they were to be treated as bogus shareholders, then also nothing stopped the Revenue to reopen their individual assessments in accordance with law and bring to tax such unexplained money in their respective hands. Accordingly, the addition was to be deleted.”

Order pronounced in the court on 17th December, 2021 at Chennai.