ITO, NEW DELHI vs. M/S. APJ CONSTRUCTION PVT. LTD., NEW DELHI

Brief facts of the case are that the assessee is a private limited company. For the assessment year 2005-06 it had filed its return of income on 27/3/2006 declaring nil income. Assessment under section 143(3) of the Act was completed by order dated 2/4/2007. Subsequently basing on the report of the Investigation Wing of the Department to the effect that the assessee was indulging in taking accommodation entries, learned Assessing Officer reopened the assessment by issuance of notice under section 148 of the Act.

It could be seen from the assessment order that in the search and survey action that was carried out on 14/9/2010 at the residential and business premises of Sh. SK Jain and Sh. Virendra Jain, a number of companies were found to have been running from the residential as well as business addresses relating to those two people whereas all the books of accounts and other relevant papers of such companies were found from the residence of SK Jain and VK Jain and nothing was found at the addresses mentioned in the statutory records of such companies. It was inferred from such fact that those companies were run by these two persons who are controlling such companies through dubious Directors/Principal Officers of such companies and a careful examination of seized material including the computer hard discs and tally data, which contain the books of accounts of such companies along with other important and confidential documents of such companies are established that these two persons were in actual control of such companies. It was further found that these two persons using such companies to provide accommodation entries to various persons/companies in lieu of cash received from the recipient the clients through RTGS/cheque transactions made in the name of such companies. As a matter of fact, it was found that no proper offices of such companies were in existence and neither the books of accounts were maintained nor were found at such addresses.

Impugned assessment order further reveals that the total accommodation entries, amounting to Rs. 4.6 crores relevant for the year under consideration, were taken by the assessee as indicated in the report received from the Investigation Wing. The details of such transactions were incorporated in the assessment order. Learned Assessing Officer recorded that in the wake of investigations done by the Investigation Wing, which is an integral part of the Department, and non- compliance on the part of the assessee established that the assessee company had taken an amount of Rs. 4.6 crores from an entry operator which remains unexplained and escaped assessment in the assessment year 2005-06. Learned Assessing Officer further recorded that the said accommodation entries were taken by the assessee by giving equivalent amount in cash with commission at the rate of 1.75% to the entry operator. Learned Assessing Officer, therefore, on that score thought it fit to add a sum of Rs. 4.6 crores under section 68 of the Act and Rs. 8.05 Lacs under section 69 of the Act.

Assessment under section 147/143(3) of the Act was accordingly complete with an addition of Rs. 4.6 crores under section 68 of the Act and a sum of Rs. 8.05 Lacs under section 69 of the Act by order dated 13/3/2013.

Challenging the said addition, assessee preferred an appeal before the Ld. CIT(A). Ld. CIT(A) referred to the contents of the assessment order. Ld. CIT(A), at the outset, upheld the action of the assessing officer in competing the assessment under section 147/143(3) of the Act holding that the proper notice was served on the Directors of the company. Insofar as the addition relating to the share capital, according to the Ld. CIT(A) the learned Assessing Officer made the addition of Rs. 4.6 crores in section 68 of the Act and adding the amount of Rs. 8.05 Lacs as commission paid to the entry operator without making any effort to conduct any enquiry from any party as to whether the said party had made investments in the shares of the company are not and, therefore, the Assessing Officer had reopened the completed proceedings on the basis of information received from the Investigation Wing.

CIT(A) further recorded that the assessee had furnished to the detailed information like copies of share application forms, copies of income tax returns of the share applicants, their bank statements reflecting the payments for purchase of shares, copies of resolution for purchase of shares, copies of their financial statements along with audit reports etc in discharge of its burden as envisaged under section 68 of the Act and on a perusal of such material CIT(A) concluded that the income tax particulars and bank statements of the share applicants established the identity, the Balance Sheet of these applicants prove the creditworthiness and documents filed by way of copies of bank statements etc establish the genuineness of the transaction. Ld. CIT(A) therefore, reached a conclusion that the assessee had discharged the burdenof establishing the identity and the creditworthiness of the share applicants, and the genuineness of the transaction. He therefore deleted the additions made by the learned Assessing Officer.

Aggrieved by such deletion in the impugned order, Revenue filed this appeal. However, when the matter is called, neither the assessee nor any authorised representative entered appearance. Ld. DR filed the copy of letter from the learned Assessing Officer stating that the notice to the assessee was served by inspector of the office on 14/11/2019 and the enclosed the copy of the affixture report. If the assessee is available in such address, non-service of notice does not arise. If for any reason, the assessee is not available there, it is for the assessee to inform the income tax department his new address to make arrangements for service of such notice in the new address where the assessee would be available, or to deliver it to some authorised person, etc. Assessee does not seem to have left its new address with the Department for service of notice in the appeal. When the assessee is not to be found in the address available with the Department, and does not respond to the notice affixed at the last known address, it is not known how to serve a notice on the assessee. There is no point in ordering service of the notice to the very same address, without any prospect of such service. Assessee had created this situation. In the circumstances,basing on the record we proceed to hear the counsel for Revenue and decide the matter on merits.

It is the submission of the Ld. DR that, no doubt the assessee had meticulously completed the paperwork and filed the documents as enumerated by the Ld. CIT(A), but the fact remains that the entire transaction is clouded with doubt and during the assessment proceedings under section 147/143(3) of the Act there was no cooperation from the assessee. Merely because certain documents are filed by the assessee, it cannot be presumed that the assessee had established the identity and creditworthiness of the share applicants or the genuineness of the transaction. He further submitted that in view of the decisions in the case of PCIT vs. NRA Iron and Steel (P) Ltd (2019) 13 taxmann.com 48 (SC) and CIT vs. NR Portfolio Private Limited (2014) 42 taxmann.com 338 (Delhi) it is incumbent on the Revenue authorities to look at many factors which are beyond the meticulous paperwork, to reach the satisfaction as to the identity and creditworthiness of the share applicant and the genuineness of transaction. He therefore prayed to dismiss the appeal.

We have gone through the record in the light of the submissions made on behalf of Revenue. Impugned order is very clear in its import that by looking at the documents the Ld. CIT(A) felt satisfaction as to the identity and creditworthiness of the share applicants and the genuineness of the transaction. Ld. CIT(A) placed reliance on certain decisions of the Hon’ble jurisdictional and other High Courts. Ld. CIT(A) did not look at the corroborative evidence as to whether the particulars available on record, in fact, reflect the correct state of affairs or not. Generally, in cases where the assessee obtain accommodation entry, they are prone to do it in such a way that it should appear legal and genuine also. That is the reason why learned Assessing Officer was attempting to locate the reality beyond the papers.

In view of the decisions in PCIT vs. NRA Iron and Steel (P) Ltd (supra) and NR Portfolio Private Limited (supra) it is legitimate for the learned Assessing Officer to make investigation into the issues like - whether the two parties are related or known to each other, or mode by which parties approached each other? whether the transaction is entered into through written documentation to protect investment? whether the investor was an angel investor? what is the quantum of money invested? how the party believed the credit-worthiness of the recipient? what is the object and purpose of payment/investment? whether the share applicant is in existence and an independent entity? how the financial capacity of the share applicant to invest funds is proved? how the source of funds from which the high share premium was invested is dealt with by the assessee? why the investor companies had applied for shares of the Assessee Company at a high premium? in case the field enquiry conducted by the AO revealed that the investor companies were found to be non-existent, and the onus to establish the identity of the investor companies, was not discharged by the assessee?whether the assessee discharged their legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO? whether the assessee discharged the onus to establish the credit worthiness of the investor companies? did the assessee do anything more than mere mention of the income tax file number of an investor to discharge the onus under Section 68 of the Act? did the assessee do anything more than mere filing all the primary evidence in discharge of their onus to prove the identity of the investee? etc.

Record does not reveal that any of the above questions stood answered to clarify the doubts in the mind of the learned Assessing Officer as to the genuineness of the identity and creditworthiness of the share applicants or genuineness of the transaction. Unless and until satisfactory answers are obtained to these questions, it would be difficult to reach a positive conclusion as to the identity and creditworthiness of the share applicants and the genuineness of the transaction. Merely because the assessee was successful in completing the paperwork very meticulously or bringing into existence certain documents, the statutory obligation of the authorities does not get absolved merely because the assessee produced certain documents. It is incumbent on the authorities to verify the genuineness of such documents also in the light of the attending circumstances.

Having regard to the facts and circumstances of the case we are not satisfied in this case that the Ld. CIT(A) appreciated the facts and circumstances in their proper perspective before reaching the impugned conclusions basing on the document as produced by the assessee. We accordingly find it difficult to sustain the findings of the Ld. CIT(A). Consequently, the impugned order is set aside and the order of the learned Assessing Officer is restored.