MARUDHARA MARKETING PVT. LTD.,NEW DELHI vs. ACIT, CENTRAL CIRCLE- 30, NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

2. On the facts and circumstances of the case, the learned Ld. CIT (A) erred both on facts and in law, in sustaining, the order passed by the Ld. Assessing Officer is bad and liable to be quashed as the same has been framed on the basis of satisfaction note which does not reveal any incriminating evidence leading to undisclosed income.

3. On the facts and circumstances of the case, the learned Ld. CIT (A) has erred, both on facts and in law, in sustaining the action of AO in completion of proceedings u/s 153A r. w .s. 153C, of the Act, solely on the basis Unverified/ unratified/ unsubstantiated/ unconfirmed statement of Shri Mul Chand Malu.

4. That on the facts and circumstances of the case, the learned Ld. CIT (A) has erred, both on facts and in law, in sustaining the assessment by the Ld. AO and making additions of Rs.1,79,99,800/- on account of share capital and share premium, ignoring the facts and circumstances of the case.

5. That on the facts and circumstances of the case, the learned Ld. CIT (A) has erred, both on facts and in law, in sustaining the assessment by the Ld. AO and in making addition of Rs.1,79,99,800/- on account of share capital and share premium, despite the fact that the assessee has discharged the onus cast upon it under section 68 of the Income-tax Act.

6. That on the facts and circumstances of the case, the learned Ld. CIT (A) has erred, both on facts and in law, in sustaining the assessment by the Ld. AO and in making addition of Rs.1,79,99,800/- despite the fact that no incriminating documents were found during the course of search.

7. On the facts and in the circumstances of the case Ld. CIT (A) has erred both on facts and in law, in sustaining the action of AO violating the principle of natural justice by not providing opportunity for cross-examination of persons, whose statements have been relied upon by the AO, in spite of specific request made by the appellant in assessment proceedings as well as before CIT(A).

8 That the impugned assessment order is arbitrary, illegal, bad in law and in violation of rudimentary principles of contemporary jurisprudence.”

2. Briefly stated the facts necessary for adjudication of the issue at hand are : Assessee company being a private limited company engaged in agricultural activities. Original assessment of the assessee was processed under section 143 (1) of the Income-tax Act, 1961 (for short ‘the Act’) at the returned income but on the basis of search and seizure operation carried out u/s 132 of the Act at the various business and residential premises of Kuber Group of cases including premises of Shri Vikas Malu at 1/8, West Patel Nagar, New Delhi. From the searched premises, documents belonging to assessee were found and Assessing Officer (AO) of Vikas Malu recorded satisfaction note that certain documents were found pertaining to assessee, which were handed over to AO of the assessee on the basis of which satisfaction note was recorded and notice u/s 153A read with section 153C was issued. AO framed assessment u/s 153A r/w section 153C by making addition of Rs.1,79,99,800/- on account of share capital and share premium on failure of the assessee to provide necessary evidence to prove the share capital and share premium to prove the identity of creditors, genuineness and creditworthiness of the company providing share capital/share application money/share premium and assessed the total income of the assessee at Rs.1,80,49,600/-.

Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

6. In the backdrop of the aforesaid facts and circumstances of the case, ld. AR for the assessee contended inter alia that in the satisfaction note recorded by the AO of the searched person, no discussion on the document seized pertaining to the assessee has been made; that addition has not been made on any of the incriminating material unearthed during the search and seizure operation at the Kuber Group of cases and Vikash Malu on 09.10.2014; that the AO has made the addition only on the basis of material already supplied by the assessee and not on any incriminating material; that the notice u/s 143 (2) of the Act was required to be issued on 30.09.2015 which was never issued till date; that alleged seized material appeared in the satisfaction note of the searched person does not find mention in the satisfaction note recorded by the AO of the assessee; that assessment which was not pending on the date of search cannot be reopened u/s 153C if there is no incriminating material found and in these circumstances, reassessment cannot be made and relied upon on the decisions in CIT vs. Index Securities (2018) 304 CTR 0067 (Del.) and CIT vs. Singhad Technical Education 397 ITR 344 (SC). He also relied upon the decisions in CIT vs. RRJ Securities 380 ITR 612 (Del.) and CIT vs. Swar Agency 397 ITR 400 (Del.).

7. As against this, ld. DR for the Revenue in order to repel the arguments addressed by the ld. AR for the assessee filed detailed submissions which are extracted for record and ready perusal as under :-

“ As mentioned in para 5 of the assessment order, the assessee was asked to produce the directors of the companies from which share capital/share premium was received during the year. The assessee never produced those persons before the AO. Therefore, onus cast on the assessee was never discharged. Further, the share capital and share premium has been received from a company based in Kolkata. The profit shown by the said subscriber M/s Binapani Merchandise Pvt. Ltd. was only Rs. 16,437/-. On perusal of bank statement of M/s Binapani Merchandise Pvt. Ltd. submitted by the assessee before the AO, it may be noted that the cheques are received and immediately another cheque is issued by M/s Binapani. At any given point of time, the balance is in the range of Rs.38,000-80,000. Hence, the surrounding circumstances show that M/s Binapani Merchandise Pvt. Ltd is an entry provider company. The reliance on statements of Mr. Moolchand Malu and Mr. Vikas Kumar Agarwal of Kolkata is only to substantiate the findings. The fact remains that the assessee never produced the directors of M/s Binapani Merchandise Pvt. Ltd before the AO and therefore onus cast on the assessee was never discharged.

1.

4. Prem Castings (P.) Ltd. Vs CIT [2017] 88 taxmann.com 189 (Allahabad) where Hon'ble Allahabad High Court held that additions u/s 68 warrant being sustained where the identities & creditworthiness of investors in the assessee company are not established by the assessee & are also proved incorrect by the Department's Assessee Information System. In such circumstances, assessee cannot resist the additions on grounds that it did not have opportunity to cross-examine relevant witnesses. An assessee company cannot hide behind the shell of a corporate entity to feign ignorance regarding the identity of any person who invests in its share capital. Prem Castings (P.) Ltd. Vs CIT 2018-TIOL-274-SC-IT where Hon'ble Supreme Court held as follows: "We do not find any merit in this petition. The Special Leave Petition is accordingly dismissed."

5. CIT Vs MAF Academy (P.) Ltd (361 ITR 258) where Hon'ble Delhi High Court held that where assessee, a private limited company, sold its shares to unrelated parties at a huge premium and thereupon within short span of time those shares were purchased back even at a loss, share transactions in question were to be regarded as bogus and, thus, amount received from said transactions was to be added to assessee's taxable income under section 68 It was held as follows:

"53 In contrast to the above judgments, in the present case, the Assessee is a private limited company and in the factual matrix, we have held that the Assessee has not been able to discharge the initial onus and has not been able to establish the identity, creditworthiness of the share applicants and the genuineness of the transaction. Though, in our considered opinion, none of the above judgments, referred to by the Assessee respondent, are applicable in the facts of the present case and in view of the findings recorded by us hereinabove.

"20. Now, when we go to the order of the Tribunal in the present case, we notice that the Tribunal has merely reproduced the order of the Commissioner of Income-tax (Appeals) and upheld the deletion of the addition. In fact, they substantially relied upon and quoted the decision of its co-ordinate Bench in the case of MAF Academy P. Ltd., a decision which has been overturned by the Delhi High Court, vide its judgment in CIT v. MAF Academy P. Ltd. [2014] 206 DLT 277 ; [2014] 361 ITR 258(Delhi)). In the impugned order it is accepted that the assessee was unable to produce directors and principal officers of the six shareholder companies and also the fact that as per the information and details collected by the Assessing Officer from the concerned bank, the Assessing Officer has observed that there were genuine concerns about identity, creditworthiness of shareholders as well as genuineness of the transactions.

Navodaya Castle Pvt Ltd Vs CIT ([2015] 56 taxmann.com 18 (SC)/[2015] 230 Taxman 268 (SC) SLP of assessee dismissed by Hon'ble Supreme Court

Konark Structural Engineering (P.) Ltd. Vs DCIT [2018] 90 taxmann.com 56 (Bombay) where Hon'ble Bombay High Court held that where assessee-company received certain amount as share capital from various shareholders, in view of fact that summons served to shareholders under section 131 were unserved with remark that addressees were not available, and, moreover, those shareholders were first time assessees and were not earning enough income to make deposits in question, impugned addition made by AO under sec. 68, was to be confirmed

8. Pratham Telecom India Pvt Ltd Vs DCIT (2018-TIOL- 1983-HC-MUM-IT) where Hon'ble Bombay High Court held that mere production of PAN numbers & bank statements is sufficient enough to discharge the burden on taxpayer to escape the realms of Section 68

9. J J Development Pvt Ltd Vs CIT (2018-TIOL-395-SC-IT) where Hon'ble Supreme Court held that when the assessee fails to provide a convincing explanation with regard to the cash credit before the AO and the same was accepted by the ITAT being a fact finding body, the same cannot be disputed further. Apex Court dismissed the Special Leave to Petition filed by the assessee

10. DRB Exports (P.) Ltd. Vs CIT [2018] 93 taxmann.com 490 (Calcutta) where Hon'ble Calcutta High Court held that where AO made addition under section 68 in respect of increase in share capital of assessee-company, in view of fact that addresses of most of purported shareholders were identical and they could not be traced out despite notice issued under section 131, Tribunal was justified in confirming impugned addition

11. CIT Vs Nipun Builders & Developers (P.) Ltd (30 taxmann.com 292, 214 Taxman 429, 350 ITR 407, 256 CTR 34) where Hon'ble Delhi High Court held that where assessee failed to prove identity and capacity of subscriber companies to pay share application money, amount so received was liable to be taxed under section 68. It was held as follows:

"12. A perusal of the order of the Tribunal shows that it has gone on the basis of the documents submitted by the assessee before the AO and has held that in the light of those documents, it can be said that the assessee has established the identity of the parties. It has further been observed that the report of the investigation wing cannot conclusively prove that the assessee's own monies were brought back in the form of share application money. As noted in the earlier paragraph, it is not the burden of the AO to prove that connection. There has been no examination by the Tribunal of the assessment proceedings in any detail in order to demonstrate that the assessee has discharged its onus to prove not only the identity of the share applicants, but also their creditworthiness and the genuineness of the transactions. No attempt was made by the Tribunal to scratch the surface and probe the documentary evidence in some depth, in the light of the conduct of the assessee and other surrounding circumstances in order to see whether the assessee has discharged its onus under Section 68. With respect, it appears to us that there has only been a mechanical reference to the case-law on the subject without any serious appraisal of the facts and circumstances of the case.

12. CIT Vs Nova Promoters & Finlease (P) Ltd (18 taxmann.com 217, 206 Taxman 207, 342 ITR 169, 252 CTR 187) where Hon'ble Delhi High Court held that amount received by assessee from accommodation entry providers in garb of share application money, was to be added to its taxable income under section 68. It Was held as follows:

"41. In the case before us, not only did the material before the Assessing Officer show the link between the entry providers and the assessee-company, but the Assessing Officer had also provided the statements of Mukesh Gupta and Rajan Jassal to the assessee in compliance with the rules of natural justice. Out of the 22 companies whose names figured in the information given by them to the investigation wing, 15 companies had provided the so-called "share subscription monies" to the assessee. There was thus specific involvement of the assessee-company in the modus operandi followed by Mukesh Gupta and Rajan Jassal. Thus, on crucial factual aspects the present case stands on a completely different footing from the case of Oasis Hospitalities (P.) Ltd. (supra).

13. CIT Vs Ultra Modern Exports (P.) Ltd (40 taxmann.com 458, 220 Taxman 165) where Hon'ble Delhi High Court held that where in order to ascertain genuineness of assessee's claim relating to receipt of share application money, Assessing Officer sent notices to share applicants which returned unserved, however, assessee still managed to secure documents such as their income tax returns as well as bank account particulars, in such circumstances, Assessing Officer was justified in drawing adverse inference and adding amount in question to assessee’s taxable income under section 68. It was held as follows:

"9. As noticed previously, the CIT (A) was of the opinion that the assessee had discharged the basic onus which was cast upon it after considering the ruling in Lovely Exports (P.) Ltd.'s case (supra). The material and the records in this case show that notice issued to the 5 of the share applicants were returned unserved. The particulars of returns made available by the assessee and taken into consideration in paragraph 3.4 by the AO in this case would show that the said parties/applicants had disclosed very meager income. The AO also noticed that before issuing cheques to the assessee, huge amounts were transferred in the accounts of said share applicants. This discussion itself would reveal that even though the share applicants could not be accessed through notices, the assessee was in a position to obtain documents from them. While there can be no doubt that in Lovely Exports (P.) Ltd. (supra), the Court indicated the rule of "shifting onus" i.e. the responsibility of the Revenue to prove that Section 68 could be invoked once the basic burden stood discharged by furnishing relevant and material particulars, at the same time, that judgment cannot be said to limit the inferences that can be logically and legitimately drawn by the Revenue in the natural course of assessment proceedings. The information that assessee furnishes would have to be credible and at the same time verifiable. In this case, 5 share applicants could not be served as the notices were returned unserved. In the backdrop of this circumstance, the assessee's ability to secure documents such as income tax returns of the share applicants as well as bank account particulars would itself give rise to a circumstance which the AO in this case proceeded to draw inferences from. Having regard to the totality of the facts, i.e., that the assessee commenced its business and immediately sought to infuse share capital at a premium ranging between Rs. 90-190 per share and was able to garner a colossal amount of Rs. 4.34 Crores, this Court is of the opinion that the CIT (Appeals) and the ITA T fell into error in holding that AO could not have added back the said amount under Section 68. The question of law consequently is answered in favour of the Revenue and against the assessee."

14. CIT Vs Frostair (P.) Ltd (26 taxmann.com 11, 210 taxman 221) where Hon'ble Delhi High Court held that where details furnished by assessee about share applicants were incorrect, addition under section 68 was proper. It was held as follows:

“12. The application of the ratio of every decision by a quasi-judicial body like the ITAT has to be nuanced, and contextual. Thus, while the findings in Divine Leasing, Oasis International or even Lovely Exports might be preceded by a general discussion of the correct approach to be adopted by the AO, in a given case where additions are sought to be made on account of share application moneys not found to be genuine, the basic facts of the case cannot be lost sight of. On a proper application of the ratio in Oasis - and subsequently, the Division Bench ruling in CIT v. Nova Promoters & Finlease (P) Ltd [2012J 206 Taxman 207/18 taxmann.com 217 (Delhi) it is evident that the AO took into account - if we may say so, in exhaustive detail, after a painstaking examination of the records after two or three layers of scrutiny- all the materials and held that the claim that the amounts claimed to be received on account of share applications were not based on genuine transactions. The CIT (A) upheld that order, after calling for a remand report. In these circumstances, the conclusion of the Tribunal, that the assessee had discharged its onus, appears to be based on a superficial understanding of the Jaw, and an uninformed one about the overall facts and circumstances of the case.

13. In view of the above reasons, the questions of law in these appeals are answered in favour of the revenue. The orders of the Assessing Officer are restored. The appeals are to succeed and are therefore allowed.”

16. CIT Vs Empire Builtech (P.) Ltd (3661TR 110) where Hon'ble Delhi High Court held that u/s 68 it is not sufficient for assessee to merely disclose address and identities of shareholders; it has to show genuineness of such individuals or entities. 17. CIT Vs Focus Exports (P.) Ltd (51 taxmann.com 46 (Delhi)/[2015] 228 Taxman 88 where Hon'ble Delhi High Court held that where in respect of share application money, assessee failed to provide complete address and PAN of certain share applicants whereas in case of some of share applicants, there were transactions of deposits and immediate withdrawals of money from bank, impugned addition made under section 68 was to be confirmed

18 PCIT Vs Bikram Singh [2017] 85 taxmann.com 104 (Delhi)/[2017] 250 Taxman 273 (Delhi)/[2017] 399 ITR 407 (Delhi) where Hon'ble Delhi High Court held that even if a transaction of loan is made through cheque, it cannot be presumed to be genuine in the absence of any agreement, security and interest payment. Mere submission of PAN Card of creditor does not establish the authenticity of a huge loan transaction particularly when the ITR does not inspire such confidence. Mere submission of ID proof and the fact that the loan transactions were through the banking channel, does not establish the genuineness of transactions. Loan entries are generally masked to pump in black money into banking channels and such practices continue to plague Indian economy 19 Rick Lunsford Trade & Investment Ltd Vs CIT [2016] 385 ITR 399 (Cal) The assessee did not produce books of account or bank accounts or shareholders' register. Eight out of fifty six persons from shareholders' list provided by assessee denied subscription. Remaining notices returned with endorsement "not known". Hon'ble Calcutta High Court held that unexplained share application money was rightly treated as assessee's income 20 Rick Lunsford Trade & Investment Ltd Vs CIT [2016- TIOL-207 -SC-IT] (Supreme Court) where Hon'ble Supreme Court dismissed SLP upholding that it is open to the Revenue Department to make addition on account of alleged share capital u/s 68, where the assessee company has failed to show genuineness of its shareholders.”

Reasons recorded for initiation of proceeding u/s 153C of the I.T. Act, 1961 in the case of M/s. Marudhara Marketing Pt. Ltd. PAN: AACCM8162G

In Kuber group of cases search & seizure action at the residential/business premises of the persons was conducted on 09.10.2014. During the course of search, various incriminating documents/books of account were found and seized. While examining the seized documents of this group, the A.O of the searched person came across with certain documents which according to him do not belong to the searched person but belong of M/s Marudhara Marketing Pvt. ltd. the person other than the searched person He has also recorded his satisfaction that action u/s 153C of the Act' is attracted in this case of person other than the searched person. The said documents are as under :-

S. Searched Annex- Page Date/ Information/ No. Premises ure Period Details Warrant in the name A-4 Page Ledger of Sh. Vikas Malu A-6 No.30- accounts found PAN:ACZPM0292M A-7 33 of Green valley 1/9, West Patel Nagar, Page Resorts. Trial New Delhi no.26 Balance. & 49 Journal entry in the Books of Blooming Dale Resorts purchase of shares amounting of Rs.5,00,000/-. Amounting to Rs.10,00,000/- given to Blooming Dale Resorts and 10,00,000/- to Kuber Breweries Ltd.

The AO of the searched person has handed over the above seized documents with his satisfaction to the undersigned being the AO of M/s Marudhara Marketing Pvt. Ltd., the person other than the person searched for initiating action u/s 153C of t he Act. I have carefully gone through these seized documents and have patiently applied my mind in the seized documents as handed over to me by the A.O. of the searched persons namely Sh. Vikas Malu. 1/8, West Patel Nagar, New Delhi from where these documents were seized along with the satisfaction and I am satisfied that these seized documents have a bearing on the determination of the total income M/s Marudhara Marketing Pvt. Ltd, PAN:AACCM8162GH for the relevant assessment years referred to in sub-section (1) of section 153A of the Act and that it is a fit case for initiating proceedings u/s 153C of the Act. Accordingly, notice u/s 153A r.w.s 153C of the I.T. Act, 1961, M/s Marudhara Marketing Pvt. Ltd. PAN:AACCM8162GH for A.Ys. 2009-10 to 2014-15 are being issued Place : New Delhi. sd/- Date : 06.9.16 (Rakesh Kumar) Assistant Commissioner of Income Tax Central Circle 31, New Delhi.”

“ …… “The provisions of s. 153C of the Act was amended to obviate practical difficulties which arose in its interpretation from time to time. The amendment made by Finance (No.2) Act, 2014 as the Legislature found that different authorities were assigning different meanings to the provisions. As such, a state of affairs resulted in ambiguities which gave rise to conflicting decisions on subject, the Legislature in its wisdom thought it prudent to change the language thoroughly explicit. It so happened from time to time that during the course of conducting a search and seizure operation u/s. 132 of the Act, money, bullion, jewellery or other valuable article or thing or books of account or documents belonging to another person were seized. On one hand, the seized materials were sent to the Assessing Authority having jurisdiction over the other person and on the other hand, the Assessing Authority receiving such seized material acts mechanically initiates proceedings His 153C of the Act without any verification. Such interpretation is never the intendment of the Legislature. The Legislature found that multiplicity of proceedings resulted and confusion reigned supreme. In order to eliminate such contradictory situations, it was made clear that the Assessing Authority while receiving such seized material belonging to the other person shall be satisfied that such material must be of incriminating nature", Thus, the Amending Act, in fact, explained the procedure to deal with a situation where incriminating materials found in course of a search belonged to a third person. The provision was amended to stop unintended consequences and to prevent undue hardship on the third party who is not being- searched. The scheme that even a partnership deed or a disclosed bank statement or projected statement was enough to assume jurisdiction u/s. 153C of the Act was curtailed to the extent of incriminating materials found. In fact a logical conclusion was drawn to that effect. In fact, the interpretation of the existing provisions was defeating the object and purpose of the enactment and was leading to infructuous litigation without any rhyme or reason. By such interpretation, there were two assessment orders standing on the same issues raising identical tax demands for the same assessment years which is an absurd proposition. This based on the maxim Ut Res Magis Valeat Quam Pareat. The construction which would reduce the legislature to a futility should be avoided; an alternative that will introduce uncertainty, friction or confusion into the working of the system should be rejected. An interpretation which leads to unworkable results and brings about absurdity cannot be accepted. In any case, such a situation was never the intention of the Legislatures. To do away with this judicial error, the Act was amended to cure the obvious omission and to clarify the intention behind the enactment."

13. Furthermore, it is undisputed fact that AO made addition on the basis of items which were not at all subject matter of the reasons recorded in case of the assessee rather made the addition on those items which were disclosed by the assessee at the time of filing the original return of income. In these circumstances, when no incriminating material was unearthed during the search operation indicating that assessee has received share application money, no proceeding u/s 153C can be initiated. All these facts as to entire share application money and share premium have been duly proved to have been disclosed in the original return of income from the questionnaire issued by AO u/s 14291) as is evident from pages 48 to 50 of the paper book, which is a letter issued by the AO to the assessee. AO further categorically mentioned at page 50 of the paper book that financials for AY 2009-10 to 2014-15 are available on ITD/MCA. All these facts go to prove that the assessment was not pending on the date of search and as such, was not liable to be reopened u/s 153C of the Act as no incriminating material and the items which are already disclosed cannot be reassessed.

“Search and Seizure-New scheme of assessment in search cases- Validity of Proceeding u/s 153C-Assessee was educational institution registered under the Bombay Public Trusts Act, 1950 and Societies Registration Act, 1860-Assessee also got itself registered under Section 12AA and because of said registration under Section 12AA of the Act, Sections 11 and 12 of the Act apply to assessee as per which income earned by assessee from property held for charitable or religious purposes (Section 11) and income from contributions were exempt from taxation under certain circumstances- AO recorded his satisfaction to effect that assessee trust could not be considered as a genuine trust and issued notice u/s. 153C for initiation of Proceeding-CIT(A) partly allowed Assessee's appeal and sustained action of AO in initiating proceeding u/s. 153C-ITAT held that satisfaction was not properly recorded and notice under Section 153C was time barred in respect of Assessment ~ 2000-01 to 2003-04 ITAT quashed notice in respect of Assessment Years and High Court upheld odder of ITAT-Held, as per provisions of Section 153C of the Act, incriminating material which was seized had to pertain to Assessment Years in question and documents which were seized did not establish any co-relation, document-wise, with these four Assessment Years-Since this requirement under Section 153C of the Act was essential for assessment under that provision, it became jurisdictional fact-Para 9 of order of ITAT revealed that ITAT had scanned through Satisfaction Note and material which was disclosed therein was culled out and it showed that same belonged to Assessment Year 2004-05 or thereafter-It was specifically recorded that counsel for Department could not point out to contrary-ITAT rightly permitted this additional ground to be raised and correctly dealt with same ground on merits as well -Order of High Court affirming this view of Tribunal was therefore, without any blemish- Assessment order was set aside only in respect of four such Assessment Years that too on the technical ground- Revenue's Appeals dismissed.”

15. Furthermore, assessment order reveals that the AO has carried out the entire exercise of assessment mechanically because satisfaction note recorded by AO of the assessee is diametrically opposite/different from the satisfaction note recorded by the AO of searched person.

Satisfaction note recorded by the AO in case of the assessee is pertaining to some entries of Green Valley Resorts, Blooming Dates Resort and Kuber Breweries but bearing no mention of receiving any share application money from Binapani Merchandise. It appears that AO has lost sight of the provisions contained u/s 153C and has travelled beyond his jurisdiction without verifying the requirement that incriminating material has to be there to initiate the proceedings u/s 153C of the Act.