RIDDHI PETROCHEM P.LTD,MUMBAI vs. DCIT CEN CIR 13(3)(1), MUMBAI

The assessee has raised the following grounds of appeal:-

The order passed by the Learned CIT(Appeals) is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now. 3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing/job wok of Flexible Plastic Film & Polythene Film and Trading of Cloths, filed its return of income for AY 2012-13 on 25/01/2013, declaring total income at Rs.’Nil’. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that during the year under consideration, the assessee company has received share capital from ‘14’ parties amounting to Rs.19.01 crores. He, further noted that the assessee has issued shares to ‘14’ parties having face value of Rs. 10/- with a premium of Rs. 40 per share. Therefore, in order to verify genuineness of transactions, identity of shareholders and creditworthiness of the parties, called upon the assessee to file necessary evidences, including justification for issue of shares at high premium. The assesee has filed details of share application money received from ‘14’ parties along with their name and address. In order to verify correctness of claim of the assessee, the Ld. AO has issued notices u/s 133(6) to ‘14’ parties. In response to 133(6) notices, except Lalit Polyster Pvt.Ltd., all parties have replied and furnished necessary details sought by the Ld. AO. Thereafter, the Ld. AO has issued summons u/s 131 to all 14 parties, but none attended in response to 131 notice issued by the Ld. AO. Thereafter, the Ld. AO has issued show cause notice, dated 10/03/2015 and called upon the assesse to explain as why additions should not be made towards share capital received from ‘14’ parties u/s 68 of the I.T.Act, 1961. In response, the assessee vide letter dated 16/03/2015 has filed necessary evidences, including justification for issue of shares at premium of Rs.40 per share. The assessee has also filed complete details of shareholders, including their identity, genuineness of transactions and creditworthiness of the parties and argued that share capital received from 14 parties is genuine in nature, which is supported by necessary evidences. The assesse, further, claimed that the share capital has been received from parties, which are closely related or associated with the assessee. Further, all subscribers to the share capital are having sufficient source of income to explain investment made in shares of assessee company.

The Ld. AO after considering the relevant submissions of the assessee and also, taken note of various facts including certain judicial precedents, came to the conclusion that the assessee has failed to prove identity of creditors, capacity of creditor to lend money and genuineness of transactions, in order to prove share capital received from 14 parties. The Ld. AO further observed that although, the assessee has issued shares at huge premium, but failed to justify shares issued at such a high premium with necessary evidences. He, further, noted that all the investors are mysterious entities, who never replied or appeared before the Ld. AO to justify their claim of having made investments in shares of Assessee Company. Therefore, he opined that the assessee has failed to prove three ingredients provided u/s 68 of the I.T.Act, 1961 to prove the identity, genuineness of transactions and creditworthiness of the parties and accordingly, by following the decision of Hon’ble Bombay High Court, in the case of Major Metals vs Union of India (2013) 359 ITR 450 (Bombay) has made additions of Rs. 15.01 crores u/s 68 of the I.T.Act, 1961.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has reiterated its submissions made before the Ld. AO and argued that share capital received from ‘14’ parties are genuine in nature, which are supported by necessary evidences. The assessee, further, submitted that all the parties are either, relatives of directors of Assesee Company or closely associated with Assesee Company. Therefore, there is no reason for the Ld. AO to doubt the identity of shareholders. Insofar as, genuineness of transactions, the share application money has been received through proper banking channels, for which bank statements of shareholders have been furnished. The assessee has also filed income tax returns of shareholder for relevant assessment years to prove capacity of the creditors with known source of income. The assessee has also explained the reasons for issue of fresh share capital along with necessary evidences. Further, justification for issue of shares at premium of Rs. 40 per share has been filed before the ld.AO. The ld. AO has disregarded all evidences filed by the assessee only for the reason that the parties did not appear before the Ld. AO, when summons were issued u/s 131 of the I.T.Act, 1961.

The Ld.CIT(A) after considering relevant submissions of the assessee and also taken note of various facts, including by following certain judicial precedents, came to the conclusion that the assessee has failed to prove the identity, genuineness of transactions and creditworthiness of the parties, which is evident from the fact that the identical stereotype confirmation letters filed ostensible from some of the investors do not substitute the failure of the assessee to show the creditworthiness and genuineness of the transactions. The signatories to the confirmation did not attend before the Ld. AO, when summons were served u/s 131 of the I.T.Act, 1961. The director of the assessee company did not respond to summons, nor produced the investors for verification. From the above, it is abundantly clear that the burden cast upon on the assesee u/s 68 of the Act, has not been discharged to the satisfaction of the Ld. AO. Therefore, he opined that there is no error in the findings recorded by the Ld. AO to disallow share application money received from certain parties and accordingly, confirmed additions made by the Ld. AO towards share application money u/s 68 of the I.T.Act, 1961. Aggrieved by the Ld.CIT(A) order, the assesee is in appeal before us.

The Ld. AR for the assessee submitted that the Ld.CIT(A) has erred in confirming the additions made by the Ld. AO towards share application money u/s 68 of the I.T.Act, 1961, without appreciating the fact that the assessee has discharged its onus by filing enormous documents to prove identity of the subscribers, genuineness of transactions and creditworthiness of the parties. The Ld. AR, further submitted that the Ld.CIT(A) has failed in appreciating the facts and evidences filed before him and incorrectly mentioning that the creditworthiness of the investors and genuineness of the transactions have not been established by the assessee. The Ld. AR, further, submitted that the assessee has filed all possible details to prove the identity of the subscribers, genuineness of transactions and creditworthiness of the parties. The assessee has also, filed copy of board resolution passed for issue of share capital along with Form-2 filed with registrar of companies, which contains full name and address of share applicants, their PAN number, ledger accounts and conformation from the parties. The assessee has also, filed audited financial statements and IT returns of shareholders to prove genuineness of transactions. Further, all the creditors are having sufficient source of income to establish creditworthiness to prove source of income for investments made in share capital of Assessee Company. The assessee has also, filed a valuation report obtained from an independent auditor, as per which the intrinsic value of per share is much more than the amount of share price at which shares are issued to all the parties. The Ld. AO, as well as the Ld.CIT(A), without appreciating all these facts has simply made additions towards share capital received from ‘14’ parties., only on the ground that parties have not appeared before the Ld. AO, when summons were issued u/s 131 of the I.T.Act, 1961. In this regard, he relied upon by the following judicial precedents.

The Ld. DR, on the other hand supporting order of the Ld.CIT(A) submitted that the assessee has failed to prove the ingredients provided u/s 68 of the I.T.Act, 1961, which is evident from the fact that when, summons u/s 131 of the I.T.Act, 1961 were issued to the parties, none of the parties were present before the Ld. AO to justify the claim of the investments made in shares of assesee company. The Ld. DR, further submitted that mere furnishing of certain evidences to prove identity is not sufficient enough to come out of the provision of section 68 of the I.T.Act, 1961, but what is relevant is to prove the identity of the investors to the satisfaction of the Ld. AO and also, discharge the burden of proving the genuineness of transactions and creditworthiness of the parties. In this case, the facts brought out by the Ld. AO clearly establishes the fact that none of the investors are having sufficient source of income to justify investments made in share capital of the assessee company. Therefore, the Ld.CIT(A) after considering the relevant facts has rightly affirmed the findings of the Ld. AO and there is no reason to interfere with the findings of the Ld.CIT(A).

We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The assessee company has issued fresh shares capital at a premium of Rs. 40 per share to 14 shareholders and received share capital of Rs.19.01 crores. The assessee has explained the reasons for issue of shares at premium and also, necessity for issue of fresh shares for the year under consideration. According to the assesse it was planned to go to public by IPO to raise capital from public at large by way of converting it into aPublic Limited Company for expansion of its business. Further, in order to strengthen its share capital, it has issued shares at a premium to closely related family members of directors and associated concerns before going to public. According to the assessee, it has discharged onus cast upon u/s 68 of the I.T.Act, 1961, by filing enormous details, including details to prove identity of subscribers to share capital, documents to prove genuineness of transactions and creditworthiness of the parties. The Ld. AO has made additions towards share capital received from the 14 parties as unexplained cash credit u/s 68 of the I.T.Act, 1961, on the ground that the assesee has failed to establish identity of subscribers, genuineness of transactions and creditworthiness of the parties. The Ld. AO has brought out various reasons to come to the conclusion that three ingredients provided u/s 68 of the I.T.Act, 1961 has not been satisfied. According to the Ld. AO, although assesee has filed certain details to prove share capital received from the 14 parties, but none of the parties have appeared before the Ld. AO, when 131 summonses were issued to the parties. The Ld. AO, further, noted that most of the parties are not having sufficient source of income to establish capacity to prove investments made in share capital. The Ld. AO has also questioned issue of shares at premium of Rs. 40 per share. According to the Ld. AO, the assesee has not filed any details to justify issue of shares at a huge premium of Rs. 40 per share.

The provisions of section 68 of the I.T.Act, 1961 deals with a case, where any sum found credited in the books of accounts of the assessee in any financial year, for which the assesee offers no explanation or explanation offered by the assessee, in the opinion of the Ld. AO is not satisfactory, then sum found credited may be treated as income of the assessee of that previous year. A plain reading of section 68 of the I.T.Act, 1961, makes it very clear that to fix any credit within the ambit of section 68 of the I.T.Act, 1961, the Ld. AO has to examine three ingredients provided therein i.e, identity, genuineness of transactions and creditworthiness of the parties. In this legal back ground, if you see the facts of present case, one has to understand, whether the assessee has discharged its onus of proving share capital received from ‘14’ parties. Admittedly, all parties are either closely related to directors of Assessee Company or associated companies of assessee. This fact has not been disputed by the Ld. AO. The Ld. AO has also not disputed the fact that all parties have responded to 133(6) notices issued by the Ld. AO and filed necessary details called for to prove share capital. In fact, the assessee has filed details of identity of each and every subscriber to the share capital. The assesee has also filed audited financial statements of shareholders along with copy of income tax returns filed for the relevant assessment year. The assessee has also filed ledger accounts of shareholders along with confirmation letters and their PAN number etc., of each investor. The assessee has also filed copies of bank statements of shareholders. All these are part of assessment records. Neither the Ld. AO, nor Ld.CIT(A) had disputed the fact that the assesse has filed all these evidences, in respect of 14 parties.

In this factual back ground, if you examine the case of the assessee, in light of provisions of section 68 of the I.T.Act, 1961, it is abundantly clear that the assesee has discharged its onus cast upon u/s 68 of the I.T.Act, 1961 to prove identity of the subscribers, their capacity and genuineness of transactions. Further, if you go through documents and evidences filed by the assessee, we find that in respect of each and every subscriber to the share capital, the assessee has filed the following documents and said documents has clerely proves the fact that the credits in the form of share capital from all parties has been stand explained. The relevant details and explanation filed by the assessee in respect of each share holder is as follows.

The resolution of the company is on page no. 67 and reply to summons is on page no.

It is extremely important that for the said from company Lalit Polyester Pvt. Ltd. Hon'ble CIT(A) deleted the addition made by AO of Rs. 6,02,36,836/- holding that unjustified addition of this amount in nature of unexplained creditor by the AO is incorrect. Thus CIT accepts the credibility of Lalit Polyester Pvt. Ltd. of Rs. 6.02 Cr. but did not accept the share application money given by journal entry of Rs. 1.30 Cr.

It had the running account with the company from which the investment was made (page no. 76). Copy of board resolution is on page no. 77 and reply to summons is on page no.

The ledger account is on page no. 76 and copy of return is on page no. 80.

From the above, it is abundantly clear that the assessee has explained with necessary evidences, the amount of share capital received from 14 parties, in order to prove the identity, genuineness of transactions and creditworthiness of the parties. We, further noted that the assessee has also, filed necessary details before the Ld. AO to prove the purpose of issue of fresh shares for the year under consideration. We, further noted that the assessee has also filed necessary evidences to prove price charged for issue of shares to the subscribers, and as per the details filed by the assesee, the intrinsic value of shares as on the date of issue of shares is at Rs.7,692/- per share, whereas, the shares has been issued at a premium of Rs.40 per share, which is much below the book value of shares of the company. We, further noted that the assesee has also filed copy of board resolution passed by the board of directors for issue of share capital along with Form-2 filed with registrar of companies, which contains the name and address of subscribers, their PAN number. The audited financial statements of shareholders categorically prove that each one of the shareholders are having sufficient source of income to prove capacity of the creditors. It is not a case of the Ld. AO that the share capital has been received from certain mysterious individuals or concerns. In fact, there is no dispute with regard to the fact that the share capital has been received from relatives of directors of Assesee Company and associated concerns of the assessee. It is also not in dispute that amount has been routed through proper banking channels. In fact, the assessee has filed necessary bank statements of subscribers to the share capital to prove that money has been paid through proper banking channels. Under these facts and circumstances, it is difficult to accept the findings of the Ld. AO that the assesee has failed to prove share capital received from ‘14’ parties by filing necessary evidences to prove identity, genuineness of transactions and creditworthiness of the parties.

Coming back to case laws relied upon by the assessee. The ld. AR assessee has relied upon various case laws in support of its arguments. We find that Hon’ble Delhi High Court, in the case of CIT vs Goodview Trading Pvt.Ltd.(supra) had considered an identical issue and held that once, it is noticed that the subscriber to share capital possessed substantial means to investment in assessee company, no addition could be made u/s 68 of the I.T.Act, 1961. The Hon’ble Allahabad High Court in the case of CIT vs Jaydee Securities Finance Ltd.(2013) 350 ITR 220 held that where, the assessee has produced return of income, PAN and confirmation of shareholders, share application money would be treated as genuine. In the case of CIT vs K.C.Pipes (P).Ltd. 386 ITR 532, the Hon’ble Punjab & Haryana High court held that if, shareholders had acquired money illegally, and assessee could not be held liable. The ITAT Ahmedabad, in the case of Namision Powertech (P.) Ltd. vs ACIT(supra) had considered an identical issue and held that where, Ld. AO made additions to assessee company u/s 68 of the I.T.Act, 1961, in respect of share application money received from daughter of one of directors of assessee company, since bank account of share applicant showed sufficient amount to make investments and moreover amount had been received from her bank account, impugned additions was to be set aside. The Hon’ble Supreme Court, in the case of CIT vs Lovely Exports Pvt.Ltd. (216) CTR 195 had held that if, the share application money received by the assesee company from alleged bogus shareholders, whose names are given to the Ld. AO, then the department is free to proceed to reopen their individual assessments in accordance with law, but sums recived by the assessee cannot be regarded as undisclosed income of the assessee company. The Hon’ble Bombay High court, in the case of CIT vs Goa Sponge and Power Ltd, has considered an identical issue and by following the decision of Hon’ble Supreme Court, in the case of CIT vs Lovely Exports Pvt.Ltd. (supra) had held that once, the authorities have got all the details, including the name and address of the shareholders, their PAN number, so also the name of the bank from which the alleged investors received money, as share application money, then it cannot be termed as bogus. Hon’ble Bombay High court, in the case of CIT vs Gagandeep Infrastructure Ltd. 394 ITR 680 held that proviso inserted to section 68 of the I.T.Act, 1961 w.e.f. 01/04/2013 is considered to be perspective in nature and applicable from Asst. Year 2013-14 onwards and consequently, no additions could be made towards share premium u/s 68 of the I.T.Act, 1961, for not proving the identity, genuineness of transactions and creditworthiness of the parties prior to Asst. Year 2013-14. The sum and substance of ratios laid down by various High courts and the Hon’ble Supreme Court is that once, the initial burden was discharged by the assessee by the filing necessary evidences to prove the identity of the creditors, then the department is free to go behind the creditors and reopen their assessment to deal with the issue in accordance with law, but sum so found credited cannot be treated as undisclosed income of the assessee u/s 68 of the I.T.Act, 1961.

Coming back to the case laws relied upon by the Ld. AO. The Ld.AO has relied upon decision of Hon’ble Bombay High Court, in the case of Major Metals vs Union of India (supra). We find that the Hon’ble High court has given its findings on the basis of findings recorded by the settlement commission in its order that in order to scrutinize, the genuineness of transactions, it had directed the petitioner to produce relevant records such as minutes books, attendance registers of AGMs, dispatch registers, share certificates and authorization of proxy forms amongst other documentary material. The order of the Settlement commission indicates at least fourteen reasons on the basis of which, the commission formed its view in regard to the genuineness of the transactions. The assessee has also failed to justify issue of shares at a huge premium of Rs. 990 per share on a face value of Rs. 10/-, in light of its financial statements. Under those facts, the Hon’ble High court came to the conclusion that alleged share capital/share application money received from certain parties is non genuine transactions. Insofar as, the case laws relied upon by the Ld. DR, in the case of PCIT vs NRA Iron & Steel Pvt.Ltd, we find that the Hon’ble Supreme Court has recorded categorically findings, in light of facts brought out by the Ld. AO that none of the shareholders have sufficient source of income to establish capacity, as required to be proved u/s 68 of the I.T.Act, 1961. Further, in most of the cases, the assesee has not filed bank statement of the subscribers. Further, several investors companies were found to be non- existence, when the field enquiries conducted by the Ld. AO. Under those facts, the Hon’ble Supreme Court came to the conclusion that mere furnishing certain evidences, in response to 133(6) notices is not sufficient enough and what is to be seen is whether, the assesee has discharged its onus cast upon u/s 68 of the I.T.Act, 1961or not. In this case, on perusal of facts , it is abundantly clear that the subscriber to the share capital are closely related to the assesee company and the assessee has filed all possible evidences to prove identity, genuineness of transactions and creditworthiness of the parties. Therefore, we are of the considered view that the case laws relied upon by the Ld. DR is not applicable to the facts of present case.

In this view of the matter and considering facts and circumstances of this case and also, by following the ratios of case laws discussed hereinabove, we are of the considered view that the assesee has discharged its onus by filing enormous documents, in order to prove the identity, genuineness of transactions and creditworthiness of the parties. Therefore, the Ld. AO, as well as the Ld.CIT(A) were erred in confirmed additions made towards share capital u/s 68 of the I.T.Act, 1961. Hence, we direct the Ld. AO to delete additions made towards share capital u/s 68 of the I.T.Act, 1961.

In the result, appeal filed by the assessee is allowed.