M/S. JOLEN MARKETING PVT. LTD., ,KOLKATA vs. ITO, WARD - 8(4) , KOLKATA

This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-3, Kolkata [hereinafter referred to as ‘Ld. CIT(A)’] dated 30.10.2018 for the assessment year 2012-13.

The only issue raised in various grounds of appeal is against the order of Ld. CIT(A) confirming the addition of Rs. 1,08,00,000/- as made by the AO u/s 68 of the Act in respect of share capital/share premium received by the assessee during the year.

Facts in brief are that the assessee filed return of income on 26.11.2012 declaring total income at Nil. The case of the assessee was selected for scrutiny through CASS and statutory notices were duly issued and served on the assessee. During the assessment proceedings, the AO observed on the basis of details/information furnished by the assessee that the assessee has issued fresh equity shares worth Rs. 1,08,00,000/- to two investor companies comprising share capital of Rs. 6,75,000/- and share premium of Rs. 1,01,25,000/- during the year ended 31.03.2012. The AO called upon the assessee to furnish the details/evidences proving the identity, creditworthiness of the investors and genuineness of the transactions. Simultaneously, the AO issued summons u/s 131 of the Act to the share subscribers namely M/s Knitworth Exports Ltd. and M/s Piyush Commodities Pvt. Ltd. However only the director of M/s Knitworth Exports Ltd. had appeared and their statements were recorded u/s 131 of the Act on two occasions i.e. on 27.02.2015 and 26.03.2015 whereas M/s Piyush Commodities Pvt. Ltd. did not comply with the summons u/s 131 of the Act. The AO also issued notices u/s 133(6) of the Act to both the investors calling for bank statements evidencing the source of funds, audited financial statements, IT acknowledgments and confirmations etc. which were duly furnished by both these parties by responding to the notices issued u/s 133(6) of the Act and are part of the assessment record. The statement u/s 131 was also recorded of the director of the assessee company on 25.02.2015. Finally the AO added the entire amount to the income of the assessee in the assessment framed u/s 143(3) of the act dated 28.03.2015 on the ground that the investments/subscription of share/ share premium remained unexplained as the source of fund could not be proved and there was no justification for issuance of shares at such a high premium by the assessee without having any business/ profitable venture.

The Ld. CIT(A) during the appellate proceedings affirmed the order of AO after calling for a remand report from the AO. The Ld. CIT(A) called for a remand report from the AO on the evidences filed by the assessee in the appellate proceedings and the AO submitted remand report with the same observations that there was no M/s Jolen Marketing Pvt. Ltd. justification of issuing shares at a high premium. However M/s Piyush Commodities Pvt. Ltd. one of the two investors, who did not comply with the summons issued u/s 131 of the Act in the assessment proceedings, appeared in the remand proceedings and the statement of the director of the said investor company was duly recorded in which the investment in the shares of the assessee company was duly confirmed. The AO however in the remand report reiterated that these investor companies were not engaged in any business and have no income but despite that they have invested in share capital/ share premium of the assessee company.Based on the said remand report the ld CIT(A) simply dismissed the appeal of the assesse.

The ld. A.R. submitted before the bench that the authorities below have failed hopelessly to appreciate the facts and evidences filed by the investor companies incorrect perspective. The ld. A.R. submitted that the assessee has furnished all the details/proofs evidencing the receipt of investments from the two investors in the assessee company. The counsel of the assessee submitted that the shares were issued at a high premium as there was no bar on issuing shares at a high premium till AY 2012- 13 and it was a business decision taken by the Board of Directors of the assessee company. The Ld. A.R. submitted that the assessee company has issued equity share at premium in order to finance its project qua which land has already been acquired. The Ld. A.R. submitted that the assessee company has already purchased a commercial land for offices/commercial spaces at Lucknow by referring to the balance sheet which was duly shown as investment in property. Thus the A.R strongly controverted the conclusion drawn by both the authorities below that there was no business in the assessee company and the shares was issued at a high premium. The ld AR argued that real estate projects have longer gestation period as it takes fairly long time to develop and sell the projects. The Ld. A.R. submitted that the AO had issued notices u/s 133(6) of the Act to the investors and has also summoned them for personal appearance u/s 131 of the Act. The Ld. A.R. submitted the notices u/s 133(6) were duly complied by both the investor companies by filing all the necessary details comprising ITRs, PANs, audited balance sheets, copies of bank M/s Jolen Marketing Pvt. Ltd. statements etc. The Ld. A.R also stated that M/s Knitworth exports Ltd. had even complied with the summons issued u/s 131 of the Act in the assessment proceedings and statements were recorded on two occasions on 27.02.2015 and 26.03.2015. The ld AR while referring to these statements argued that on both the occasions the director of the investor company M/S Knitworth Exports Ltd. confirmed to have invested in the share capital of the assessee company. The Ld. A.R. stated that the AO has mainly harped on the issue of share being issued at high premium without the assessee having any business by overlooking the facts on records that the assessee had already acquired land for commercial project by investing money on the said land. The ld AR stated that the said project in subsequent years have progressed substantially by filing the evidences in the form of balance sheets which showed that the assessee has incurred expenses on the said real estate project. The Ld. A.R submitted that the second company M/s Piyush Commodity Pvt. Ltd. who did not comply with the summons in the assessment proceedings but duly complied with all the summons including ones issued u/s 131 of the Act in the remand proceedings and confirmed to have made the investment in the shares of the assessee company. The Ld. A.R. submitted that both these companies have sufficiently proved that the investments were made through banking channel and out of their own funds. The ld AR argued that it is not the case of AO that there was introduction of cash before making investment or before issuing a/c payee cheques. The Ld. A.R. submitted that the fact of investor companies were not having any business during the assessment year or in the preceding year would not automatically make the investments as unexplained as has been done by the AO. The AR even pointed out that there was gross non- application of mind by the AO to the facts on records by submitting that in the assessment year as well as in the remand report, the AO mentioned the assessee company was not having any business whereas as a matter of fact the assessee had filed return of income showing an income of Rs. 2,55,345/-. The ld. A.R. also controverted the findings of the AO in the remand report that the assessee company did not furnish any documents by submitting that the notices were received by the assessee on 25.08.2017 and were replied along with necessary documents on M/s Jolen Marketing Pvt. Ltd. 12.09.2017 which was duly acknowledged. The Ld. A.R also denied the observations of the AO in the remand report that the assessee company is not a non-banking finance company as the balance sheet as on 31.03.2012 did not show the business of NBFC. The ld AR submitted that the assessee made an investment into unlisted equity shares of Rs. 3,91,29,802/- and advance against property which is apparent from the balance sheet. The Ld. A.R. submitted that the AO has not appreciated the fact that investment in shares and securities is one of the business activity of NBFC as per Section 45IA of the RBI Act, 1934. The Ld. A.R. therefore submitted that the assessee company is NBFC under RBI Act and having registration No. B.05.06081 vide certificate of Registration dated 29.01.2004. The Ld. A.R. submitted that the assessee company had issued 67,500/- equity shares of Rs. 10/- each at a premium of Rs. 150/- per share to two investor company namely M/s Knitworth Exports Ltd. (Rs. 58,00,00/-)and M/s Piyush Commodity Pvt. Ltd. (Rs. 50,00,000/-). The Ld. A.R. submitted that all the payments were received through banking channel and all the evidences were placed before the authorities below which proved the identity, creditworthiness of the investors and genuineness of the transactions. The Ld. A.R. submitted that these shares were issued to these investors after complying with all the necessary formalities under the Companies Act. The Ld. A.R also submitted that even the share premium which was not required to be justified by the assessee company as it had share capital of Rs. 1.65 crores and reserve and surplus of Rs. 4.89 crores which is almost three times of share capital. The Ld. A.R submitted that the assessee company is an operational company having substantial assets in the form of immovable properties. The Ld. A.R also submitted that besides the investing in office/commercial space, the assessee has also entered into various agreements for purchase and sale of properties and during the year approximately made profit of Rs. 32,00,000/- The ld. A.R. while admitting that the trading activity of the M/s Knitworth Exports Ltd. was suspended and therefore there was no sale and purchase in the annual account as on 31.03.2012 however the A.R furnished before the Bench a copy of annual account for year ended on 31.03.2017 which confirmed the assessee has a trading activity of Rs. 2,67,44,373/- . The Ld. A.R therefore controverted the findings of the lower authorities that the said M/s Jolen Marketing Pvt. Ltd. company was not having any genuinity and creditworthiness by submitting that the company was incorporated on 16.09.1994 and has regularly been filing IT return with ROC. The Ld. A.R. submitted that the AO has ignored the fact that said company was having sufficient net worth out of which Rs. 58 lakhs was invested in the assessee company and thus the said company has the creditworthiness to make investment in shares of the assessee company. As regards identity, the Ld. A.R. submitted that the said company was subjected to tax by way of scrutiny assessment in AY 2007-08 and therefore the identity of the said company shall stand established. As regards the genuineness, The Ld. A.R submitted that the transactions were made through a/c payee cheques and nothing was brought on record by the authorities below to prove these are non-genuine transactions. The Ld. A.R submitted that the said investor company duly showed the amount of investment made by the said investor company in the assessee company therefore the genuineness of the said transactions were also proved. The Ld. A.R. submitted that the observations of the AO in the remand report that the director of M/s Piyush Commodity Pvt. Ltd. had appeared and did not produce the documents such as details of director, shareholdings of the company are wrong.The Ld. AR submitted that the said investor company was incorporated on 12.10.2007 and has regularly been filing ITR’s and annual return with ROC and assessed to tax u/s 143(1) of the Act and AY 2014-15 company was also assessed u/s 143(3) of the Act. The net worth of the company is at Rs. 4.50 crores out of it had invested 50 Lakhs in the shares of the assessee company. The Ld. A.R. also submitted that the said funds were raised by liquidating the investments and thus it invested its own funds in the shares of the assessee company. The Ld. A.R. submitted that since the investment was made through banking channel and source was proved therefore there was no iyota of doubt with respect to identity and creditworthiness of the investor and genuineness of the transactions. The Ld. A.R. also referred to the fact that the AO has made the addition to the tune of Rs. 1,08,00,000/- by invoking first proviso to Section 68 of the Act which states that the assessee is required to prove the source of source of such credit but as a matter of fact the proviso was inserted to the section by Finance Act, 2012 w.e.f 01.04.2013 and therefore was applicable for AY 2013-14 onwards. The Ld. A.R.

Per contra, the ld. D.R relied heavily on the order of authorities below by submitting that the AO as well as Ld. CIT(A) has examined the issue of subscription of share capital at a high premium in detail. The Ld. D.R submitted that even in the appellate proceedings the Ld. CIT(A) called for remand report the AO reiterated the same facts as in the assessment order and therefore the appeal of the assessee may kindly be dismissed. The mere facts that the assessee is filing return of income and evidencing that the investment was made by a/c payee cheque would not automatically prove creditworthiness and genuineness of the transaction therefore he relied heavily on the order of Ld. CIT(A) and prayed before the Bench the appeal of the assessee may kindly be dismissed as all the arguments made before the Tribunal presently both the authorities.

We have heard rival contentions and perusing the material on record, the undisputed fact that the assessee has raised share capital and share premium of Rs. 1,08,00,000/- for two companies namely M/s Knitworth Exports Ltd. and M/s Piyush Commodity Pvt. Ltd.. The shares were issued by the assessee company of Rs. 67,500/- face value of Rs. 10/- each at a premium of Rs. 150/-. We note that the assessee has filed all the details before the AO qua these investments and evidences connected therewith. Besides the AO issued notice u/s 133(6) to both these investor companies which was duly responded by filing necessary details even this summons u/s 131 of the Act were duly complied with by both these companies. The director of M/s Knitworth Exports Ltd. appeared before the AO and statement were recorded on two occasions as stated hereinabove and they confirm to have investment made to the assessee company. The Second investor M/s Piyush Commodity Pvt. Ltd. who did not comply with the summons in the assessment proceedings but duly complied with the summons in the remand proceedings and reiterated the facts that investment which was disclosed in their books of accounts. We note that the AO has only doubted that the M/s Jolen Marketing Pvt. Ltd. investor company was not carrying any business during the year or succeeding year and therefore the investment is not genuine and creditworthiness is also warranted with doubts. The Ld. CIT(A) affirmed the order of AO without appreciating the facts on record we note that both these companies though were not carrying any business for sufficient source of funds and investing their money out of their own funds. M/s Knitworth Exports Ltd. subscribed shares amounting to Rs. 58 Lakhs whereas M/s Piyush Commodity Pvt. Ltd. subscribed share of Rs. 50 Lakhs. Needless to mention that the equity shares of 67,500/- at face value of Rs. 10/- each at a premium of Rs. 150/-, we note that both these companies were existing on the other record and regularly filed return of income with the department. In the case of M/s Knitworth Exports Ltd. even the scrutiny assessment was framed for AY 2007-08 and in which department was stated which was adjusted against the refund for AY 2014-15 which proved that there is no doubt about genuineness of the said company besides the said company added net worth of Rs. 3crores and out of that funds the said investor companies invested in the share of the assessee company. Similarly in the case of M/s Piyush Commodity Pvt. Ltd. was regularly filing its return of income and as well as with ROC and for AY 2014-15 the assessee was also having net worth of Rs. 4 crores whereas the investment in the assessee company was only Rs. 50 Lakhs. We note that the said investment was made out of funds generated by liquidating the investment of the company thus in both the above cases even the creditworthiness is not proved and transactions are genuine. Considering all these facts we are not in concurrence with the conclusion of the Ld. CIT(A) that this transaction are not genuine besides we note the assessee company has raised sales near real estate projects at Lucknow for which piece of land was already acquired besides we note the assessee company has entered into for number of purchase agreements and also sold some property and thus realized the profit from the said transaction. We also note that the AO has invoked First proviso to Section 68 which states that the source of source of such credit has to be proved. We observe from the perusal of the Act that First proviso was inserted by the Finance Act, 2012 and is applicable from 01.04.2013 meaning thereby the immediate effect for AY 2013-14 and not from the instant assessment year. Considering the above facts and M/s Jolen Marketing Pvt. Ltd. circumstances of the case, we are inclined to set aside the order of Ld. CIT(A) by allowing the appeal of the assessee.

In the result, the appeal of the assessee is allowed.