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Income Tax Appellate Tribunal, “D” Bench, Mumbai
O R D E R Per Shamim Yahya (AM) :- These are appeals by the assessee against respective orders of learned Commissioner of Income Tax (Appeals) [in short learned CIT(A)] for assessment years 2009-10 and 2010-11 respectively.
2. Since the appeals have common issues and were heard together, these are being consolidated and disposed of by this, common order.
The grounds of appeal
raised are common except for the amounts, the grounds of appeal for assessment year 2009-10 are reproduced hereunder for the sake of reference :- “GROUNDS OF APPEAL IN APPEAL AGAINST ORDER DT. 22.11.2018 OF CIT(A) U/S. 250 R.W.S. 143( 3) & S. 147 I. Re-opening and Re-assessment
1. The Ld. CIT(A) erred in law and on facts in upholding the action of Id. AO in re-opening the completed assessment and in re-assessing the total income without any basis in law and any valid reason to believe that Income has escaped the assessment and without application of mind by relying upon the 2 M/s. Moraj Realty Pvt. Ltd. information received from ADIT (Inv.), Unit 7(4) and in violations of various provisions of law.
2. Your appellant submits that Ld. CIT(A) was not in possession of any information nor any mind was applied by him to such alleged information and had violated the provisions of law and of natural justice.
3. Your appellant prays that the re-opening and the consequent re- assessment be held as bad-in-law and consequently the re-assessment order be quashed.
II. Invalid Proceedings
The Id. CIT(A)/ AO erred in law and on facts in upholding an order of re- assessment passed in pursuance of the invalid proceedings initiated in the names of and against the amalgamating companies which companies were amalgamated with your appellant with effect from 20.03.2015 under an order u/s. 391 of the Companies Act dt. 04.04.2014 passed by the High Court much before the date of recording reasons and issue of notice u/s. 148 dt. 31.03.2016.
2. Your appellant strongly submits that the proceedings for re-opening and re-assessment were in gross violation of the provisions of the law and defects percolated to the roots of the re-opening of the case and therefore could not have been cured by any means of whatsoever nature.
3. Your appellant prays that the order passed be held to be without jurisdiction and bad in law and be quashed.
III. Addition on account of Cash Credits u/s. 68 of Rs. 1.40.00.000/-:
1. The Ld. CIT(A) erred in law and on facts in confirming the action of Id. AO in holding that an amount of Rs. 1,40,00,000 received by your appellant for issue of Share Capital including share premium by amalgamating companies namely Teejay Sugars Pvt. Ltd. and Raja Foods Products Pvt. Ltd. based on unsubstantiated allegations of third party without any inquiry or finding and satisfaction to such and in making addition in gross violations of provisions of natural justice and ignoring that your appellant had discharged the onus by substantiating the receipts and further erred in applying the amended provisions of s.68 amended by Finance Act, 2012 w.e.f. 01.04.2013 retrospectively to the assessment year under consideration.
Your appellant submits that the said amounts aggregating to Rs. 1,40,00,000 received towards issue of share capital including share premium were genuine in nature and were fully substantiated and explained.
3. Your appellant prays that the addition of Rs. 1,40,00,000 made on account of alleged unexplained cash credit or otherwise u/s. 68 towards issue of share capital including share premium be deleted.”
Since facts are identical we are referring to facts from A.Y. 2009-10.
3 M/s. Moraj Realty Pvt. Ltd.
Brief facts of the case are that in this case, return of income was filed on 12.11.2009 declaring total income at NIL. The assessee company was earlier known as M/s. Concept Land Developers & Builders Pvt. Ltd. The Hon’ble Bombay High Court vide order dated 04.04.2014 sanctioned the scheme of amalgamation of Ketal Builders & Land Developers Pvt. Ltd., Raja Food Products Pvt. Ltd. and Teejay Sugars Pvt. Ltd. with Concept Land Developers & Builders Pvt. Ltd. Subsequently on 20-03-2015, the assessee-company changed its name to M/s. Moraj Realty Pvt.Ltd. A search action was carried out in Gurnani Group on 04.02.2016 and Shri Vipul Vidur Bhatt on 05.02.2016. Based on the information received from the Investigation Wing that the amalgamating companies were the beneficiaries of the accommodation entries provided by the companies operated by Shri Vipul Vidur Bhatt (hereafter call VVB), notice u/s. 148 dated 31.03.2016 was issued in the cases of amalgamating companies i.e. M/s. Raja Food Products Pvt. Ltd. and M/s. Teejay Sugars Ltd. In response the assessee company stated that the return of income earlier filed by the amalgamating companies should be treated as return filed in compliance to notices issued u/s. 148. Assessment u/s. 143(3) rws 147 was completed on 29.12.2016 determining the total income at Rs. 1,40,00,000/-.
During the course of assessment the AO issued notice u/s 142(1) on 14.12.2016. In this notice, the appellant was asked to establish the identity and creditworthiness along with genuineness of the transactions with several entities from whom money has been received during the year. Similar notice was issued in respect of money received by erstwhile Teejay Sugars Pvt. Ltd., on similar lines. The first notice has been issued in respect of money received by Raja Food Products Pvt. Ltd. Replies were filed by the assessee in respect of Raja Foods Pvt. Ltd. Similar reply was filed in respect of second amalgamated company Teejay Sugars Pvt. Ltd., which was also on similar lines. The AO observed that Teejay Sugars Pvt. Ltd. (TSPL) received share capital of Rs. 20,00,000/- from two unrelated shareholders i.e. M/s Santoshimaa Tradelinks
4 M/s. Moraj Realty Pvt. Ltd.
Ltd. and M/s. Shyam Alcohol & Chemical Ltd. Each of the investor invested Rs. 10,00,000/- each in this company. In the case of Raja Foods Products Pvt. Ltd. (RFPPL), share capital of Rs. 1,22,00,00/- was received from nine share holders. Out of these, Rs. 2,00,OOO/- was received from Shri Raju Gurnani and Shri Mohan Gurnani Rs.1,00,000/- each. However, the remaining amount of Rs.1,22,00,000/-was received from the following unrelated parties :-
Sr.No. Name of the shareholder Amount invested (in Rs.) 1 Santoshimaa Tradelinks Ltd. 17,50,000 2 Dolex Commercial Pvt. Ltd. 10,00,000 3 Conart Trader Ltd. 20,00,000 4 LunkadTextiles Pvt. Ltd. 15,00,000 5 Shyam Alcohol & Chemical Ltd. 42,50,000 6 B K Dyeing & Printing Mills Pvt Ltd. 5,00,000 7 Victory Sales Pvt. Ltd. 10,00,000 Total 1,22,00,000
The Assessing Officer observed that the two erstwhile amalgamating companies did not have financials to justify such huge infusion of funds towards share capital. These two companies did not have any history of declaring dividend prior to the allotment of shares or after this allotment of shares. Thus, no genuine investor could have subscribed to the shares of these two amalgamating companies. There was always a meager balance in the bank account of the investors. The financials of the investor companies were also examined by the Assessing Officer. The Assessing Officer noted that these investing companies had invested in shares in other companies, on which there was no returns received. There was no dividend received. Further, source of the funding of the investor companies showed that the shares in the two amalgamating companies have been allotted at huge premium, which forms the substantial portion in the financials of the invested companies. Though the investor companies have shown to have received huge unsecured loans exceeding Rs. 50,00,000/- as on 31.03.2009, no interest has been paid on such huge borrowings. Thus, the on 31.3.2009, no interest has been paid on such huge borrowings. That thus, the only possibility was the huge reserve and surplus in the form of share premium and interest free loans shown and 5 M/s. Moraj Realty Pvt. Ltd.
receipts by these investor companies, who have in turn acted as a conduit for the unaccounted income of the two amalgamating companies. The investor companies did not have any significant genuine profit. No commercial activity could be seen in the case of the investor companies. The details of the tax payment and the TDS in the hands of the investor companies were also noted. The investor companies were shell companies which are usually involved as a conduit in providing entries to beneficiaries. To corroborate the same, the AO referred to the findings of the search action carried out on Shri Vipul Vidur Bhatt on 05.02.2016. The AO deputed an Inspector to serve the notice u/s. 133(6) of the investor company M/s Victory Sales Pvt. Ltd., having address at 60/A, Tariwala Building, 3rd floor, SANE Guruji Road, Tardeo, Mumbai-400 034. The Inspector reported that there was no trace of any such company at the address mentioned. The AO asked the appellant to produce the shareholders of RFPPL and TSPL. However, the investors could not be produced for examination. The appellant furnished confirmations from the investors of RFPPL & TSPL on 23.12.2016 and 26.12.2016. Copy of the ITR, annual accounts and relevant bank statements of the investors of RFPPL and TSPL was filed on 22.12.2016. The AO observed that if the appellant had access to the share applicant's PAN or bank account statement, the relationship must be closed, but the assessee was unable to contact the shareholder and produce the same before the AO. Thereafter, the AO has narrated various case laws to come to the conclusion that the amount shown to be received by M/s Raja Foods Products Pvt. Ltd. of Rs. 1,20,00,000/- and M/s Teejay Sugars Pvt. Ltd. Rs. 20,00,000/- was unexplained credit u/s 6.8 of the IT Act. Accordingly, addition of Rs. 1,40,00,000/- was made in this case.
For the assessment year 2010-11 the Assessing Officer reproduced the assessee’s reply and thereafter just rejected the same by holding that the assessee has taken bogus entries from VVB without any further discussion.
Upon assessee's appeal learned CIT(A) referred to the search action in the case of Shri Vipul Vidur Bhatt. That he was an entry operator. That the 6 M/s. Moraj Realty Pvt. Ltd.
beneficiaries included Raja Foods Pvt. Ltd. and Teejay Sugars Ltd. which amalgamated with Concept Land Developers and Builders Private Ltd. now known as Moraj reality the assessee company. That the share applicants were operated by VVB. That these two amalgamating company did not have financial track record that any 3rd party would subscribe to their capital. That the investor companies have negligible profit. That there cannot be clinching evidence of cash deposits before issue of cheques since the Hawala Operators operate a sophisticated system in which the needs of persons seeking cash and persons offering cash are squared up and all cash does not show up clearly in the bank accounts. That however, in such large scale operation of Hawala Syndicates, one to one correlation is impossible. That Shri Vipul Vidur Bhatt had admitted to providing accommodation entry for commission in the course of search when confronted with the evidences found. That there cannot be any allegation of threat or coercion in recording of the statements.
Thereafter learned CIT(A) referred to several case laws including Delhi High Court decision in the case of N R portfolio, N. Tarika Property Ltd., Empire Buildtech, ITAT decision in the case of Subhalakshmi Vanijya and honourable Bombay High Court decision in the case of Major Metals. He further referred to honourable Supreme Court decision in the case of Sumati Dayal, Durga Prasad More and other case laws.
He finally concluded that tax return filed by the seven entities established the identity. However the creditworthiness and genuineness was not established. Hence he upheld the addition.
Against the above order the assessee has filed appeal before the ITAT.
We have heard both the parties and perused the records. Learned counsel of the assessee assailed the order of the learned CIT(A) on various grounds. He challenged the validity of reopening and reassessment after four years. In this regard he referred to a Catena of case laws. He submitted that the reopening is also invalid in as much as notice was given to non-existent
7 M/s. Moraj Realty Pvt. Ltd. companies in as much as those companies had ceased to exist after the amalgamation with the assessee company, which was duly approved by honourable Bombay High Court. He submitted that this issue is squarely covered in favour of the assessee by the decision of honourable Supreme Court in the case of Maruti Suzuki India Ltd 107 Taxmann.com 375. He submitted that it was clearly held by Hon'ble Supreme Court that assessment pursuant to notice on non-existent companies is a nullity. The learned counsel of the assessee further submitted that assessee has duly provided all the necessary details about the shareholders. The financials, the balance sheet the profit and loss account the bank statement and the income tax details were all provided. He also submitted that shares were issued at face value and no premium was charged/received. That there is complete lack of application of mind by the learned CIT(A) as he has stated that assessee has received shares at premium. That the assessee has also provided the confirmation from the shareholders. He submitted that authorities below totally erred in holding that the amended provisions of section 68 are applicable retrospectively and the assessee is required to prove the source of source. He submitted that this issue is directly covered in favour of the assessee by the decision of honourable jurisdictional High Court in the case of Gagandeep Infrastructure Private Limited (394 ITR 680). He further submitted that there is serious violation of natural justice in as much as assessee was never provided an opportunity to cross examine the alleged bogus entry operator the search in whose case is the basis of action of the assessing officer. In this regard learned counsel of the assessee referred to several case laws including that from Supreme Court in the case of M/s. Andaman Timber Industries Vs. Commissioner of Central Excise (Civil Appeal No. 4228 of 2006). The learned counsel further submitted that even the said VVB in his statement never mentioned the name of the assessee as beneficiary of bogus entry operation. Moreover the said VVB had duly retracted the statement. The learned counsel of the assessee further submitted that Assessing Officer has referred a notice issued u/s. 133(6) of the Act for A.Y. 2009-10. That the assessee has asked under RTI information about the said
8 M/s. Moraj Realty Pvt. Ltd. notice under section 133(6) issued by the assessing officer to only one of the shareholders. Learned counsel submitted that in response it was stated that copies of notice issued under section 133(6) were not available. Hence, learned counsel submitted that the so called inquiry by the Assessing Officer is an incomplete one lacking credibility.
Per contra learned departmental representative relied upon the orders of the authorities below. He submitted that the search and seizure action in the case of VVB had clearly indicated that he was engaged in bogus entry operation. That the impugned companies where beneficiary of the bogus entry operation as share capital. The learned departmental representative extensively relied upon the finding of search in the case of VVB. He further submitted that the investing companies did not have the wherewithal for investing large amount of money in the assessee company who did not have the capacity to command share capital investment.
Upon careful consideration we note that assessee companies in the present case which are subject matter of addition were not in existence at the time when the share application and capital was received. The assessment was reopened pursuant to notice issued in the name of non-existent companies. The share application and the capital were received by erstwhile companies which had amalgamated pursuant to an order of the honourable Bombay High Court and subsequent thereto the assessee company had come into existence. Thereafter subsequent to search and survey activity in the case of VVB notice to the erstwhile companies was issued for reopening of the assessment. This learned Counsel of the assessee submits renders the assessment a nullity on the touchstone of Hon'ble Supreme Court decision in the case of Maruti Suzuki India (supra). With regard to the examination of impugned share capital the assessee has provided the following details before the authorities below :- a. Details of share capital received b. Ledger Accounts of shareholders
9 M/s. Moraj Realty Pvt. Ltd. c. Return of Allotment filed with ROC d. Board Resolution of assessee for issue of shares e. Extract of minutes books of assessee f. Confirmations by shareholders giving name, address and PAN g. Share Application form of RFPL and TSPL alongwith receipts h. Annual Return filed by assessee with ROC i. Annual Return filed by shareholders with ROC j. Bank statements of the shareholders for the relevant period showing investments in RFPL or TSPL k. Audited Balance Sheet of shareholders, l. Audited Profit & Loss Account of shareholders m. ITR-V of shareholders n. Extract of Assessment Order of shareholders
The same has also been produced by way of paper book before us. The assessee’s plea is that assessee has duly discharged its onus. That all the necessary details regarding the shareholders have been provided. In this regard we note that assessee has clearly provided the details of source of share capital. All the details of bank statement. Registrar of company (ROC), details, income tax details financials and confirmation by the investing companies were submitted. Hence assessee has duly discharged its onus. The amended provisions of section 68 which empower the Assessing Officer to examine the source of source were brought into the statute books with effect from 1.4.2013. The honourable Bombay High Court in the case of Gagandeep Infrastructure has clearly provided that the said provisions are not retrospective and are applicable for A.Y. 2013-14 onwards. Hence the adverse inference drawn by the authorities below in this regard is not sustainable.
Moreover, except for relying on the statement of VVB the Assessing Officer has not done any inquiry himself except for referring to a notice issued under section 133(6) in A.Y. 2009-10 only. The learned counsel of the assessee has challenged the very veracity of this observation. He has submitted that assessee has asked for the copy of the said notice issued under RTI Act. In response it was replied that copies thereof are not available. Hence, this shows that even the so called inquiry by the Assessing Officer was done in case of only one party for A.Y. 2009-10 and the veracity of which is itself in doubt.
10 M/s. Moraj Realty Pvt. Ltd.
We find ourselves in agreement with the submissions of the assessee’s counsel. We note that except for the statement of the entry operator which was also retracted the addition made by the authorities below is devoid of cogent material. In this regard we note that in similar circumstances honourable Bombay High Court in the case of CIT Vs. Orchid Industries Pvt. Ltd. (ITA No. 1433 of 2014 dated 5.7.2017) held as under :-
“The Assessing Officer added Rs.95 lakhs as income under Section 68 of the Income Tax Act 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.
The Tribunal has considered that the Assessee has 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. It was also observed by the Tribunal that the Assessee has 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 these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the Assessee. The judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be applicable in the facts and circumstances of the present case.”
Similarly honourable Bombay High Court in the case of Gagandeep Infrastructure Pvt. Ltd. (supra) has held 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 11 M/s. Moraj Realty Pvt. Ltd.
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.
(ii) 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. 317 ITR 218 in the context to the preamended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer 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.
Similarly Hon'ble Bombay High Court in the case of CIT Vs. Apeak Infotech (3971 ITR 148) has held as under :-
“Amendment to Section 68 of the Act by the addition of proviso thereto took place with effect from 1st April, 2013. Therefore, it was not applicable for the subject Assessment year 2012-13, So for as the pre-amended Section 68 of the Act was concerned, the same cannot be invoked in this case, as evidence was led by the Respondents- Assessee before the Assessing Officer with regard to identity, capacity of the investor as well as the genuineness of the investment Therefore, admittedly, the Assessing Officer did not invoke Section 68 of the Act to bring the share premium to tax. Similarly, the OT(A) an consideration of facts, found that Section 68 of the Act cannot be invoked, in view of the above, it was likely that the Revenue may have taken an informed decision not urge the issue of Section 68 of the Act before the Tribunal. High Court may also point out that decision of High Court in Major Metals Ltd. vs. Union of India, 359 ITR 450 proceeded on its own facts to uphold the invocation of Section 68 of the Act by the Settlement Commission. In the above case, the Settlement Commission arrived at a finding of fact that the subscribers re shares of the Assessee - Company were not creditworthy in as much as they did not have financial standing which would enable them to make an investment of Rs. 6,00,00,000/- at premium of Rs. 990 per share. It was this finding of the fact arrived at by the Settlement Commission which was not disturbed by High Court in its writ-jurisdiction. In the present case the person who have subscribed to the share and paid share premium have admittedly made statement on oath before the Assessing Officer as recorded by the Tribunal. No finding in this case has been given by the Authorities that shareholder/share applicants were unidentifiable or bogus.
High Court find that the impugned order of the Tribunal upheld the view of the CIT(A) to hold that share premium is capital receipt and therefore, cannot be taxed as Income. This conclusion was reached by the impugned order following the decision of this Court in Vodafone India Services Pvt. Ltd. (supra)
12 M/s. Moraj Realty Pvt. Ltd. and of the Apex Court in M/s G.S. Homes and Hotel P. Ltd. (supra). In both the above cases the Court has held that the amount received on issue of share capital including premium are on capital account and cannot be considered to be income. It was further pertinent to note that the definition of income as provided under Section 2(24) of the Act at the relevant time did not define as income any consideration received for issue of share in excess of its fair market value. This came into the statute only with effect from 1st April, 2013 and thus, would have, no application to the share premium received by the Respondent - Assesses in the previous year relevant to the assessment year 2012 - 2013. Similarly, the amendment to Section 68 of the Act by addition of proviso was made subsequent to previous year relevant to the subject Assessment year 2012-13 and cannot be invoked. It may be pointed out that High Court in Commissioner of Income Tax vs. M/s. Gangadeep Infrastructure (P) ltd (Income Tax Appeal No. 1613 of 2014 decided in 20 March 2017) has while refusing to entertain a question with regard to Section 68 of the Act has held that the proviso to Section 68 of the Act introduced with effect from 1 April 2013 will not have retrospective effect and would be effective only from Assessment year 2013-14. In view of the above, Question No .B as proposed also does not give rise any substantial question of law as it is an issue concluded by the decision of High Court in M/s Vodafone India Services Pvt. Ltd. (Supra) and in the Apex Court in M/s G.S. Homes & Hotels P. Ltd. (supra). Thus not entertained. ”
Accordingly in the background of aforesaid discussion and precedent in our considered opinion assessee has given all the necessary details required for establishment of identity creditworthiness and genuineness under extant provisions of section 68 of the IT Act. The onus cast upon the assessee stands discharged. The addition by invoking amended provisions of section 68 of the Act which are not applicable for the assessment year is not sustainable.
The decisions relied upon by the Revenue are not applicable on the facts of this case. The case law from Hon'ble Bombay High Court in the case of Major Metals Ltd. (supra) is not applicable as it was a confirmation by Hon'ble Bombay High Court of bogus share capital with huge premium added as per the Income Tax Settlement Commission order. Moreover this decision is duly explained by Hon'ble Bombay High Court in the case of Apeak Infotech (supra). Similarly the decision of N.P. Portfolio (supra) is also not applicable on the facts of this case. Moreover, as we have pointed out in this case there is no issue of share premium and we have drawn support from decision of Hon'ble
13 M/s. Moraj Realty Pvt. Ltd.
Bombay High Court decisions referred above, which also drew support from Hon'ble Supreme Court decisions referred therein.
Hence in our considered opinion the addition under section 68 is not sustainable. Hence we set aside the orders of authorities below and delete the addition
Our above decision applies mutatis mutandis to for A.Y. 2010-11.
Since we have already deleted the addition on merits the adjudication on the various aspects of challenge of jurisdiction including validity of reopening after four years, including validity of notice to non-existent entities and challenge to the violation of natural justice et cetera are only of academic interest. Hence we are not engaging into the same.
In the result these appeals by the assessee stand partly allowed as above
Order pronounced under Rule 34(4) of the ITAT Rules by placing the result on notice board on 08.12.2020.