ITO, NEW DELHI vs. M/S OPTIMA WEBTECH PVT. LTD,, NEW DELHI

Date of hearing 27.05.2019 Date of pronouncement 10.06.2019 ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against order dated 22/06/2012 passed by the Ld. Commissioner of Income-tax (Appeals)-XVI, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2007-08, raising following grounds:

1. Whether on the facts & in the circumstances of the case, the Ld.CIT(A) has erred in deleting the addition of Rs. 1,80,00,000/- u/s 68 of the IT Act on account of unproved credits in the grab of share application money/share capital and share premium by allowing the alleged investors of share capital and premium without allowing the AO an opportunity to cross examine them.

2. Briefly stated facts of the case are that the assessee company filed its return of income electronically on 14/11/2007 declaring total income of Rs.2761/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued on 22/09/2008, which was duly served upon the assessee. During the assessment proceeding, compliance of various notices was made partly by the Authorised Representative appeared on behalf of the assessee. In the assessment completed under section 143(3) of the Act on 21/12/2009, the Assessing Officer made addition of Rs.1,80,00,000/- under section 68 of the Act for the share application money/share capital shown to be received by the assessee during the year under consideration. The Assessing Officer also made addition of Rs.6,14,000/- under the head ‘Income from Other Sources’ for the amount credited in the profit and loss account as sales. Aggrieved, the assessee filed appeal before the Ld. CIT(A) and produced books of account and vouchers before him. The Ld. CIT(A) after considering submission of the assessee and books of account produced, deleted the additions made by the Assessing Officer. Aggrieved with the finding of the Ld. CIT(A), the Revenue is in appeal before the Tribunal raising the grounds as reproduced above.

5.3 In view of the conclusions, the Ld. Assessing Officer held that the share capital/share premium amounting to Rs.1,80,00,000/-received was unexplained cash credit in terms of section 68 of the Act. 5.4 Before the Ld. CIT(A), the assessee accepted that due to non- cooperation of the subscribers to share capital, the directors of the assessee company were so perturbed and disturbed that they could not produce the books of accounts and other details as asked by the Assessing Officer. The assessee produced copy of the cashbook of the assessee company for the period from 01/04/2006 to 31/03/2007 before the learned CIT(A) in order to explain the cash received on account of share application money from various subscribers of share capital and further investment in share of various companies. The assessee also accepted that no dividend could be paid by the assessee company on the investment made by the subscribers of the share capital. Before the Ld. CIT(A), the assessee claimed that report of Inspector dated 09/12/2009 regarding no business activity at the addresses of the subscribers of the share capital, was not provided to the assessee. It was also contended that no cross-examination of Sh. K.K. Bansal was provided to the assessee. According to the assessee, there is nothing illegal to receive the share application money in cash and make further investment in cash. The assessee relied on the decision of the Hon’ble Supreme High Court in the case of CIT Vs Divine Leasing and Finance Ltd (SLP No. CC 375/2008 arising out of of the Hon’ble High Court of Delhi) and CIT versus lovely export private limited( SLP No. CC 11993/07 arising out of ITA No. 953/06 of the Hon’ble High Court of Delhi) and other decisions. 5.5 In view of the decisions relied upon by the assessee, the Ld. CIT(A) held that the assessee has discharged its onus provided under section 68 of the Act. The Ld. CIT(A) observed that when the money is received by cheque and is transacted through banking or other undisputed channels, to establish the genuineness of the transaction, submission of shareholder register, share application form, share transfer ratio etc. would be sufficient. As far as creditworthiness of the parties is concerned, same can be proved by producing bank statement of the creditor/subscriber showing that it had sufficient balance in its account to enable it to subscribe to the share capital. Once these documents are produced, the assessee would have satisfactorily discharged the onus placed upon it. In view of the detailed finding in para 3.2 of the impugned order, the Ld. CIT(A) deleted the addition. 5.6 Before us, the Ld. DR has relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs Navodya Castle Private Limited (supra) wherein the matter of addition under section 68 of the Act was restored back to the Tribunal as the assessee was unable to produce the directors and principal officers of the shareholder companies. In the case of CIT Vs. Ultra Modern Exports Private Limited (supra) where the notices sent to the share applicants returned answered, still the assessee managed to secure documents such as income tax returns as well as bank accounts from the share applicant companies, the Hon’ble High Court held that the Assessing Officer was justified in drawing adverse inference and adding the amount in question to taxable income under section 68 of the Act. The relevant finding of the Hon’ble High Court is reproduced as under:

“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 ITAT fell into error in holding that AO could not have added back the said amount under Section

5.7 Further, in the case of CIT versus N.R. Portfolio Private Limited (supra), the Hon’ble High Court held that if the Assessing Officer doubts the document produced by the assessee, the onus shift on the assessee to further substantiate the facts or producer share applicant in proceeding. The relevant finding of the Hon’ble High Court is reproduced as under: “30. What we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individuals behind them who run and manage the said companies. It is the persons behind the company who take the decisions, controls and manage them. ”

5.8 Further the Hon’ble Supreme Court in the case of recent decision of NRA Iron & Steel Pvt. Ltd. in Civil Appeal of 2019 arising out of SLP (Civil) No. 29855 of 2018 has analysed all the decisions available on the issue of addition or share capital/share premium under section 68 of the Act and held that wherever the creditworthiness or genuineness of the subscriber of the share capital is not found to be satisfied, the addition made under section 68 of the Act, has been held to be justified. The relevant finding of the Hon’ble Supreme Court is reproduced as under:

“11. The principles which emerge where sums of money are credited as Share Capital/Premium are: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.

14. The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be 27 placed on the Assessee since the information is within the personal knowledge of the Assessee. The Assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the AO, failure of which, would justify addition of the said amount to the income of the Assessee.” 5.9 In view of the above judicial decisions, when we examine the facts of the instant case, we find that entire share capital/share premium money of Rs. 1.80 crore has been shown to be received by the assessee in cash from the share subscriber companies. This amount of share capital/share premium money shown to have been received by the assessee company has been further shown to have been invested in purchase of the shares of the other companies that too in cash. In our opinion the investment by cash is not a normal phenomena because both the assessee company and the share subscriber companies in normal course are expected to transact through banking channel. Making investment through cash in itself raises doubt and therefore it was the onus of the assessee to explain the source of cash invested by way of share capital/share premium into its cashbook. The assessee has merely furnished confirmation from said subscriber of the share capital without any detail of source of the cash in the hands of the subscriber companies. The assessee even failed to produce books of accounts and vouchers etc. of the Assessing Officer. In the independent enquiry made by the Assessing Officer through Inspector, those companies were not found at the addresses given and in response to summons issued, none appeared on behalf of those companies before the Assessing Officer to explain the source of cash in their hands. In such circumstances, it cannot be said that the assessee has discharged its onus of explaining nature and source of the credit as required under section 68 of the Act. In the instant case, the Assessing Officer has not relied only on the report of the Inspector or on the statement of Sri. K.K. Bansal, who was engaged in providing accommodation entries and the Assessing Officer has taken into consideration the failure of the assessee in explaining the creditworthiness of the share subscriber companies as well as genuineness of the transaction. In view of the recent decision of the Hon’ble Supreme Court in the case of NRA Iron & Steel Pvt. Ltd.(supra), wherein the decision of in the case of CIT versus lovely export P Ltd (supra) has also been considered, we find that the assessee failed to establish the creditworthiness of the share subscriber parties and genuineness of the transaction and accordingly, we set aside the finding of the Ld. CIT(A) on the issue in dispute and restore the finding of the Assessing Officer of making addition under section 68 of the Act. The addition in dispute of Rs. 1.8 crore under section 68 of the Act is accordingly sustained. The ground No. 1 of the appeal of the Revenue is accordingly allowed.

6.1 Before us, the Ld. DR submitted that the Ld. CIT(A) has admitted the additional evidence in the form of books of account or bills and vouchers etc., however, no opportunity was provided to the Assessing Officer as required under Rule 46A of the Income Tax Rules, 1962 and thus, matter may be restored back to the Ld. CIT(A) for adjudicating the issue afresh after providing opportunity of being heard to the Assessing Officer. 6.2 We have heard the submission of the learned DR and perused the relevant material on record. There is no doubt that the Assessing Officer made addition in absence of bills of purchase and sales produced by the assessee. The Ld. CIT(A) himself has admitted this fact while adjudicating the issue, however, he failed to follow the procedure provided in Rule 46A of the Income Tax Rules. The relevant rule provides as under:

Commissioner (Appeals)] [and Commissioner (Appeals) ]. 46A. (1) The appellant shall not be entitled to produce before the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)], any evidence, whether oral or documentary, other than the evidence produced by him during the course of proceedings before the [Assessing Officer], except in the following circumstances, namely :— (a) where the [Assessing Officer] has refused to admit evidence which ought to have been admitted ; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the [Assessing Officer] ; or (c) where the appellant was prevented by sufficient cause from producing before the [Assessing Officer] any evidence which is relevant to any ground of appeal ; or (d) where the [Assessing Officer] has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal. (2) No evidence shall be admitted under sub-rule (1) unless the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission. (3) The [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the [Assessing Officer] has been allowed a reasonable opportunity— (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. (4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub- section (1) of section 251 or the imposition of penalty under section 271.]”

6.3 In view of the clear violation of the Rule 46A(3) of the Income Tax Rules, we feel it appropriate to restore this issue to the file of the Ld. CIT(A) for deciding afresh after following the due process of law. This ground of the appeal is accordingly allowed for statistical purposes.

Order is pronounced in the open court on 10th June, 2019.