WOOD CRAFT EXPORTS CO. PVT. LTD.,SAHARANPUR vs. ITO, WARD- 3(4), SAHARANPUR

ORDER This appeal by Assessee has been directed against the Order of the Ld. CIT(A), Muzaffarnagar, Dated 29.03.2017 for the A.Y. 2013-2014.

3.1. The addition was challenged before Ld. CIT(A). The written submissions of the assessee is reproduced in the appellate order in which the issue have been discussed in three categories (i) addition of Rs.1,48,1000/- in respect of three depositors who have denied having invested the amount with the assessee-company (ii) addition of Rs.11,73,800/- in respect of 23 depositors. The A.O. assumed that the investments made by them were not genuine. The assessee explained that no proper opportunity was given to the assessee to ensure the attendance of the depositors. (iii) addition of Rs.16,11,000/- out of Rs.18,58,100/- In the opinion of the A.O. the depositors were not having creditworthiness in respect of 33 depositors. The assessee explained that persons whose statements on oath were recorded, have admitted having made investment with the assessee-company. The assessee

3 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. explained that A.O. has initially issued summons on his own. However, the assessee-company was neither informed of the summons being issued in time and date of attendance of depositors/ witnesses for recording their statements on oath nor was intimated to the assessee-company. The assessee-company was not accorded any opportunity to verify their statements on oath recorded by the A.O. or to cross-examine the witnesses. Their statements were recorded at the back of the assessee and in case of non- attendance of some persons, no intimation have been given to the assessee. The assessee explained the source of the amount received and nature of the transaction. The A.O. has not enquired about their creditworthiness and source. No questions whatsoever has been made regarding the source of investment made by them with the assessee- company. The deponents have nowhere stated that money has been deposited out of the earning or saving of the current year income. The amounts are less than Rs.50,000/- each and the persons were not having taxable income and they were having many source to make deposit

4 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. with the assessee-company. Since no right of cross- examination have been allowed, therefore, their statements cannot be read in evidence against the assessee. It is also against the principles of natural justice, therefore, no adverse inference could be drawn. The assessee further made written submissions to explain the three categories of the investments made by the large number of investors which is reproduced in the appellate order in which the assessee again reiterated that statements of Investors have been recorded at the back of assessee and no right of cross- examination have been given to assessee. The assessee was not given time to ensure attendance of the Investors. The persons whose statements were recorded on oath at the back of the assessee are having creditworthiness to the extent and the arguments of the assessee-company were rejected summarily. It was explained that three persons denied to have made investment in assessee-company in a sum of Rs.1,48,100/- but their statements were recorded at the back of assessee without giving opportunity to cross- examine the witnesses, therefore, the same cannot be read

5 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. in evidence against the assessee. In respect of remaining credits, it was submitted that their statements were recorded at the back of assessee, therefore, their identity have been proved. The assessee furnished sufficient documentary evidences to prove genuineness of the transaction i.e., share certificates, share applications, acknowledgment of applications countersigned by applicants. All ROC formalities and legal documents regarding fresh issuance of capital including minute books and resolution and the confirmations of the same from the ROC to verify the genuineness of the transaction. The documents have not been adversely commented upon by the A.O. The A.O. has not informed of recording of the statements of the investors at the back of assessee and no right of cross-examination has been allowed. Therefore, such statements cannot be read in evidence against the assessee. The assessee relied upon several decisions in respect of explanation that addition is wholly unjustified. The assessee also further highlighted the anomalies or discrepancies in the assessment of the A.O. regarding

6 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. creditworthiness of the share applicants. The details are noted in the appellate order in which assessee explained that all the Investors were having source of income and the investments are less than Rs.50,000/- each. Since the assessee produced documentary evidences to prove receipt of genuine share application money and no opportunity was given to the assessee to cross-examine the statements of the investors, therefore, no addition could be made against the assessee. It was also explained that all the deponents, except the three, have admitted having deposited the amount with the assessee and majority of them were related to the Directors of the assessee-company. They have also explained their source of deposits and shares have been issued to all the share applicants. Since small amounts have been invested by various persons, therefore, the same could not be doubted.

7 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. in respect of 65 share applicants, A.O. made detailed enquiry and recorded their statements on oath in which some of them denied having made investment in assessee- company which were 03 in number. Further, statements of various Investors were recorded as noted above and they were found to have income of Rs.80,000/- Rs.90,000/- per year. They were having petty amounts with them. The assessee further explained that A.O. has not considered their savings and earning of the entire family. The Ld. CIT(A), therefore, confirmed the addition.

8 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. return, ROC documents and share certificates issued to the Investors were filed. The share application forms duly signed as well as acknowledgment have been filed. Thus, the assessee-company proved identity of the share applicants, their creditworthiness and genuineness of the transaction. The statements of investors were recorded at the back of the assessee without affording right of cross examination to their statements. Therefore, such statements cannot be read in evidence against the assessee. He has submitted that assessee-company was incorporated on 14.12.2011 i.e., in preceding assessment year. The income of the Company started only after acceptance of share application money in assessment year under appeal. In previous financial year, there were no business operations. The assessee-company is 100% EOU and all the trading results and sales were found correct, therefore, there is no question of introducing own money. He has relied upon decision of Hon’ble Supreme Court in the case of CIT vs. Bharat Engineering & Construction (1972) 83 ITR 187 (SC) in which it was held as under :

9 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. “The assessee, an engineering-construction company, commenced its business in May, 1943. In its accounts there were several cash credit entries in the first year of its business totalling Rs.2,50,000. Though the explanation regarding the cash credit entries was found to be false, the Appellate Tribunal held that these cash credits could not represent the income or profits of the assessee as they were all made very soon after the company commenced its activities : Held, that the inference drawn from the facts proved was a question of fact and the Tribunal’s finding on that question was final. A construction company took time to earn profits and it could not have earned a huge profit within a few days after the commencement of its business. Hence, it was reasonable to assume that the cash credit entries represented capital receipts though for one reason or another the assessee had not come out with the true story as regards the source of the receipts. Decision of Allahabad High Court affirmed.”

10 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. 5.1. He has, therefore, submitted that no such addition could be made against the assessee. The assessee produced voluminous evidences in respect of the genuine share application money received which have not been properly appreciated. He has relied upon decisions of Hon’ble Delhi High Court in the case of CIT vs. Kamdhenu Steel & Alloys Ltd., (2014) 361 ITR 220 (Del.) and CIT vs. Fair Finvest (2013) 357 ITR 146 (Del.), decision of Hon’ble Supreme Court in the case of CIT vs. Orissa Corporation Pvt. Ltd., (1986) 159 ITR 78 (SC) and Judgment of Hon’ble Delhi High Court in the case of CIT vs. Divine Leasing & Finance Ltd., 299 ITR 268.

11 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. 2012 relevant to preceding A.Y. 2012-2013. Learned Counsel for the Assessee, therefore, rightly contended that since assessee was at the stage of formation in preceding assessment year (during the part period) and has received share application money in assessment year under appeal, therefore, there could not be any unaccounted money invested by the assessee-company. The decision of the Hon’ble Supreme Court in the case of Bharat Engineering & Construction Co., (supra) is squarely apply to the facts and circumstances of the case. Hon’ble Allahabad High Court in case of Lal Mohar 409 ITR 95 observed credits pertain to first day of business, therefore, deletion of addition was held to be justified. Therefore, even if the A.O. may not be satisfied with the explanation of assessee but such an addition could not be made against the assessee. I may also briefly note that assessee produced sufficient documentary evidences before A.O. to prove that large number of investors have made investment in assessee-company, they were mostly related to the Directors of the assessee- company and that the amount in question was mostly less

12 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. than Rs.50,000/-. Except in three cases, most of the creditors were examined who have admitted to have made investment in assessee-company. However, it is a fact that all the Investors who have been examined by the A.O. on oath were not subjected to cross-examination on behalf of the assessee, therefore, their statements cannot be read in evidence against the assessee. Therefore, the only material left for consideration was the documentary evidences filed by the assessee on record which supports the explanation of assessee that assessee received share application money from large number of investors who have made very small investment in assessee-company in each case. No evidence has been brought on record if the investment made by the investors have actually emanated from the coffers of the assessee so as to enable it to be treated as undisclosed income of the assessee. Therefore, considering the smallness of the issue and the fact that assessee was incorporated only in preceding assessment year, therefore, in the light of decision of Hon’ble Supreme Court in the case of Bharat Engineering & Construction Co. (supra), there

13 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. were no justification for the authorities below to sustain the addition. I, accordingly, set aside the Orders of the authorities below and delete the addition.

14 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. submitted that no addition can be made under section 68 of the I.T. Act on account of difference in balance of the creditor. I do not agree with the submissions of the Learned Counsel for the Assessee. Section 68 would be applicable if assessee failed to explain sum of the amounts credited in the books of account of assessee to the satisfaction of the A.O. The party has however, denied of having outstanding balance with the assessee in response to notice under section 133(6) of the I.T. Act. Therefore, addition was correctly made against the assessee. This ground of appeal of assessee is dismissed.

12. On Ground No.6, assessee challenged the addition of Rs.7,46,774/- under section 68 of the I.T. Act on account of loan received from one Director.

13.1. The assessee submitted before Ld. CIT(A) that source of the loan given has been advance from customers, receipts from the sundry creditors and opening capital balance. The assessee relied upon return for A.Y. 2013-2014 wherein in Schedules-E-7 and E-8 amounts of sundry creditor have been at Rs.5,22,554/-. The Ld. CIT(A) noted that no regular of books of account have been maintained by the creditor and that the submissions of the assessee is not based on any authenticated documentary evidences.

16 ITA.No.3802/Del./2017 Woodcraft Export Co. Pvt. Ltd., Saharanpur, U.P. Therefore, creditworthiness of the creditor has not been proved. Therefore, addition was confirmed and this ground of the assessee was dismissed.

Order pronounced in the open Court.