THE ITO, WARD-1(1)(2), VADODARA vs. M/S. DUKRAFT PAPER DISTRIBUTOR PVT. LTD., MUMBAI

The brief facts leading to the case is this that the assessee a dealer and trader of paper and board filed its return of income on 29.09.2012 declaring total income at Rs. 3,49,190/-.

The case was selected for scrutiny assessment. Notice under Section 143(2) dated 06.08.2013 followed by notice under Section 142(1) dated 20.10.2014 was issued and served upon the assessee alongwith the questionnaire for necessary compliance. During the year under consideration the assessee company has shown turnover of Rs. 3,09,95,681/- and profit of Rs. 3,49,189/-. Record further revealed that the assessee has introduced Rs. 1.93 crores to the share capital account through equity shares. Further that the assessee during the year under consideration issued 67000 shares having face value of Rs.10/- at a premium of Rs. 290/- per share, thereby accepted total premium of Rs. 1,94,30,000/-. The assessee was asked to give the details of the share capital introduced during the year under consideration in response whereof the assessee furnished the details wherefrom the following facts revealed: Sr Name of Opening balance Shares No. of Percent Date of shareholder of shareholding issued Shares age of allotment during the share year holding 1. Arun 5,000 17,000 22,000 28.57% 31.03.2012 Agarwal 2. Anuj 5,000 17,000 22,000 28.57% 31.03.2012 Agarwal 3. Bigwin - 13,000 13,000 16.88% 31.03.2012 Paper Dist. Pvt. Ltd.

As per the submissions made by the Ld. D.R. it is the case of the Revenue that the Bigwin Paper Distributors Pvt. Ltd. the lender company is a paper company and the fund has been rotated through chain amongst the Agrawal Group or Agrawal group of companies in which the directors are substantially interested. It was further submitted by the Ld. DR that the directors mainly Anuj Agrawal and Arun Agrawal who are having major percentage of shareholding in the sister concerns namely Dukraft Paper Distributors Pvt. Ltd., Arun Iron & Paper Industries, Bigwin Paper Distributors Pvt. Ltd. and Haryana Paper Distributors Pvt. Ltd. have planned fully for rotating the funds in the chain without having sufficient balance in their bank account. It was pointed out by the Ld. D.R. that the assessee was asked by the Ld. AO to justify the premium on which the shares were allotted in order to ascertain the worth of the company under which circumstances the share were issued at huge premium, the assessee could submit estimated cash flow with ITO vs. Dukraft Paper Distributor Pvt. Ltd. Asst.Year –2012-13 - 4 - growth @ 25% and the valuation/analysis on equity shares was based only upon the future projection of the company depending upon various assumptions in respect to the operations of its business which is insufficient to decide the transaction in favour of the assessee.. He ultimately relied upon the order passed by the Ld. AO. In support of his argument the following case laws were relied upon:

Upon perusal of the assessment order we find that the Ld. AO upon considering the entire aspect of the matter came to a finding that no concrete plans, about the future expansions, growth etc. were submitted before him. Furthermore, the balance sheet of the assessee does not suggest that that value of shares of Rs. 10/- per share to be valued at Rs. 300 per share at a premium value of Rs. 290/- in the absence of any supporting evidence. Apart from that the assessee company debited Rs. 1,02,885/- are as ROC charges and Stamp Duty of Rs. 24,500/- claiming the same as revenue expenditure. A further show-cause has been issued to justify the above, in response whereof the assessee submitted a written reply on 06.01.2015. However, considering the entire aspect of the matter the Ld. AO came to a finding that funds have been transferred from one Paper Company to other having same directors in it and provided bank entries for the loans and other investments. The source of investment was doubtful and passes through a specific manner having same directors in it as has been observed by the Ld. AO.

Though the assessee sought to prove the identity with PAN Nos., copies of Return of Income and bank statements, the Ld. AO was of the opinion that the shareholders’ complete identification reflects that such identity is managed for layering and plans for unaccounted money. It has no real and substantial existence. Observing the companies are only name-lenders, transaction related

In support of the case made out by the assessee following judgments were relied upon:

In addition following relevant submissions were also made by the assessee: “3. Your appellant further submits that the learned AO had issued 133(6) to all seven shareholders asking the details of transactions with the appellant company. 3.1 Your appellant submits that all seven shareholders have duly responded and provided the details in response to notice u/s 133(6). They have duly accepted their respective investment in appellant company. 3.2 Your appellant submits that all the payments have been made through banking channel. It is a genuine transaction. The appellant company had ITO vs. Dukraft Paper Distributor Pvt. Ltd. Asst.Year –2012-13 - 8 - already proved the onus. It had discharged the initial onus of establishing the bona-fide of the transactions. 3.3 Your appellant submits that the learned AO has made an addition purely on an assumption basis. All the information was available with the AO. The AO was not justified in ignoring various evidences provided to him by the appellant. Your appellant submits that if AO has a doubt than it would be for the AO to disprove the same. However, the learned AO has not choose to cross verify the transactions and made disallowances purely on an assumption without evidence which is not permitted in law. 3.4 Your appellant submits that when summons were issued and share holders had accepted the investment and that apart, the names and identity of the share applicants/ share holder was also available on record and the nature and the source of the amount invested were known/provided, it cannot be allowed to be concluded as undisclosed income in the hands of appellant.”

In support of the submissions made by the assessee inter alia the judgment passed by the Hon’ble Jurisdictional High Court in the case of CIT vs. Namastey Chemicals Pvt. Ltd., reported in (2013) 33 taxmann.com 271 (Guj.), the judgment passed by the Hon’ble Apex Court in the case of CIT vs. Steller Investment Ltd., reported in (2001) 115 taxmann 99 (SC) and CIT vs. Lovely Export Pvt. Ltd., reported in (2008) 216 CTR 195 were relied upon.

The assessee further submitted as follows: “6.1 The appellant company had submitted the working of Fair Market Value of equity shares in accordance with DCF method vide submission dated 26.12.2014. The said working is reproduced herewith as Annexure -13. The appellant company had also gave justification regarding issue of shares at a premium vide submission dated 06.01.2015. The reply is reproduced herewith as Annexure – 14. (Pg. No. 153 to 154) 6.2 However, AO disregarded the valuation of shares at a premium by contenting that the cash flow with growth @ 25% is not acceptable as such no concrete plans about the future expansion, growth were submitted. 6.3 Your appellant submits that the learned AO further contended that premium is decided on the basis of net worth of the company and not on the basis of future plans of the company. The year under consideration is first

Upon considering the order passed by the Ld. AO and the submissions made by the assessee the Ld. CIT(A) observed as follows: “4.3. I have considered the facts of the case, the appellant's submission and the AO's observations. From a perusal of the assessment order and the submissions made by the appellant, it is seen that the appellant had provided complete details of the shareholders including their names, PAN, addresses, sources of funds along with bank statements and copy of return of income and confirmation from all the shareholders. Thus the appellant has established the identity of the shareholders as well as the genuineness of transactions. Now the only reason given by the AO for disbelieving the genuineness of such share application transactions are that the shareholders had obtained loans from other concerns before making investment in the appellant company. She has observed that the whole fund was diverted through loan from M/s Bigwin Paper Distributors Private Limited. It may also be mentioned here that the AO had also made enquiry directly with the shareholders by issuing notices under section 133(6) of the Act and in response to this, all the shareholders had submitted these details directly, to the AO also. Thus the only reason for making addition of these share application amounts as income of the appellant company is that the AO has disbelieved the creditworthiness of the applicants for issue of shares. 4.3.1 In this regard, it is seen that the honorable High Court of Gujarat in its decision in the case of of Himatsu Bimet Ltd., 12 taxmann.com 87 (Guj.), has held as follows:- "4. As can be seen from the Impugned order of the Tribunal, the Tribunal has recorded that the respondent-assessee had filed confirmations from all share applicants with details of share capital paid which contained details such as full addresses, permanent account numbers and tax jurisdiction of the depositors. The Tribunal further recorded that all payments were received by cheques and were credited in the bank account of the respondent; the share application ITO vs. Dukraft Paper Distributor Pvt. Ltd. Asst.Year –2012-13 - 10 - forms contained all details of the depositors; their confirmations were clear with all addresses; and that they were on the departmental records as tax-payers. In the aforesaid factual background, the Tribunal was of the view that the respondent had sufficiently discharged its burden of explaining the same. The Tribunal further observed that the department has not brought any material on record to show that the depositors were bogus. According to the Tribunal none of the decisions relied upon by the revenue had held that the assessee was required to establish the credit worthiness of the share applicants strictly in the manner understood in the context of cash credits under section 68 of the Act. The Tribunal was of the view that the assessee had given the names and addresses of the share applicants, it was within the know/edge of the revenue that the said share applicants were assessed to Income-tax, hence the burden was on the revenue to make further inquiry. The Tribunal placed reliance upon the decision of the Apex Court in the case of CIT v. Divine Leasing Finance Co. wherein it has been held that when the assessee company had given the name of the shareholders, the department was free to reopen their individual assessment in accordance with law.

The Tribunal further observed that in respect of Mangal Finance Limited, the said company was assessed to tax on department records; the copies of the application forms were submitted by the said company, which were at pages 3 to 14 of the paper book; all funds had been received by cheque as per bank details at page 130 of the paper book; in the audited balance-sheet Mangal Finance Limited was shown to have been allotted shares of Rs. 1.20 crores, which formed part of total paid up capital of Rs. 3.80 crores of the assessee which was duly reflected in the balance-sheet; and that the return of allotment was also filed with Registrar of Companies. In the aforesaid factual matrix, the Tribunal was of the view that the respondent had discharged the burden and accordingly reversed the findings of the Commissioner (Appeals).

Thus the Tribunal has after appreciation of the evidence on record found as a matter of fact that the assessee had supplied addresses and permanent account numbers as well as confirmation letters of the share applicants. In the circumstances, it was for the revenue to make further inquiry in case it was of the opinion that the share applicants were not genuine. In absence of any findings recorded by the Assessing Officer to the effect that the share applicants are bogus, there is nothing on record to doubt or disbelieve the confirmations and application forms submitted by the depositors. In the circumstances, no infirmity can be found in the impugned order ITO vs. Dukraft Paper Distributor Pvt. Ltd. Asst.Year –2012-13 - 11 - of the Tribunal in holding that the assessee had discharged its burden. Whether burden has been discharged or not is a question of fact." 4.3.2 Again the honorable High Court of Gujarat in its decision in the case of Rama Multi Tech Ltd (supra) has held as follows: "7. If can be noted from the submissions made by learned counsels as also from the material on record that both CIT(Appeals) as well as the Tribunal have duly considered issue and having found complete details of the receipt of share application money, along with the form names and addresses, PAN and other requisite details they found complete absence of the grounds noted for invoking the provision of section 68 of the Income tax Act. Moreover, both rightly had applied the decision of Lovely exports (P) Ltd. (supra) to the case of the respondent assessee. We find no reason in absence of any illegality much less any perversity too to interfere with the order of both these authorities, who have concurrently held the due details having been proved. What of the assessee-company had noted to prove it had presented the necessary worth proof before both the authorities and it is not excepted by the assessee company to further prove the source of the deceased. This tax appeal resultantly raises no question of law and therefore do not merit for the consideration and is dismissed." 4.3.3 Both these decisions are based upon the decision of honourable Supreme Court of India in the case of Lovely Exports Private Limited, [2010] 14 SCC 761. Following this decision, the honourable High Court of Gujarat again in its decision in the case of[ 2013 ] 33 taxmann.com 271 (Gujarat), Namastey Chemicals (P.) Ltd., has held as follows: “5. Having heard the learned counsel for Revenue we do not find that the Tribunal committed any error. The Supreme Court in the case of Lovely Export (P.) Ltd. (supra) observed as under: "Delay condoned. Can the amount of share application money be regarded as undisclosed income under section 68 of the Income-tax Act, 1961 ? We find no ment in this special leave petition for the simple reason that if the share application money is received by the assessee Company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment."

We have further considered the judgment relied upon by the Ld. DR. We find that the Ld. A.R. distinguished the said judgments in the following manner:

We have considered several others judgments relied upon by the Ld. A.R. including the order passed by the Hon’ble Supreme Court in the case of CIT vs. Steller Investment Ltd., reported in (2001) 115 taxman 99 (SC). The finding of the Hon’ble Apex Court on the issue is as follows: “…it was evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, could the amount of share capital be regarded as undisclosed income of the assessee. It held that it might be that there were some bogus shareholders in whose names shares had been issued and the money might have provided by some other persons and if the assessment of the persons who were alleged to have really advanced the money was sought to be reopened, that would have made some sense but there was no reason why this amount of increased share capital could be assessed in the hands of the company itself.”

We have further carefully considered the judgment passed by the Hon’ble Supreme Court in the matter of CIT vs. Lovely Exports Pvt. Ltd., reported in (2010) 14 SCC 761 which has been followed by the Hon’ble Jurisdictional High Court in the case of Namastey Chemicals Pvt. Ltd., reported in (2013) 33 taxmann.com 271 (Gujarat) with the following observation: “5. Having heard the learned counsel for Revenue we do not find that the Tribunal committed any error. The Supreme Court in the case of Lovely Export (P.) Ltd. (supra) observed as under: "Delay condoned. Can the amount of share application money be regarded as undisclosed income under section 68 of the Income-tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee Company from alleged bogus shareholders, whose names are given to the Assessing Officer, then the ITO vs. Dukraft Paper Distributor Pvt. Ltd. Asst.Year –2012-13 - 15 - Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment."