ITO WARD-4(1)(4),, AHMEDABAD vs. VALLEY COMTRADE PVT LTD ( EARLIER KNOWN AS JHAWAR COMTRADE PVT. LTD.,), AHMEDABAD

आदेश/O R D E R

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The captioned appeals have been filed at the instance of the Assessee and the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-10, Ahmedabad, dated 28/06/2017 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2012-2013.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 3

Sr. Name of Investor Face Value (Rs.) Premium Total No. (Rs.) (Rs.) 1. Shri Narayan Mercantiled Pvt Ltd. 275000 27225000 27500000 2. Pragya Commoditeis Pvt. Ltd. 130000 12870000 13000000 3. Dewdrops Mercantiles Pvt Ltd. 205000 20295000 20500000 4. Divya Secfin Pvt. Ltd. 25000 2475000 2500000 5. PCJ Finvest Pvt. Ltd. 50000 4950000 5000000 6. Seema Holding Pvt. Ltd. 25000 2475000 2500000 7. Smarat Finvest Pvt Ltd. 75000 7425000 7500000 8. Pearl Tracom Pvt Ltd 120000 11880000 12000000 Total 905000 89595000 90500000

4.1 The assessee during the assessment proceedings has furnished PAN, ITR, ledger copies, confirmation, shares valuation report and balance sheet etc in support of the share capital issued to the parties as discussed above. The assessee also submitted that the above facts were also confirmed by all the companies as discussed above in response to the notices issued under section 133(6) of the Act.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 4

4.2 However, the AO during the assessment proceedings observed certain facts with respect to all the shareholders who subscribed the shares of the assessee company except PCJ Finvest Pvt Ltd. and Divya secfin Pvt. Ltd. which are detailed as under:

i. There were deposits in the bank accounts of all the shares subscribers as discussed above immediately before the transfer of funds in the bank account of the assessee. In other words, there was the infusion of fund by way of share capital & premium in the books of accounts of the subscribers companies from different sources/other companies, most of which, were controlled and managed by the entry providers namely Rakesh Agarwal, Dinesh Dhandhania, Dines kumar Aggarwal/ Shantilal Lunia and Ankit Bagri. ii. All the entry providers have admitted in the statement furnished under section 131 of the Act to be engaged in providing accommodation entries in lieu of commission. iii. There was the investigation carried out by DDIT (Inv.) wing of Kolkata to verify the existence of above-mentioned investors as well as shareholding companies of investors. The Inspector of Income Tax in his report has submitted that none of the company was found at the given address. Therefore, it was concluded that the investor companies and shareholders of the investor companies are nothing but paper companies. iv. All the investor companies as discussed above have shown nil/nominal income in their respective returns of income. v. On examination of the bank statements of all the investor companies, it was found that there is a pattern of depositing the cheque in the bank accounts which is immediately transferred to other companies. As such there was identical pattern of depositing the money and transferring the same immediately after leaving the negligible balance in the bank account of the investor companies.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 5

vi. The investor companies have not shown any establishment expenses or any other regular expenses which are necessary to carry out any business activity. Likewise, there was no significant asset in any of the investor company except the investment made in different companies and loans and advances given to different parties. Thus it is established that there was no activity carried out by the investor companies except depositing the money in garb of share capital & premium and transferring the same to different parties in garb of investment and loan & advances which is nothing but pattern of accommodation entries. Accordingly the investor companies were used for channelizing the unaccounted money of various parties. 4.3 With respect to the investor company namely M/s PCJ FINVEST Pvt Ltd, the AO observed that before subscribing the shares of the assessee company, there was the fund received from M/s High Construction Private Ltd. for ₹50 lakhs. Likewise, there was nil income shown by the PCJ Finvest Pvt Ltd. in the return of income. Similarly, there was not appearing any establishment expense and the significant fixed assets in its financial statements.

4.4 Based on the above, the AO issued a show cause notice dated 17 March 2015 proposing to treat the impugned amount of share capital of ₹9.05 crores as unexplained cash credit under the provisions of section 68 of the Act.

4.5 The assessee in response to such show cause notice submitted vide letter dated 28th of March 2015 that none of the investor company and its shareholders i.e. shareholders of the investor companies were connected with the entry providers in any capacity i.e. shareholders, directors or employees. Likewise, none of the entry provider in the statement furnished under section 131 of the Act has identified the investor companies including its shareholders engaged in the activity of accommodation entry. Similarly, it was nowhere mentioned in the statement

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 6

furnished under section 131 of the Act of the entry providers stating that they were controlling/ managing the affairs of the investor companies including the shareholders of the investor companies. Accordingly, there cannot be drawn any adverse inference against the assessee based on the statement of the entry providers under the provisions of section 131 of the Act.

4.6 The assessee with respect to PCJ Finvest Pvt Ltd submitted that there was no fund received from High Construction Private Ltd as alleged by the AO. As such, the amount was received by PCJ Finvest Pvt Ltd from the partnership firm namely Hi-tech Construction which has declared the return of income at Rs. 3,91,28,458/- and having the turnover of Rs. 52 crores, thus the observation of the AO is contrary to the facts available on record.

4.7 The assessee with respect to M/s Divya Secfin Pvt Ltd. submitted that there was no whisper in the show cause notice issued by the AO alleging that there was any accommodation entry received by the assessee in the form of share capital. Thus, it can be inferred that there was no doubt raised by the AO under the provisions of section 68 of the Act with respect to the impugned company.

4.8 It was also contended by the assessee that the shares were issued by it at a premium which is based on the valuation report prepared by the registered valuer using the discounted cash flow method which has been recognized under the provisions of the Act.

4.9 It was also submitted that all the investor companies were holding the license of NBFC issued by the Reserve Bank of India. All the companies were having high net worth and their capital was much more than the assessee company. Accordingly, the creditworthiness of the investor companies cannot be doubted.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 7

4.10 There was the due compliance by the investor companies in response to the notice issued under section 133(6) of the Act whereas the inspector of income tax has given contradictory report by stating that none of the investor companies was found available at the given address. Thus the report of the inspector is not free from doubts and therefore the same cannot be relied upon.

4.11 All the investor companies have admitted and confirmed to have provided the share capital to the assessee and to this effect they have also furnished the notarized affidavit.

4.12 The assessee also expressed its inability to enforce the attendance of the directors of the investor companies as they are controlling the bigger companies than the assessee. Furthermore, the AO has been empowered by the statute to enforce the attendance of such directors under the provisions of section 131 of the Act.

4.13 Without prejudice to the above, the assessee further submitted that it has discharged the onus imposed under section 68 of the Act by way of furnishing the identity, creditworthiness and genuineness of the transactions. Therefore, the same cannot be treated as unexplained cash credit in the hands of the assessee. Thus, if at all any addition is required to be made on account of unexplained cash credit under section 68 of the Act that can be made in the hands of the respective investor companies and not in the hands of the assessee company. It is for the reason that, the assessee cannot be held guilty in the event the investor companies fails to explain the source of funds in their hands.

4.14 However, the AO was not satisfied with the contention of the assessee on the reasoning that none of the investor company was carrying out any business activity except receipt of share capital and investment in different companies out of such receipt of capital. As per the AO, all the companies, in the absence of any

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 8

business activity, represents the paper companies. In paper companies, the documents are prepared in such a way so as to give a true colour of the transactions which are not real but supported by all the necessary documents. According to the AO, all the investor companies are paper companies for the reasons as discussed below: i. The financial statements of these companies neither show any income by way of operation nor operating expenses such as rent, electricity, telephone, salary etc. Likewise, there was no fixed asset shown by these companies except the investments/loans & advances in other companies. ii. There is negligible balance in the bank account of the investor companies despite having so much share capital. As such, the amount received by the investor companies against the issue of shares have been utilized by acquiring the shares of other companies on the same date. In the present case, the investor companies have acquired the shares in the assessee company at high premium. In simple words, the investor companies are showing receipt of money in the form of share capital & premium which have been utilized for making the investment in the other companies at the same time. Thus, on perusal of the bank statement of the investor companies, there are appearing only incoming and outgoing entries leaving a negligible balance in their bank accounts. iii. The amount of share capital & premium shown by the investor companies was received from the shell companies which were operated and managed by the entry providers namely Shri Rakesh Agarwal, Dinesh Dhandhania and Ankit Bagri iv. The Income Tax Inspector visited at the premises of the investor companies but none of the company was found operating therefrom. 4.15 Based on the above, the AO was of the view that the identity, creditworthiness of the parties and genuineness of the transaction have not been established by the assessee of the investor companies despite having filed the

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 9

necessary documents such as registration papers, memorandum of association, IT PAN, copy of the return of income, audited financial statements, share application form, MCA compliance form etc. In most of the cases, in the case of shell companies, there is sufficient compliance of different provisions of law and it maintains the necessary document evidences which are not enough to justify the identity and genuineness of the transaction as these company only exist on papers. In other words, in the case of shell companies, one has to see the sub- stance over the form whether the investor company is actually engaged in any revenue generation activity after considering the surrounding circumstances and human probabilities. All the investor companies do not have their own fund, rather they are engaged in accepting the fund from the shell companies which is diverted to the beneficiaries.

4.16 It is highly improbable and beyond the human probabilities that the investor company would make the investments in other companies and that too on high premium despite the fact that there is no possibility of receiving any dividend income in the future.

4.17 Likewise, the directors of private Ltd do not issue the shares to the outsiders in order to avoid the possibility of losing the controlling interest in the companies.

4.18 In view of the above, the AO after making a reference to the various case laws concluded that identity of the investor companies cannot be accepted only on the basis of paper. It is for the reason that the identity/existence should be proven in real sense by demonstrating PAN, address, share application form, place of work of investor, their staff, actual business, their recognition in public eye and by producing the principle officer/director of the investors companies in person. Thus the assessee failed to prove the identity of the investor companies in real sense.

4.19 Similarly the genuineness of the transaction cannot be held to have proved merely on the basis of transaction carried out through banking channel and legal

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 10

compliance has been fully done. Indeed, a genuine transaction must be proved genuine from all perspective not merely on papers. As such genuineness of transaction should pass the human probability test, commercial prudence and surrounding facts & circumstances and these test has not been passed or explained fully. Thus the assessee failed to prove the genuineness of transaction also.

4.20 Likewise, the credit worthiness of the investor companies cannot be held to have proved merely on the basis that these companies have huge amount of share capital and reserve. As such, the credit worthiness does not depend upon the facts of having capital and reserve in the books of account but same depends on: - Availability of sufficient cash at the time of investment at its disposal. - Having income in commensurate to the investment made. - Sources of money in the hand of investors and their genuineness. - Commercial prudence of investment. 4.21 The assessee failed to establish credit worthiness of the investors companies based on the parameters as discussed above. Hence, the AO treated the share capital and premium of Rs. 9.05 crores as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 11

framed assessment on the basis of their audited books of account and accepted their net worth. Thus, in such facts and circumstances, the identity of investor companies and their capacity to invest or genuineness of transaction cannot be doubted. In case of remaining parties, the income declared and net worth has been accepted by issuing intimation under section 143(1) of the Act. Further, in case of these parties substantial TDS has been deducted which establishes the fact that there was business activity being carried out, hence identity, creditworthiness and genuineness of transaction of these party also cannot be doubted.

6.1 During the assessment proceeding, it was highlighted that alleged entry providers are not connected either with investor companies or with their shareholders company in any manner. However this fact has not been rebutted by the AO. Indeed the AO held that observation about entry operators operating those companies are general observation. Thus no adverse inference can be drawn and evidentiary value can be placed on the statement of entry provider specially without providing opportunity of cross examination.

6.2 The AO relied heavily on inspector report that the investor companies were not found on the given address, however report of the inspector was not provided for the rebuttal whereas notices under section 133(6) of the Act, issued to all the investors have been duly served on the given address and duly complied with. Therefore, the fresh report should be sought for and provided for rebuttal.

6.3 Allegation that the investor companies are shell/ paper company are also contrary to facts, as all these companies are registered with RBI as NBFC and having high value of net worth. Further, the investment made by those companies in the share capital of the assessee company is very negligible in comparison to their net worth which ranges between 0.25% to 2% only.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 12

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 13

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 14

opeiators, that these companies had no business operations and had used share capital and premium from such companies to invest in the assessee company, and that there was no justification to invest in the assessee company at a steep premium. 4. The Id. CIT(A) has erred in law and on facts in not appreciating that mere payment by cheque does not render a .cash credit as genuine under the parameters of section 68 of the Act, without establishing tho creditworthiness of the credits and the genuineness of the transaction

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 15

12.1 The learned CIT (A) during the appellate proceedings to verify the veracity of the aforesaid companies has appointed a commission under section 131(1)(d) of the Act. The relevant contents of the letter appointing the commission reads as under:

"5. In view of the above and in view of the fact that the above-mentioned eight \ entities are based in your territorial jurisdiction, you are requested to kindly \ inquire into the identity, genuineness and creditworthiness of these entities and \ give your report to this office for further necessary action at this end. You are \ requested to investigate the nature of investment also. (a) Confirm/deny the availability of the above parties of the stated addresses. (b) If present of any of the addresses- i. Duration of their functioning from that premise. ii. Nature of the business. iii. Scale of business (Copy of the IT return may be obtained alongwith audit report, balance sheet.). V iv. Brief description of the office premises v. Principal persons of the company details of directors and their contact addresses. vi. Mode and quantum of investment. vii. Source of investment(s).

12.2 In response to such commission, the DDIT (Inv.) Unit-3(3) Kolkata vide letter no. DDIT(Inv.)/U-3(3)/Kol/Commission-131(1)(1d)/Jhawar/15-16/113 dated 11-04- 2016 has made the submission as detailed below:

The desire report in respect of the companies entered in to alleged bogus share application money/ share premium in the case of M/s Jhawar Comtrade Pvt. Ltd. (PAN - AADCS3553N) for the assessment year 2012-13, Is furnished in the table given below: Address ; Sr. Name of the PAN Remarks No. Company 1 Shri Narayan N.A. 5/1, Clive Row, 4m Floor,;Room No Summon u/s 131 of Mercantile (P) Ltd, 125, Koikata- 700001'; Income Tax Act.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 16

2 Pragya Commodities N.A. C-11, CIT Building, 30 C, Madan 1961 was served (P) Chatterjee Lane, Koikata and in Ltd. 700007 compliance requisite documents were submitted by the 3 Dewdrops Mercantile N.A. C-11, CIT Building. 30 C, Madan (P) Lid. Chatterjee Lane. Kolkata company. \ 700007 4 Divya Secfin (P) Ltd N.A. C-11, CIT Building. 30 C, Madan Chatterjee Lane, Kolkata 700007 5 Samrat Finvest (P) N.A. Room No 125, 4!t> floor, Kolkata- Ltd. 700001 •• 6 Pear! Tracom (P) N.A. 20, goenka lane, ground floor, Inspector was Ltd. Kolkata-700007 deputed but not found at given address

12.3 Likewise, at this juncture, it is also important to refer the remand report furnished by the AO vide letter dated 27-04-2017 which reads as under: "2. The case of the above mentioned assesses has been transferred to this ward vide order u/s 127(2) of the I.T. Act passed by the Pr. Cll-1, Surat vide No SRT/Pr.CIT- 1/!TO(HQ)/NOC/PAN/2016-17dated 11.11.2016. However, the case records have been received in the month ofFeb-2017In the above referred case CIT, Appeals-4, Surat h :,s catted for the remand report vide letter No. SRT/CIT(A)-4/RE/JC/2015-16 cited 05.02.2016. The then Assessing Officer vide his letter No SRTA/vJ 1(1)(3)/Remand Report/JCPL/2015- 16 dated 15.02.2016 has requested for time for submitting the remand report. However, subsequently the case has been transferred to this office. In view of this and as per the

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 17

personal directions given by Your Honor, the remand report in the above mentioned case is submitted by as under In this case the assessment was finalized by the then Assessing Officer at the total income of Rs. 9,77,97,7007- against the returned income of Rs. 6,97, TOO/- after making the addition of Rs. 9,05,00,000/- on account of bogus share application money u/s 68 of the I.T. Act. received from (he following companies. Sr. No Name and Address of Investors Amount (Rs.)

1 Shri N&rayan Mdercantiles Pvt Ltd 5/1, Clive Row, 4'" Floor, Room No. 27500000 125, Kolkata- 70000 / 2 Pragya Commodities Pvt Ltd •C-11, CIT Building, 30 C Madan Chaterjee 13000000 Lane, Kolkata-700007 3 Dewdrops Mecantites Pvt Ltd 20500000 C-11, CIT Building, 30 C Madan Chaterjee Lane, Ko&afa-700007

4 DjVya Secfin Pvt Ltd C-11. CIT Building, 30 C Madan Chaterjee Lane, 2500000 Koikata-700007 5 PCJ Finvest Pvt Ltd J/J-4A, Room No -4, Neelkanth Appartment, 5000000 Ashwinir.-agar, Baquiati, Kolkata-700159 6 Seema Holding Pvt Ltd C-11, CIT Building, 30 C Madan Chaterjee Lane, 2500000 Kolkata-700008 7 Sniarat Finvest Pvt Ltd Room No. 125, 4'" Floor, Room No. 125, 7500000 Kolkata-700001 8 Pearl Tracom Pvt Ltd 20, GoenkaLane, Ground Floor, Kolkata-700007 12000000 Total 9,05,00,000

During the course of assessment proceedings the then A.O has established beyond doubt that the assessee has failed to give a satisfactory explanation with regard to the creditworthiness of all the above share subscribers and the assessee company has credited the funds in guise of share capita! and share premium under a colorful device detailed discussion in assessment order dated 31.03 2015 which is not discussed for sake of brevity). Aggrieved with the order the assessee has filed appeal before the ClT(Appeals-l), Surat and filed additional evidences M/s 46A(i}/46A(3) of l.T. Rules.In the course of assessment proceedings the then A.O has vide letter No. SRT/ITO 1(1)(3)/Jhawar/233/2014-15 dated 29.01.2015 has issued commission u/s 131(1) (d) to the Additional Director of Income tax , (Investigation ), Unit-Ill, 2nd Floor, Aayakar Bhavan Koikata to conduct inquiries with regard to the identity, genuineness and creditworthiness of the above mentioned eight companies (the copy of commission issued vide letter dated 29.01.2015 is enclosed ). The DOIT, (Inve), Unit-3(3). Koikata vide his letter No. DDIT (!nv)/U'3(3)/Kol/2014-15/Jhawar/Surat/736 dated 27.02.2015 has given the findings which have already been forwarded to the CIT(Appeals-4), Surat, vide letter No. SRT/Wd.1(1)(3)/Remand Report 'JCPL/201 '5-1 6 dated 02.03.2016 Another letter issuing commission u/s 131(1)(d) of the I.T. Act was issued by the then A.O vide letter No SRTA/Vd.1(1)(3)/131(1)(d)/JCPL/2015-16 dated 02.03.2016

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 18

(copy enclosed) to verify the genuineness of the investment made by the above mentioned eight investor companies. The DDIT (lnv)-Unit-3 (3), Koikata vide his letter No. DDIT(lnv)/U- 3(3)/Kol/Commission-131(1)(d)/Jhawar/15-16/113 dated 11.04.2016 submitted the detailed inquiries conducted by in the above mentioned eight investors. (Copy enclosed). As evident from the report it is crystal clear that out of the eight investor companies namely the M/sPCJ Finvest Pvt. Ltd. and M/s Seema HoldingPvt. Ltd have been considered as Jamna Kharchi companies in the data base of investigation wing, Kolkata. Moreover, the investor company namely M/. Pearl Tracom Pvt. Ltd. Has not been found at the given address.

12.4 On perusal of the report of the commission appointed under section 131(1)(d) of the Act dated 11-04-2016 and remand report of the AO dated 27-04- 2017, we find that there is no adverse remark with respect to the 5 companies as discussed below: 1. Shri Narayan Mercantile Pvt. Ltd. 2. Pragya Commodities Pvt. Ltd. 3. Dewdrops Mercantile Pvt. Ltd. 4. Divya Secfim Pvt. Ltd. 5. Samrat Finvest Pvt. Ltd. 12.5 Now the controversy arises whether the transactions carried out by the assessee with these 5 companies can be categorized as bogus? To our understanding, the answer stands in negative. It is for the reason that the commission appointed by the learned CIT-A was representing one of the wing of the Department which has not pointed out any adverse remark in its report about the genuineness of these companies. In other words, the transactions of shares capital from these companies was accepted by the Revenue with respect to the identity, creditworthiness of the parties and genuineness of the transactions. Accordingly, we are of the view that the documents filed by the assessee in support of the share capital issued to them as discussed above cannot be doubted with respect to the identity, creditworthiness of the parties and genuineness of the transactions.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 19

12.6 We also note that out of the 5 companies listed above, there were scrutiny assessments under the provisions of section 143(3) of the Act with respect to the companies as mentioned below: 1. Pragya Commodities Pvt. Ltd. 2. Dewdrops Mercantile Pvt. Ltd. 3. Divya Secfim Pvt. Ltd.

12.7 The scrutiny assessment by the Income Tax department under the provisions of section 143(3) of the Act establishes the fact that impugned companies were not the paper companies as alleged by the AO. In other words, the existence of these 3 companies have also been accepted by the revenue in their respective assessment. The relevant submission of the assessee with respect to the assessment carried out under section 143(3) of the Act which has not been disputed by the ld. DR appearing on behalf of the Revenue. The contentions of the assessee are appearing in the order of the AO.

12.8 Thus, in view of the above, we hold that there cannot be any question of doubting on the existence of the companies which were subject to the scrutiny assessment under the provisions of section 143(3) of the Act as discussed above.

12.9 There was one of the company namely M/s Divya Secfim Pvt. Ltd. which was not issued any show cause notice by the AO during the assessment proceedings raising any doubt about the identity, genuineness and creditworthiness of the same. But we find that, the AO in the assessment framed under section 143(3) of the Act in the case of the assessee has treated the investment made by such company as bogus in nature without giving any opportunity to the assessee. However, despite that we find that the assessee itself has furnished the necessary details as detailed below: - Copy of share application form - Copy of bank statement of party

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 20

- Copy of ITR-V and assessment order under section 143(3) - Copy of audited financial statements - Copy NBFC Registration certificate, PAN, MOA, AOA and Board Resolution - Copy of notarized affidavit. 12.10 Further, the notice issued by the AO under section 133(6) was also duly replied by M/s Divya Secfin Pvt Ltd along with requisite details. Accordingly, we hold that no adverse inference can be drawn against the transaction carried out by the assessee with M/s Divya Secfim Pvt Ltd. in view of the fact that there was no question raised by the AO during the assessment proceedings.

12.11 In view of the above we hold that the assessee has discharged the onus imposed under section 68 of the Act by furnishing the necessary details about the source of share capital and premium received from above mentioned 5 investor companies.

13.1 With respect to above 3 companies the DDIT in commission report under section 131(1)(d) has submitted that one company namely M/s Pearl Tracom Pvt Ltd was not found at given address whereas other two are identified as Jama/kharchi company in the record maintained by them to this effect.

13.2 We, first, proceed to understand the legal prospect of appointment of commission. The civil court under section 75 of CPC was empowered to appoint commission. The purpose of issuing commission by the court is to impart the complete justice to the parties of the suit and to find out and obtain evidences which would bring clarity and help the court in determining the case. Similar, power has been given under section 131(1)(d) of the Act to The Assessing Officer, Deputy

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 21

Commissioner (Appeals), Joint Commissioner, Commissioner (Appeals) etc. However, these power cannot be exercised in each and every case. The Assessing Officer, before issue a commission under section131(1)(d), must apply his judicial mind and derive satisfaction that such a commission, on the facts and circumstances of the case before him, is requisite and proper. Such satisfaction of the Assessing Officer must be supported by reasons which ought to be recorded by him so that the propriety of the whole exercise of discretion by him is visible.

13.3 The next aspect arise is the evidentiary value of such commission report. In this regard we note that courts have held that it is not binding on the court. As such, the courts have full power to arrive at its own conclusion even at variance with the report. Some of these cases are Mohi Ram v. Bansi Lal AIR 1957 HP 9; P. Moosa Kutty, In re AIR 1953 Mad. 717; Rambilakh Singh v. Chairman of Dinajpure Nizamat Muncipality AIR 1926 Pat. 462; Mokam Haldar v. Naimaddi Shaikh AIR 1935 Cal. 28 and Bansi Singh v. Chakradhar Prasad AIR1938 Pat. 569. Thus from the above, it is inferred that the report of the Commission appointed under section 131(1)(d) of the Act would not be binding on the AO/ CIT(A), since the matter of adequacy or otherwise is to be adjudged by the AO/CIT(A) himself and he cannot delegate this authority to the Commission officer. Furthermore, the AO/CIT(A) is to apply his own mind and cannot make such a report the sole basis of his assessment without application of his mind.

13.4 The Assessing Officer must also allow a reasonable opportunity to the assessee to point out any lacuna or inadequacy in the report submitted by the Commissioner. It is trite law that no person can be condemned without being heard. The powers conferred to the relevant authorities by section 131(1)(d) cannot be invoked if no defects are found in the books of account of the assessee. In the famous case of CIT v. Pratapsingh Amrosingh Rajendra Singh and Deepak Kumar [1992] 64 Taxman 585 (Raj.), it was held as under:

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 22

". . . Simply because the valuation report is of a higher amount, the books cannot be said to be unreliable unless by a deeper probe any defect is found in the maintenance of books of account...." (p. 589)

13.5 Coming to the case on hand, we note that the commission has been appointed under section 131(1)(d) for verification of genuineness of share capital and premium introduced by the 8 companies as discussed above where no adverse remark has been made with respect to 5 companies. Thus the learned CIT (A) based on commission report treated such transaction with those 5 companies as genuine whereas treated the transaction with remaining 3 companies as bogus. However, we note that no opportunity of being heard has been provided by the learned CIT (A) to the assessee before using the report of DDIT against assessee. Further, the learned CIT(A) has also not applied his mind on other documentary evidences which have been provided by the assessee during assessment proceeding as well during appellate proceeding. Thus in our considered view action of the learned CIT(A) merely relying upon report of commission without applying own mind and without providing opportunity of rebuttal is unjustified.

13.6 Moving forward, with respect to M/s Pealr Tracom Pvt. Ltd, we note that its name was not appearing in the data base maintained by DDIT (Inv.) for the JAMA Kharchi Company. As per the report of the DDIT (Inv.) Unit-3 (3) Kolkata it was discovered that company was not found at the given address. It is quite often that the assessee for one or the other reason changes the address. Therefore, no adverse inference can be drawn against the assessee merely on the reasoning that the assessee was not found at the address given therein. The copy of the PAN was very much available with the Revenue and it is also a fact on records that intimation under section 143(1) of the Act was issued against the return filed by such investor company. This fact can be established from the submission of the assessee, which has not been disputed by the revenue, as reproduced below: "We enclosed herewith copy of intimation u/s 143(1) of the A-;t in the case of PEARL TRACOM (P) LTD. for A.Y. 2013-14 in which its total ,ncome has been accepted and a TDS credit of Rs. 63J01/- has been granted. Refund of Rs. 60,126/- has been granted

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 23

and has been received by the investor. The amount of TDS reflected the level of gross receipt of this investor and his creditworthiness. Total net worth of the investor as on 31/03/2012 is Rs. 80.36 Crores, whereas the investment made by him in the appellant company is Rs. 1.20 Crores only.

13.8 It is also important to note that the AO has made detailed analysis of the balance sheet filed by the investor company which is reproduced on page 40 of the order of the AO. The question arises how is it possible to have the details of such company if such company had not been in existence. Therefore, we are of the view that no adverse inference can be drawn against the assessee.

13.9 With respect to the PCJ Finvest Pvt Ltd, we note that there was the assessment by the Income Tax Department under section 143(3) of the Act as evident from the submission of the assessee, which has not been controverted by the revenue. The relevant submission of the assessee reads as under: We furnish herewith copies of assessment order passed u/s 143(3) of the act in the cases of investor companies namely PRAGYA COMMODITIES PVT. LTD., DEWDROPS MERCANTILE PVT. LTD.. DIVYA SECFIN PVT LTD., and PCJ FINVEST PVT. LTD. By their respective AOs for A.Y. 2012-13. This fact alone proves the Identity, existence and genuineness of these investors. Their AOs have assessed them u/s 143(3) of the Act on the basis of their audited financial statements and have accepted their net worth. Investments made by them in appellant were out of their net worth and have been duly reflected in their respective Balance- Sheets, on the basis of which they have been assessed by their respective AOs u/s 143(3) of the Act. Hence, their creditworthiness is also proved beyond any doubt.

13.10 Once the assessment has been framed under section 143(3) of the Act and held as genuine then in our considered view the question on the identity of the party cannot be arisen in the given facts and circumstances. Accordingly, there is no question of drawing any adverse inference against the assessee based on the fact that the name of the investor company was appearing in the database maintained by DDIT (Inv) as Jama Kaharchi Company. We also note that the role of the DIT (Inv.) is limited to planning and execution of search and seizer and survey operation, statutory function, Grant of awards/rewards, administration of secret fund etc. Any adverse remark by the DTIT is of significant value but that cannot be the basis of

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 24

making any addition in the hands of the assessee without bringing cogent supporting material on record.

13.11 With respect to M/s Seema Holding (P) Ltd., we note that the DDIT(Inv) unit- 3 (3) Kolkata has reported that its name is included in the data base maintained for Jama/Kahrchi Company. Thus, it was held as bogus. However we note all the necessary information was provided by the assessee, notice issued under section 133(6) was duly complied with where Seema Holding confirmed the investment made in assessee share capital which was further confirmed by furnishing the notarized affidavit. From the submission of the assessee, we also find that the investor company for the year under consideration has shown interest income of Rs. 86,89,155/- on which TDS for an amount of Rs. 700476 was deducted and all these declarations in return of income have been accepted in the intimation under section 143(1) of the Act. The relevant undisputed submission of the assessee reads as under: We enclosed herewith intimation u/s 143(1} of the Act in the-.case of SEEMA-HOLDING (P) LTD for A Y 2012-13 in which its total income has been accepted and a TDS Credit of Rs. 7,00,476/- has been granted. Refund of Rs. 6,90,206/-has also been granted and has been received by the investor. Total Interest income of this investor was Rs.86,89,7557- on which TDS deducted was Rs. 7,00,476/- of which credit has been given The case of this investor for A.Y. 2013-14 is under scrutiny assessment and we enclosed herewith copy of the questionnaire cum notice u/s 142(1) received by the investor from his AO at the given address. These evidences clearly prove the identity, existence, genuineness and creditworthiness of the investor. Amount invested by this investor in appellant company is Rs. 25,00,000/-,

13.12 Considering all these material facts, the transaction of purchase of shares by Seema holding cannot be held as bogus merely on the basis that its name appearing in the list of Jama/Kharchi company maintained by DDIT(Inv) Kolkata.

13.13 Without prejudice to the above discussion with respect to all the investor companies, we note that under the provisions of section 68 of the Act as applicable for the year under consideration, the assessee has to justify the source of cash in its hands and he’s not supposed to justify the source of source in the hands of the

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 25

investor companies. Indeed, there was an amendment under the provisions of section 68 of the Act requiring the assessee (not being a company in which public are substantially interest) to justify the source of source in case amount credited in the form of share application money/capital and premium. The said amended was brought by the Finance Act 2012 which is applicable from 01-04-2013 i.e. assessment 2013-14 as held Hon’ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure (P) Ltd. reported in 80 taxmann.com 272, the relevant finding extract as under: The proviso to section68 has been introduced by the Finance Act, 2012 with effect from 1- 4-2013. Thus, it would be effective only from the assessment year 2013-14 onwards and not for the subject assessment year.

13.14 Moving further, we find that all the investor companies were the registered NBFC companies which implies that all these investor companies were approved by the Reserve Bank of India. The relevant contention of the assessee on this point reads as under: All the investors have been regularly doing their NBFC business at their given address and are subject to monitoring and supervision of the RBI XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX These investors are in NBFC business. Their income depends on the realizations' of the investments in a particular year. Investors, who are also engaged in \financing business, are having good interest income. TDS credit given in the lease of SRI NARAYAN MERCANTILE (P) LTD. in A.Y. 2014-15 is Rs. 37,22,793/-, which indicates it's gross interest income. Similarly, gross interest income of SEEMA HOLDINGS (P) LTD. for the year under appeal is Rs. 86,89,155/- and TDS deducted is Rs. 7,00,476/-. All other investors have been assessed u/s 143 (3) for the year under appeal and their net worth has been accepted/ assessed by their AOs. These investors being in NBFC business, their assets have to be mainly comprised of the 'investments' and 'loans given'. Unlike the industrial companies, they do not need much fixed assets. All of them do have fixed assets to the extent required for their business. Their main assets are bound to be the 'investments' and 'loans granted'. This is because of the very basis nature of their business. Similarly, because of the very nature of their business, they do not need to incur heavy establishment expenses like in manufacturing and trading companies. Moreover, if more than one group concerns operate from same place, then the expenses may has been bifurcated amongst them. From their P & L A/Cs, it is evident that they have incurred required establishment expenses From the chart given below, it is evident that they have incurred the salary and other administrative expenses required for their business.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 26

13.15 A company registered as NBFC with the RBI has to undergo for certain formalities as provided under section 45(1A) of RBI Act, which can be classified as under: - Have to provide complete identity, details of directors and shareholders - Director must have experience of finance, credit and banking business - Company must have detailed business plan for next 5 years - There must be capital of Rs. 2 crores which should be own fund of promoters/shareholder without comprising borrowings - Directors and shareholder must have clean credit history. In other words there should not be any default by them in repayment of loans or credit in past - The capital employed by the shareholders/promoters out of net own fund must have been taxed - All the compliance under law of the land has been duly complied with.

13.16 Once, a company registered as NBFC, then it has to make certain compliance on regular basis some of which are detailed as under: - Quarterly statement that lays down information related to the risk assets ratio, capital funds, risk-weighted asset. - Monthly- statement of short-term dynamic liquidity - Half Yearly- Statement of structural liquidity - Half Yearly- Statement of interest rate sensitivity - Quarterly return on the important financial parameters of non-deposit taking NBFC with assets of more than 50 crores rupees and above but less than 100 crores rupees. The requirement such as the name of the company, address, Net Owned Fund, profit/loss during last three years should be furnished quarterly by the non-deposit taking NBFCs with an asset size between 50 crore rupees and 100 crores rupees.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 27

13.17 Thus from the above, it is revealed that a company registered with the RBI as NBFC is under the monitoring of the Reserve Bank of India. However we find that, there is nothing available on record having any adverse remark pointed out by the RBI with the activities of the assessee. Thus, the impugned investor companies cannot be said as bogus/paper companies as alleged by the AO in the light of the above discussion.

13.18 We also note that the AO has alleged that all the subscriber companies/shareholder companies of the so-called eight investor companies were controlled and managed by the Entry-operators namely Rakesh Agarwal, Dinesh Dhandhania, Dines kumar Aggarwal/Shantilal Lunia and Ankit Bagri. However, we find that the AO in his order has not referred all the shareholders of the investor companies being entry operators. In other words, it was alleged by the AO with respect to the investor company namely M/s Shri Narayan Mercantile that its shareholders were managed and controlled by the entry operators. However, we note that there are certain shareholders of the company namely Metrol Agencies Pvt. Ltd and Moontree Tie Up Pvt. Ltd which were not controlled and managed by the entry operators. Thus, we are of the view that the finding of the AO is not ipso facto true.

13.19 It was also contended by the assessee before the AO that the name of the investment companies or its shareholders has not been identified by the entry operator namely Shri Rakesh Agarwal, Ankit Bagri, Dinesh Agarwal as engaged in the activity of entry providers. Likewise, none of the investor company and its shareholders companies were controlled or managed by the entry operators. The relevant submission of the assessee reads as under: It may further be appreciated that, as per the statements provided alongwith the show-cause letter, none of the alleged entry operators (Mr.Dinesh Dhandhania. Mr.Rakeshaganval, Mr.Ankit Bagri and Mr. Dinesh Agarwal) have admitted that any of our investor company (or its shareholders) are bogus. It is surprising that how the statement of such entry operators can be used against us, especially when such people are neither directors nor shareholders of our investor companies. Since such persons are unrelated to us or our investors, their admission or otherwise should have no bearing on the nature of our transactions.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 28

14.1 Accordingly a question arises, whether such statement referred by the AO can be relied upon for drawing any adverse inference against the assessee. It is the trite law that no credence can be attributed to the statement recorded under section 131 of the Act by a third party until and unless some connection established with the transaction carried out by the assessee.

14.2 Going ahead we also note that the assessee in support of its share capital has filed the confirmations and the affidavit of the respective shareholder companies which can be ascertained from the submission of the assessee before the authorities below. The relevant submission of the assessee is extracted as under: All of our investor companies have given affidavit, copies enclosed as annexure-C wherein they have affirmed on oath regarding the investments made in our companies. Such affidavits are also authenticated and attested by Notary Govt of India. Hence, it may be appreciated that there is no scope for any adverse inference, since the affirmation is made before a competent authority prescribed for the purpose by the law.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 29

14.3 It was the duty of the revenue to disapprove the affidavit provided by the investor companies. In holding so we draw support and guidance from the judgment of Hon’ble Supreme Court in case Mehta Parikh & Co. vs. CIT reported in 30 ITR 181, the relevant portion of observation of Hon’ble Supreme Court is extracted here under: The assessee took it that the affidavits of these parties were enough and neither the AAC, nor the ITO considered it necessary to call for them in order to cross-examine them with reference to the statements made by them in their affidavits. Under these circumstances it was not open to the revenue to challenge the correctness of the cash book entries or the statements made by those deponents in their affidavits.

14.4 It is also a fact on records that notices under section 133(6) was issued upon all the companies by the AO which were duly complied with. In this regard, the submission of the assessee which, has nowhere been controverted by the authorities below, reads as under: We are informed that notice u/s.133(6) were issued by your good office in our investor companies at their given address, and sent by speed post. Our Investor companies have received such statutory notice u/s.133(6), at the given address, and given address, and have duly replied to the same.

14.5 Thus, once the response has been made against the notice issued under section 133 (6) of the Act, it is implied the existence of the company. In holding so we draw support and guidance from the judgment of Hon’ble Delhi High Court in case of CIT vs. Winstral Petrochemicals (P.)Ltd. reported in 10 taxmann.com 137 the relevant extract of the order reads as under: If the Assessing Officer so desired, the genuineness of the PAN cards and PAN details could easily have been verified by him from the record available with the department. The assessee also furnished written confirmations from the applicant-companies. All the share applicants were dulyserved with the noticesundersection133(6). In those circumstances, the finding of the Commissioner (Appeals) and Tribunal that the identity of the subscribers stood duly established from the documents produced by the assessee, could not be said to be perverse and did not call for interference.

14.6 It is also a fact on records that the assessee has issued shares at premium of his 990 which was based on the valuation report by independent valuer by using the method of discounted cash flow which has been recognized under the provision of law and the same has also not been controverted by the AO except stating that

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 30

valuation has been made on basis of future expected profit. Furthermore, we also find that the basis of the valuation for determining the premium on the share has nowhere been doubted by the AO during the assessment proceedings. Based on the above, we note that the value of the premium cannot be doubted.

14.7 Now proceeding to examine whether the principles laid down by the Hon’ble Supreme Court in the case of Pr. CIT v. NRA Iron & Steel (P.) Ltd. [2019] 103 taxmann.com 48 (SC) are applicable to the present facts of the case. In that case, the assessee-company received share capital and premium of Rs. 17.60 crores in all from nineteen parties (six from Mumbai, eleven from Kolkata and two from Guwahati). The shares had a face value of Rs. 10 and were subscribed by the investor-companies at a premium of Rs. 190 per share. The AO made the addition of Rs. 17.60 crores after carrying out various inquiries as under-

(i) To verify the veracity of the transactions, the notices were served on three investor-companies namely Clifton Securities Pvt. Ltd.-Mumbai, Lexus Infotech Ltd.-Mumbai, Nicco Securities Pvt. Ltd. Mumbai but no reply was received. (ii) The address with respect to a company namely Real Gold Trading Co. Pvt. Ltd.-Mumbai was not correct. (iii) The notice could not be served on two investor-companies, namely Hema Trading Co. Pvt. Ltd.-Mumbai, Eternity Multi Trade Pvt. Ltd.-Mumbai. (iv) Submissions from nine companies were received (Neha Cassetes Pvt. Ltd.- Kolkata, Warner Multimedia Ltd. Kolkata, Gopikar Supply Pvt. Ltd. Kolkata, Gromore Fund Management Ltd. Kolkata, Bayanwala Brothers Pvt. Ltd. Kolkata, Shivlaxmi Export Ltd. Kolkata, Natraj Vinimay Pvt. Ltd. Kolkata, Neelkanth Commodities Pvt. Ltd. Kolkata, Prominent Vyappar Pvt. Ltd. Kolkata), however, they had not given any reasons for paying such a huge premium. Furthermore, they had declared very low income in their respective returns of income.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 31

(v) The details of share purchased and the amount of premium were not specified by certain companies namely Super Finance Ltd. Kolkata, Ganga Builders Ltd. Kolkata. Furthermore, these companies had not enclosed the bank statement. (vi) In addition to above, ld. AO found that: a. Out of the four companies at Mumbai, two companies were found to be non-existent at the address furnished.

b. With respect to the Kolkata companies, nobody appeared nor did they produce their bank statements to substantiate the alleged investments. c. Guwahati companies - Ispat Sheet Ltd. and Novelty Traders Ltd., were found non-existent at the given address. d. None of the investor-companies appeared before the A.O.

14.8 Based on the above it was held the by the Hon'ble Apex Court, that the Assessee-Company failed to discharge the onus required under Section 68 of the Act. Therefore, the Assessing Officer was justified in adding back the amounts to the Assessee's income. However in the case on hand, we find that the assessee has discharged its onus cast upon it under the provisions of section 68 of the Act which has been elaborated in the preceding paragraphs.

14.9 In our humble understanding, we also note that the decision in the case of NRA Iron & Steel (P.) Ltd. (supra) is based on facts. Thus such case will become binding on those cases having similar facts and circumstances and not other cases having different facts and circumstances. In this regard, we draw support and guidance from the judgment of Hon’ble Calcutta High court in the case of CIT v. Peerless General Finance and Investment Co. Ltd. [2006] 154 Taxman 179/282 ITR 209- wherein it was observed that the binding nature of a decision is of two kinds—one is in relation to the facts and the other is in

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 32

relation to the principles of law. A principle of law declared would be treated as precedent and binding on all. The finding of facts would bind only the parties to the decision itself and it is the ultimate decision that binds. Where facts are distinguishable, such as assessee has replied and clarified all the doubts like non-service of summons on the directors of the investing companies due to change of address, existence of the investing companies on the portals of MCA/ROC and with the Income Tax Department long after investment, providing DIN of directors of investing companies and their other particulars, providing reasons for charging huge premium, adequate creditworthiness on the basis of assets, source of immediate availability of funds for investment, etc., then this decision in NRA Iron & Steel (P.) Ltd. (supra) cannot be applied.

14.10 Admittedly, the assessee in the case on hand has sufficiently furnished the details of the parties which have been elaborated somewhere in the preceding paragraph. Therefore in our humble understanding the principles laid down by the Hon’ble Apex court in the case of NRA steels (supra) are not applicable to the facts of the case.

14.11 It is also pertinent to note that various Hon’ble court after considering the judgment of Hon’ble Supreme Court in the case of NRA Steel (supra) has deleted the addition made by the AO under the provisions of section 68 of the Act. In this connection we draw support and guidance form the judgment of Hon’ble Bombay High Court in case of PCIT vs. Ami Industries (India) (P.) Ltd. reported in 424 ITR 219 where it was held as under:

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 33

nonetheless, Tribunal took the view that Assessing Officer had made inquiries through the investigation wing of the department at Kolkata and collected all the materials which proved source of the source. 22. In NRA Iron & Steel (P.) Ltd. (supra), the Assessing Officer had made independent and detailed inquiry including survey of the investor companies. The field report revealed that the shareholders were either non-existent or lacked credit-worthiness. It is in these circumstances, Supreme Court held that the onus to establish identity of the investor companies was not discharged by the assessee. The aforesaid decision is, therefore, clearly distinguishable on facts of the present case.

14.12 In view of above and after detailed discussion and considering the case laws on record, we are of the view that the assessee company has sufficiently discharged its onus cast under section 68 of the Act with respect identity of the investor companies, credit worthiness and genuineness of the transaction. Therefore we direct the AO to delete the addition made by him. Hence ground of appeal raised by the assessee is allowed whereas ground of appeal raised by the Revenue is dismissed.

14.13 In the result appeal of the assessee is allowed.

Coming to ITA No. 2034/Ahd/2017 an appeal by the Revenue.

ITA no.2034/AHD/2017 & ITA No.68/Srt/2017 A.Y. 2012-13 34

Act, without establishing the creditworthiness of the credits and the genuineness of the transaction

17.1 In the result appeal of the Revenue is dismissed.

Order pronounced in the Court on 28/02/2022 at Ahmedabad.

Sd/- Sd/- (SIDDHARATHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER

(True Copy) Ahmedabad; Dated 28/02/2022 Manish