ITO, WARD-25(2), NEW DELHI vs. TELPLAY PACKAGING SOLUTIONS P.LTD, NEW DELHI

This appeal is filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-38, New Delhi (in short “Ld. CIT(A)”), vide order dated 08/06/2017 for the Asst. Year 2012-13.

Brief facts of the case are that the assessee is a private limited company and return of income for the year under appeal was filed on 25/09/2012 declaring total income of Rs.1100/-. The case of the assesse was taken up for scrutiny and assessment order was passed u/s 143(3) dated 27.03.2015 wherein addition of Rs.7,70,00,000/- was made u/s 68 of the Act on account of share capital and share premium and further disallowance of Rs.28,900/- was made u/s 14A of the Act, after invoking the provisions of Rule 8D of the IT Rules, 1962.

Whether allotment of shares under swapping arrangement without bringing money into books by way of cash/cheque/draft could attract provisions of section 68 of the IT Act, 1961.

Whether deletion of addition made u/s 14A r.w.r 8D is justified when there is no exempt income in the hands of assessee. Leave has been granted to revenue in the case of DB Corporation Ltd. A.Y. 2009-10, ITA no, 206/2016 dated 16.02.2016 against the judgement of Hon'ble Gujarat High Court on the same question of law involved in the case of CIT Vs Holcim India Pvt. Ltd.. 5. "The appellant craves, leave or reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."

During the course of hearing, the Ld. Sr. DR has failed to controvert the findings of Ld. CIT(A) with regard to the fact that no cheque or cash or draft was deposited in the bank account of the assessee and it is a case of swapping of shares. We further find that the assessee during the course of assessment proceedings, have filed all the relevant details such as incorporation details of the subscribers companies and their PAN and identity details to establish their identity.

With regard to the creditworthiness, it is seen that all these companies have not made any payment to the assessee company rather they have transferred the shares to the assessee company and in view of such transfer the shares owned by them to the assessee company which are duly appearing in their Balance Sheet before transfer which itself prove their creditworthiness and in lieu of such transfer, they were allowed the shares of the assessee company at a premium. Therefore, when there was no payment made in the form of cheque or demand draft for subscription of the share at a premium to the assessee company, question of their creditworthiness for subscribing shares does not arise. This view is fully supported by the decision of the Co-ordinate Bench of ITAT in the case of M/s Elative Building Solutions (P) Ltd. (supra) wherein the Tribunal after considering the facts has observed as under: “16. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find, the assessee, in the instant case, has received the ITO vs. Telplay Packaging Solutions Pvt. Ltd. share capital of Rs.4,37,500/- and a share premium of Rs. 6,71,62,500/- by issue of 33750 shares to five corporate entities, the details of which are given at para 4 of this order. Although the assessee filed the confirmations, affidavit of the directors, acknowledgement of their ITRs for the assessment year 2012- 13, copy of their balance sheet and P&L Account, etc., however, the assessee failed to produce the directors/principal officers of these companies for recording of their statements by the AO. According to the AO, the assessee has issued shares of certain corporate entities at a high premium and, at the same time, purchased certain shares from these companies at a high premium and all the companies to whom shares have been sold and from whom shares have been purchased are inter-related companies. He, therefore, invoking the provisions of section 68 of the Act, made addition of Rs.6,76,00,000/- to the income of the assessee. Similarly, he also made addition of Rs.8,50,000/- u/s 68 of the Act in respect of one creditor, namely, M/s Wamil Clothing Pvt. Ltd., on the ground that the summons issued u/s 131 of the Act was received back unserved and, therefore, the provisions of section 68 of the Act are applicable. We find, the ld.CIT(A), deleted the addition by relying on the decision of the Tribunal in the case of M/s Vital Communications Ltd. (supra) on the ground that the share transactions by the assessee are only on paper and are in the nature of swapping of shares at a very high premium. Further, the said transactions and arrangements have not resulted in earning/receipt of a single rupee and no cash or cheque have been received in assessee’s bank or in hand.

We do not find any infirmity in the order of the ld.CIT(A) on this issue. Admittedly, the assessee does not have any bank account during the relevant assessment year, a fact brought on record by the AO himself. The provisions of section 68 of the IT Act, 1961 read as under:- “Cash credits.

Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the 79[Assessing] Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : The following provisos shall be inserted in section 68 by the Finance Act, 2012, w.e.f. 1-4-2013 :

As per the above provision where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory according to the AO, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. ‘Any sum’ has not been defined in the Income-tax Act. However, the Hon’ble Supreme Court had an occasion to analyse the use of the expression: ‘any sums paid’ while deciding a case u/s 80G of the Act in the case of H.H. Sri Rama Verma vs. CIT, reported in 57 Taxman 149 (SC). The relevant observations of the Hon’ble Supreme Court at para 4 of the order reads as under:- “4. The language used in Section 80G(2)(a) is clear and unambiguous. On a plain reading of the section, it is apparent that an assessee is entitled to claim deduction from his income on the amount of money paid by him as donation to the authorities and for the causes specified therein. The use of the expression "any sums paid" contemplates payment of an amount of money. One of the dictionary meanings of the expression "sum" means any indefinite amount of money. The context in which the expression "sums paid by the assessee" has been used makes the legislative intent clear that it refers to the amount of money paid by the assessee as donation. The Act provides for assessment of tax on the income derived by an assessee during the assessment year ; the income relates to the amount of money earned or received by an assessee. Therefore, for purposes of claiming deduction from income-tax under Section 80G(2)(a), the ITO vs. Telplay Packaging Solutions Pvt. Ltd. donation must be a sum of money paid by the assessee. The plain meaning of the words used in the section does not contemplate donations in kind. ………” …………………………………………………………………………………………… ……………………………………………………………………… 5. ……… On a careful scrutiny of the two opinions in the aforesaid judgments, we are in agreement with the view taken by the High Courts of Andhra Pradesh, Allahabad and Gujarat in holding that Section 80G(2)(a) contemplates only cash amount of money as donation, for claiming relief of deduction and it does not refer to any donation made in kind.”

We find, the coordinate Bench of the Tribunal in the case of Vital Communication Ltd. (supra) while holding that the provisions of section 68 cannot be applicable where shares were issued against the shares received under the swapping arrangements and no fresh amount of money was brought into the books by way of cash/cheque/draft has observed as under:- “8.3 We find force in the Ld. CIT(A)'s finding that the aforesaid addition cannot be sustained for another legal premise also. Section 68 of the I.T. Act 1961 under which these additions have been made by the Assessing Officer reads as under: - "Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and sources thereof or the explanation offered by him is not, in the opinion of the (Assessing) Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." 8.3.1 It is evident from the perusal of this provision that section 68 can be invoked only if any "sum" is credited in the account books of the assessee for which no satisfactory explanations could be furnished by the assessee. "Sum" denotes the money brought into the account books by way of cash / cheque / draft. Mere transfer of entries from one head to another cannot be treated as sum credited in the account books for the purpose of see 68 of the IT Act. Similarly, exchange of shares also cannot be brought into the ambit of Section 68 of the IT Act. In the present case, out of the addition of Rs.27,00,00,000 made u/s. 68 of the IT Act, the amount of Rs.25,00,00,000 was not brought into the account books by way of cash / cheque / draft during the relevant previous year. Shares worth Rs.15,00,00,000 were issued against the outstanding liabilities i.e ITO vs. Telplay Packaging Solutions Pvt. Ltd. there were only the transfer of entries from trade liability head to the share capital head. No fresh capital was brought into the account books by way of cash / cheque / draft. Similarly, the shares worth Rs.10,00,00,000 were issued against the shares received under the swapping arrangements. Here also, no fresh amount of money was brought into the books by way of cash/ cheque / draft. Hence, the addition made in respect of these share holders to the extent of Rs.25,00,00,000 does not come into the purview of section 68 of the IT Act. On this ground also, the said addition cannot be sustained. Though the said addition made u/s 68 cannot be sustained on the legal grounds itself as discussed above. 8.4 We further note that during the appellate proceedings, the Assessee's AR has filed the copies of ledger accounts of eleven trade creditors to whom the shares were, issued to settle their outstanding liabilities. The software supplied by such creditors share holders to the assessee company were also demonstrated during the appellate proceedings on 26-2-2007 by the Director of the aaseessee company Mr. J.P.Madaan. There is no evidence brought on record the show that such transactions of purchase of softwares were sham transactions to evade the taxes nor there can be any, since there is no advantage to the appellant company to enter into such sham transactions. Assessee had neither debited such expenses on purchase of software into the P & L account nor claimed any depreciation thereon. These were only reflected in the work in progress in the balance sheet under head fixed assets. There is no tax implication of such transactions. The Appellant has also furnished the copies of agreements in respect of shares with the other three companies. Swapping of shares is a recognized standard Assessee has also furnished the copies of agreements in respect of swapping the commercial practice and cannot be treated as any tax evasion technique. The technical objections raised by the AO regarding the difference in the date of agreements is satisfactorily explained by the Ld. AR. It is worthwhile to note from the assessment record, that one of the shareholder namely M/s Wisdom Publishing Pvt. Ltd has even confirmed the allotment of shares to them directly to AO in SWAP arrangement to the extent of Rs. 2,50,00,000/-. In view of the above, there is no question for making addition of this amount. Thus the Assessee has satisfactorily discharged the onus lying on him by proving the identity of each and every new shareholder. Further, presuming that the assessee is required to prove the other two requirements of section 68, i.e., creditworthiness of the share holders and genuineness of transactions. Assessee has proved beyond any iota of doubt that all the share holders were creditworthy and all the transactions were genuine. It is so evident from the documents filed during the assessment proceedings. To explain the credit entries in the said bank accounts, the bank accounts of the third parties in the chain were also filed by the assessee. Thus the assessee has ITO vs. Telplay Packaging Solutions Pvt. Ltd. not only proved the creditworthiness of the said share holders but also proved the source of the source, for which though no onus lie on him. 8.5 The Assessee has also furnished the copies of agreements in respect of swapping the shares with the other three companies. Swapping of shares is a recognized standard commercial practice and cannot be treated as any tax evasion technique. The technical objections raised by the AO regarding the difference in the date of agreement is satisfactorily explained by the Ld. AR before the Ld. CIT(A). It is pertinent to mention here that the said swapping transactions have been accepted as genuine by the Assessing Officers having jurisdiction over the other companies with whom the shares were swapped. Therefore, having filed above evidences establishing the identity of the shareholders, genuineness of the transactions and capacity of the shareholder, there remains nothing more for the assessee to prove and onus is discharged and thus action of A.O. in treating the entire increase in share capital as undisclosed income of the assessee is unjustified and therefore Ld. CIT(A) has rightly deleted the addition of Rs. 27 crores. 8.6 In the background of the aforesaid discussions and precedents relied upon, we do not find any infirmity in the detailed and well reasoned order passed by the Ld. CIT(A), hence, we uphold the same by deleting the addition of Rs. 27 Crores. As a result, the ground raised by the Revenue stands dismissed.”

We find, the Kolkata Bench of the Tribunal in the case of ITO vs. M/s Anand Enterprises Ltd., vide and CO No.56/Kol/2016, order dated 26th September, 2018, while deciding an identical issue has observed as under:- “4. We have heard the rival submissions. At the outset, we find that the assessee had not raised any share capital by receipt of cash consideration in the instant case. The shares were issued for consideration other than cash in lieu of assessee company making investment in shares in some other company. Effectively, the assessee purchased certain shares from the aforesaid six shareholders and instead of paying cash to them, the assessee company issued shares in its own company to those shareholders. Hence the assessee had made investments in shares of another company for which consideration was settled through issuance of its shares to those shareholders. Now the crucial point is whether the provisions of section 68 could be invoked in the instant case for making investment towards share capital. There was no receipt of any sum as provided u/s 68 of the Act in the instant case. It would be pertinent here to refer to the decision of Hon'ble Supreme Court in the case of Shri H.H. Rama Varma vs. CIT reported in 187 ITR 308 (SC) wherein it was held that 'any sum' means ITO vs. Telplay Packaging Solutions Pvt. Ltd. 'sum of money'. We find that ld. CIT(A) had deleted the addition by observing as under: "6. On consideration of the AR's submission, especially the portion reproduced above, it is seen that section 68 of I.T. Act, 1961 does not apply to cases of purchase of share assets and allotment of shares by the appellant when purchase and allotment are under a barter system. The AO has not refuted the appellant's claim that shares were allotted in exchange for acquisition of shares by the appellant from the companies which surrendered such shares to the appellant. Though as per the AO to apply section 68 to make the said addition in the appellant's hand. Transactions purportedly executed by entry operators involve multiple layers and other complexities, introducing delays in introduction of unaccounted cash/money and multiple players being incorporated entities. Measures taken by the AO in the course of the assessment proceeding falls much short of what is required to be done in such case laws, which have evolved on this issue, call for concerted actions on the part of the AO pinpointing utilization of unexplained/unaccounted/untaxed money and the players and the beneficiaries effectively using the weblike scheme to plunder black money. For example introduction and use of black money in the present case may be at a different point of time and in different hands. The AO's action in the present case cannot be upheld in law. I, therefore, delete the additions and grounds of appeal Nos. 3 & 4 are allowed." 4.1. We find that the Hon'ble Allahabad High Court in the case of CIT vs. Sohanlal Singhania reported in 235 ITR 616 (All) had held in the context of allowability of donation as deduction u/s 80G of the Act that the expression 'any sum paid' used in the said section denotes ' sum of money paid' . Hence if certain shares were donated by a person, then the same would not fall eligible for deduction u/s 80G of the Act. We also find that the Hon'ble Jurisdictional High Court in the case of Jatia Investment Company (Co.) vs. CIT reported in 206 ITR 718 (Cal) also supports the case of the assessee herein, wherein it was held as under: "It is finally emphasised by learned counsel for the assessee that the ultimate result is that the firm becomes a debtor to GB and Co. and the three non-financial companies of the group got discharged. Learned counsel also emphasised that, at the worst, it can be said that the assessee-firm has received valuable assets being the said ITO vs. Telplay Packaging Solutions Pvt. Ltd. shares of the equivalent value of the debt taken over by it from the companies, i.e., Rs. 11.20 lakhs. Therefore, the question of cash credit does not come in, there being no actual passing or receipt of cash. In other words, the transactions are mere book entries. It was contended that the fact that the entries passed through the cash book could not detract from or efface the essential nature of the entries. It was also urged that the entries were passed through the cash book so that the repayment of loans by the said three companies could be established before the Reserve Bank of India. But, according to Shri Bajoria, that does not mean that it amounts to an artifice employed to deceive any authorities, because the transactions showing the amount as received in cash and paid away spontaneously and simultaneously were not actual but only notional. He, however, stated that, as far as the question of section 68 is concerned, the nature of the transactions and the entries clearly show that no cash, in fact, flowed. It was further stressed that the transactions are above board. No outsider is involved. The entries were made in the books of the concerns of the same group. The shares in question were also of the companies of the group. There was no attempt at hiding the transactions. Nor is it the case of any of the parties to the transaction that there was any passing of cash. Every party unequivocally stated that the transactions were carried into effect merely by way of adjustments of the said loans and the share transfers. Shri A. C. Moitra, the learned advocate for the Revenue, reiterated the grounds on which the Tribunal has affirmed the addition of the amount of Rs. 11.20 lakhs as unexplained cash credit. He particularly emphasised that the assessee's contention that the entries are only adjustment entries is not acceptable, because the adjustment entries are not made through the cash book. It is an accepted principle of accounting that book adjustments and the entries in effecting them are made by journal entries and not cash entries. He urged that the purported motive of the entries being the reduction of loans of the three limited companies does not explain the whole matter, because the entries are cash entries. The fact remains that, at every stage, the parties showed the payments and receipts of cash even when there was no cash available for such entries. This quite justifies the addition as sustained by the Tribunal.

Similar view has been taken by the Kolkata Bench of the Tribunal in order dated 28th February, 2020 in the case of Blooming Tradelink Pvt. Ltd. vs. ITO by observing as under:- “4. We have heard rival submissions and gone through the facts and circumstances of the case. The addition u/s. 68 of the Act was resorted by the AO and confirmed by the Ld. CIT(A) on the share capital and premium of Rs.5,01,00,000/-. However, according to the assessee, no sum of money has been collected for transfer of shares, whereas shares have been received by the assessee in lieu of exchange of its shares, therefore, no addition u/s. 68 of the Act can be made. In support of its submission, the Ld. AR relied on the following case laws:

This case is distinguishable from the case of CIT v. Lovely Export (P.) Ltd. [2008] 216 CTR 195 (SC) in that the transactions were only book transactions, and there was no cash receipt. The decisions in (i) CIT v. Focus Exports (P.) Ltd. [2014] 51 taxmann.com 46/228 Taxman 88 (Delhi) (Mag.); (ii) CIT v. Globus Securities & Finance Pvt. Ltd. [2014] 41 taxmann.com 465/224 Taxman 237 (Delhi); (iii) Onassis Axles (P.) Ltd. v. CIT [2014] 364 ITR 53/224 Taxman 80 (Mag.)/44 taxmann.com 408 (Delhi); (iv) Olwin Tiles India (P.) Ltd. v. Dy. CIT [2016] 382 ITR 291/237 Taxman 342/66 taxmann.com 8 (Guj.); (v) B.R. Petrochem (P.) Ltd. v. ITO [2017] 81 taxmann.com 424 (Mad.); and (vi) Rajmandir Estates (P.) Ltd. v. Pr. CIT [2016] 386 ITR 162/240 Taxman 306/70 taxmann.com 124 (Cal.), cited on behalf of the respondent are distinguishable, in that the cash credits towards share capital were admittedly only by way of book adjustment and not actual receipts which could not be substantiated as receipts towards share subscription money.”

Applying the propositions of law laid down in the above cases to the facts of this case, we uphold the order of the ld. First Appellate Authority and dismiss this appeal of the revenue.”

In the facts and circumstances of the case and respectfully following the aforesaid judicial precedents relied upon hereinabove, we hold that the AO had erroneously invoked the provisions of section 68 of the Act to the facts of the instant case, which, in our considered opinion, are not at all applicable herein. This is a simple case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and instead, the consideration was settled through issuance of shares to the respective parties. Hence we hold that provisions of section 68 of the Act are not applicable in the instant case and accordingly, the entire addition deserves to be deleted and we delete the addition as confirmed by the Ld. CIT(A) and allow the appeal of the assessee. In the result, appeal of assessee is allowed.” 7.

The various other decisions relied on by the ld. Counsel for the assessee in the paper book also supports the case of the assessee that provisions of section 68 are not applicable in a case of acquiring shares of certain companies from certain shareholders without paying any cash consideration and, instead, considerations were settled through issuance of shares to the respective parties. In other words, provisions of section 68 of the Act does not apply to cases of purchase of shares and allotment of shares when the purchase and allotment are under a barter system. In this view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting the addition of Rs.6,75,00,000 /- (wrongly typed in the grounds as Rs.6,76,00,000/-). Therefore, the ground of appeal

As a result, the appeal of the Revenue is dismissed. Order is pronounced in open court on 07/03/2025.