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

On the facts and in the circumstances of the case and law, where the Ld. CIT (A) has erred in relying upon the decision of Hon'ble ITAT in the case of M/s Vital Communication Ltd,. ITA No. 2448/Del/2007 while Hon'ble Delhi High Court has kept open interpretation of term 'Sum' to be defined in appropriate case used in section 68 as decided in the case of Pr. CIT9 Vs Vital Communication Ltd., ITA No, 911/2016 dated 25.07.2017 provisions of section 68 of the IT Act, 1961. 4. 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 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, ld. Sr. DR vehemently supported the order of the AO and submit that during the year under appeal assessee has received share capital and share premium. During the course of assessment proceedings, the AO has made inquiries with respect to the subscribers companies and it was found that they were non-existent and therefore, the additions was made. The Ld. DR further submitted that Ld. CIT(A) while deleting the additions relied upon the judgment of the Tribunal in the case of Vital Communication Ltd., in ITA No 2448/Del/2007 wherein it is held by the Tribunal that where no cash or cheque has been received and only swapping of shares taken place, provisions of 68 of the Act are not applicable. The Ld. Sr. DR submit that against this order, the Revenue went in appeal before the Hon’ble Delhi High Court who vide its order dated 25/07/2017 has held that both CIT(A) and the Tribunal has notwithstanding their conclusion on the legal issue also examined the case on merits and in considerable details, each of the allegation made by the AO and concluded that addition made u/s 68 therefore, the Ld. Sr. DR prayed that the term “sum” as defined in section 68 of the Act as referred in section 68 of the act has not been decided by the Hon’ble Juri ictional High Court in the case of Vital Communications (supra) and, therefore, the reliance placed by the Ld. CIT(A) in the instant case on the judgment of Vital Communication (supra) is misplaced and the addition made by AO on account of share capital and share premium deserves to be upheld. He further submit that assesse has failed to establish the creditworthiness of the subscriber companies and since they have not been found at the given address when the Inspector visited their premises, their identity is also doubtful. He, therefore, prayed that the Ld. CIT(A) has wrongly deleted the addition so made and he prayed that the reversal of the order of the Ld. CIT(A).

On the other hand, the Ld. AR vehemently supported the orders of the lower authorities and submit that during the course of hearing before AO, the assessee had filed all the relevant details with respect to the share subscribers which incudes their incorporation details with ROC, their PAN and Income Tax details and their financial statements which not only established the identity of the subscribers but also proved their creditworthiness. He further submit that in the instant case, assessee has purchased share from subscribers companies and the consideration was paid by way of issue of shares at premium, therefore, it is not the case where any sum of money is of the Hon’ble Tribunal in the case of ITO vs. M/s Elative Building Solutions (P) Ltd. in ITA No.2497/Del/2017 wherein the Co-ordinate Bench of the Tribunal vide order dated 24/03/2021 under identical fact has allowed the appeal of the assessee and dismissed the appeal of the Revenue. In that case also the share premium purchased and allotment on shares was made in barter system thus, the Co-ordinate Bench of Tribunal was of the view that provisions of section 68 of the Act are not applicable. He thus, prayed that the order of the Ld. CIT(A) deserves to be uphold.

We have heard the rival submissions and perused the materials available on record. In the instant case, the Ld. CIT(A) has deleted the additions by observing in para 3.2 of his order as under: “3.2 I have considered the opinion and reasoning of the assessing officer and the submissions of the appellant. It is undisputed that the share transactions by the appellant are only on paper and are in the nature of swapping of shares at a very high premium. As submitted by the appellant, the said transactions and arrangements have not resulted in earning/receipt of a single rupee and no cash or cheques have been received in appellant's bank or in hand. The decision of Hon'ble ITAT in the case of M/s Vital Communication Ltd., ITA No. 2448/ Del/2007 [(2016-TIOL-ITAT- DEL)] relied upon by the appellant is applicable to this appeal as the transactions as well as the additions in both the cases revolve around swapping of shares, mere transfer of entries and no cash, cheque or draft has been deposited in the books of account or bank account of the appellant. Being guided by the case law relied upon by the appellant in the case of M/s Vital Communication Ltd., ground of appeal 1 is allowed in favour of the appellant.” 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 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. 68. 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 : whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.”

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 (SC). The relevant observations of the Hon’ble Supreme Court at para 4 of the order reads as under:-

……… 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 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 Wi om 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 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 ITA No.1614/Kol/2016 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 '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 Juri ictional High 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 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. showing payments and receipts ; but since the entries made a complete round, no passing of cash was necessary for the purpose of making the entries. That there was no passing of cash is also admitted by the Income- tax Officer himself. We have already extracted the observation of the Income- tax Officer in paragraph 14 of his assessment order. The Income- tax Officer has clearly opined that all the respective parties did not receive cash nor did pay cash as none had any cash for the purpose. The only point in the assessment order is that the entries not involving the passing of cash should not have found a place in the cash book, but in the ledger account through journal entries. There is another self- contradiction in the Income-tax Officer's finding that, if there was no real cash entry on the credit side of the cash book, but merely a notional or fictitious cash entry, as admitted by him, there is no real credit of cash to its cash book ; the question of inclusion of the amount of the entry as unexplained cash credit cannot arise.

Similar view has been taken by the Kolkata Bench of the Tribunal in ITA no.2691/Kol/2018, order dated 28th February, 2020 in the case of Blooming Tradelink Pvt. Ltd. vs. ITO by observing as under:-

The undisputed fact in this case is that the allotment of shares were for consideration other than by way of cash. The four companies which applied for allotment of shares, have sold their investment to the assessee company and the assessee company, has as consideration for the purchase of those shares had allotted shares at a premium. It is a case of swapping of shares. The shares were allotted for consideration other than cash. The question is whether under these facts and circumstances Section 68 of the Act, would be attracted.

1. The ld. D/R, submits that the premium is not justified and that the ld. CIT(A) was wrong in holding that the assessee has proved the identity, creditworthiness and genuineness of the transaction. He relied on the order of the Assessing Officer. In reply the ld. Counsel for the assessee, submits that each of the above companies have filed replies before the Assessing Officer to the notice issued u/s 133(6) of the Act. He further pointed out that the ld. CIT(A) called for a remand report the Assessing Officer had not disputed the identity, creditworthiness of the share subscribers as well as the genuineness of the transactions. He relied on the order of the ld. CIT(A). Kolkata ‘C’ Bench of the Tribunal in the case of ITO vs. M/s. Anand Enterprises Ltd., ITA No. 1614/Kol/2016 & C.O. No.56/Kol/2016; dt. 26/09/2018, wherein under identical circumstances, at para 4.3. it was held as follows:-

2. The Hon’ble Juri ictional High Court in the case of Jatia Investment Co .v. Commissioner of Income-tax [1994] 206 ITR 718 (CAL.) held as follows:-

3. Recently, the Hon’ble Madras High Court in the case of V. R. Global Energy (P.) Ltd. v. Income-tax Officer, Corporate Ward 3(4), Chennai [2018] 96 taxmann.com 647 (Madras) while dealing with a case where cash credit towards share capital were admittedly, only by way of book adjustments and no actual cash was received towards share subscription money held as follows:-

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 result, appeal of assessee is allowed.”

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 No.1 raised by the Revenue is dismissed.

Since the facts of the instant case are identical to the facts in the case of M/s Elative Building Solutions (P) Ltd. (supra) and also certain other cases relied upon by the assessee which are filed in the PB before us, wherein it is held that provisions of section 68 are not applicable in case of Swapping of Shares. The assessee had acquired the shares of certain companies and no cash consideration was paid and the same was settled by way of issue of shares at premium to such parties and thus it is a case of clear cut barter system. With regard to the judgment of the Hon’ble Juri ictional High Court in the order of Co-ordinate Bench in case of Elative Building Solutions (supra), we find no reason to interfere with the order of the Ld. CIT(A) and the same is hereby upheld. Therefore, ground of appeal Nos.1 to 3 of the Revenue are dismissed.

Ground No.4 is in relation to the disallowance of Rs.28,900/- made u/s 14A by invoking the provisions of Rule 8D of the Act. The Ld. Sr. DR vehemently supported the order of the AO and submit that the assessee has since made the investment in share, therefore, the provisions of section 14A of the Act are clearly applicable and, he prayed for restoration of the disallowance so made.

On the other hand, the Ld. AR supported the orders of the CIT(A) and submit that no investment was made in acquisition of shares and they were swapping of the shares, therefore, when no funds were involved nor any interest was paid nor any exempt income was received by the assessee on such investment, therefore, the CIT(A) has rightly deleted the disallowance and, he request for confirmation of the order of the Ld. CIT(A). its share at premium. The Hon’ble Juri ictional High Court in the case of Cheminvest reported in 378 ITR 33 has held that where no exempt income is received by the assessee, no disallowance could be made u/s 14A of the Act. Thus by respectfully following the aforesaid judgment and in view of the facts as discussed above, we find no infirmity in the order of the Ld. CIT(A) which is hereby upheld.

As a result, the appeal of the Revenue is dismissed. Order is pronounced in open court on 07/03/2025. (ANUBHAV SHARMA) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 07/03/2025