SPARTEN GRANITO PVT. LTD,MORVI vs. PCIT RAJKOT-1, RAJKOT

The facts of the case which can be stated quite shortly are as follows: The assessee, before us, is a private limited company and had filed its return of income for assessment year (A.Y.) 2018-19, on 31/10/2018, declaring total income of Rs.NIL. The assessee`s case was selected for limited scrutiny by "CASS" for the following reasons, viz: (1) substantial increase in share capital in a year and (2) Purchases shown in the ITR is less than the invoice value of imports shown in the export- import data. The Assessment was finalised u/s 143(3) r.w.s. 143(3A) & 143(3B) of the Income-tax Act, 1961, on 01/04/2021, accepting returned income of Rs.NIL.

In response to the above notice, of the ld. PCIT, the assessee furnished copy of its earlier reply dated 11th March 2023. In its reply, the assessee submitted copy of income tax return of shareholders, bank statement, copy of ledger accounts, copy of balance sheet only for few shareholders. In support of M/s Sparten Granito P. Ltd. (AY : 2018-19) 4 the amount of Rs.10,20,12,500/- (Share capital) received from 27 persons, the assessee has submitted that in some of the cases, balance sheet of the subscriber of shares, were also submitted at the time of assessment proceedings. Further, the assessee has submitted that it has fully justified the identity, genuineness and creditworthiness of the investors by way of submitting documentary evidences. The assessee has relied on various judicial pronouncements as mentioned in its reply dated 11.03.2023.

However, the ld.Pr.CIT rejected the contentions of the assessee and observed that many of such share subscribers have declared returned of income in the income bracket of Rs. 2.34 lacs to Rs. 5.00 lacs and claimed to have invested the amount 6 to 26 times higher to their income which proves that these subscribers are not persons having capacity of making investments irrespective of the chances of return on investments. It is not a secret that share investment in an un-listed company, does not give easy exit route and are normally illiquid for a considerable time with few/limited exit options. Further, looking to the income declared by the assessee- company, it can be stated that no reasonable return on such investment by way of dividend is visible in these cases. In such scenario, no prudent investor would like to stack such huge amount of money in shares of the assessee- company, where no return on investment, appeared forthcoming. It was also observed that the assessee had not furnished balance sheet of most of subscribers/lenders in order to gauge the credit-worthiness of such subscribers. The ld PCIT further notice that some of the bank accounts of investors contained cash deposits, which are immediately invested in the assessee- company. It was further seen that, in some case the bank statements of the investors have no any major transactions other than the transaction with the assessee- company. For example, in case of Rupal Chandrakantbhai Dadhaniya who has invested total Rs.42,00,000/-, in the shares and given Rs. 11,50,000/-, as loan to the assessee- company, having M/s Sparten Granito P. Ltd. (AY : 2018-19) 5 capital of Rs.21,84,015/-, only as per the balance sheet, for the year ended as on 31.03.2018 of Rupal Chandrakantbhai Dadhaniya.

The ld PCIT observed that balance sheets of the shareholders were not filed. Further, in respect of cases where balance sheets were filed, it was observed by the ld. PCIT that huge unsecured loans were shown, as the source for share investment, in the assessee-company. From the Balance Sheets / Bank Statements, it appeared that most of these loans have been taken for the purpose of Share Capital Investment and unsecured loans. For example, in the case of Rupal Chandrakantbhai Dadhaniya, whereas her own capital is Rs.21,84,015/-, loan taken is about Rs.37.30 lacs from which Share Capital and Unsecured loan are provided. Similarly, in the case of Mittal Jayeshbhai Bavarva, it was seen that her own capital is Rs.16,61,816/-, whereas Rs.69.13 lacs is claimed to have been taken, as loan from which Rs.21 lacs invested in the Share Capital of the assessee -company. It was further noted by ld PCIT that Shri Dharmeshkumar Premjibhai, Kothiya has shown returned income of Rs.2,43,440/-, which also raises grave doubts on the creditworthiness of the person of investing Rs.21 lacs in share capital during the year under consideration. The ld PCIT stated that these are only few instances of such glaring discrepancies and manipulation of books. The above point to glaring and obvious mismatch/discrepancies between the source of income/funds and the capacity/creditworthiness for making investment in the Share Capital. These glaring discrepancies/mismatches should have raised the antenna of the assessing officer and he should have conducted necessary enquiries/verifications. However, the assessing officer accepted the share capital investment and loans without carrying out inquiry/verification that should have been done. The assessee was also required to furnish the explanation about nature & source as well as to prove the capacity of creditors to advance money. However, the assessee failed to furnish/prove the same. The ld. PCIT also invoked the provisions of explanation to section 263 of the Act M/s Sparten Granito P. Ltd. (AY : 2018-19) 6 and stated that assessment order was passed without making enquiry or verification, which should have been done, therefore impugned order passed by the assessing officer, under section 143(3) r.w.s. 143(3A) and (3B), was set- aside by the ld. PCIT for fresh assessment and directed the assessing officer to pass a fresh assessment order after making necessary enquiries.

Aggrieved by the order of the ld.Pr.CIT, the assessee is in appeal before us.

The ld. Counsel for the assessee, Shri S.N. Soparkar,( Senior Advocate), argued that assessee has introduced fresh capital in the assessment year under consideration and the assessee has proved the identity, creditworthiness and genuineness of the transaction and the assessing officer has examined the same by issuing notices, two times, under section 142(1) of the Act, during the assessment proceedings, therefore, it is not a case of lack of enquiry. The shareholders who have invested the money in the company submitted their balance sheet, profit & loss account, bank statements. During the assessment proceedings, the assessing officer issued notice to the assessee, asking the assessee to submit documentary evidences to prove the identity, credit- worthiness and genuineness of the investment in the assessee-company. The assessee has replied to the assessing officer along documentary evidences. The assessing officer has also issued further two notices under section 142(1) of the Act, which are placed at paper book (PB) page no.378-406 of the assessee’s paper book. In response to these notices, the assessee submitted required details and documents. Therefore, the assessing officer has scrutinized the details, so submitted by the assessee, and did inquiry also, and thereafter passed the assessment order, therefore, such assessment order should not be stated to be erroneous and prejudicial to the interest of the Revenue.

In addition to this, the ld DR pointed out that 55 shareholders have not filed their balance sheets, neither before the assessing officer, nor before the ld. PCIT, therefore, without balance sheets, creditworthiness of shareholders cannot be examined. The non-submissions of the balance sheets by 55 shareholders, mean that the assessee-company has failed to prove the credit- worthiness. Apart from this, in the bank statements of the shareholders, there is no other transaction except the cash deposited prior to the issue of cheque to the assessee-company. Therefore, it is a serious matter, where the assessee has failed to prove the source of source also. Therefore, the ld.DR pointed out that the assessee has not submitted documents and evidences to prove source of the source.

In rejoinder, the ld. Counsel for the assessee submitted that the shareholders income were adequate and 12 shareholders had filed balance sheets also. There is withdrawal of cash by the respective shareholders, in their bank statements, also. If there is no major bank transactions getting reflected in the bank statements of the shareholders, it is not a point to make addition in the hands of the assessee-company. The shareholders normally invest money out of the past savings and not from the current income. The ld. Counsel also submitted various judgements before the Bench, explaining the terminology of source of the source, which we have gone through.

We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld PCIT and other materials brought on record.

We note that in assessee`s case, under consideration, balance sheets of 55 Shareholders were not available before the Ld. PCIT, which is needed to prove the source( first degree evidence to prove source only).In the assessee’s case under consideration, the assessment year involved, is the assessment year 2018-19. Therefore, as per the proviso to section 68 of the Act, the assessee needs to explain the source of the source. However, the assessee has failed to prove the source of the source, as necessary documents and evidences were not filed by the assessee. As per ld DR balance-sheets of 55 shareholders are not available. The assessee has not submitted the entire documents and evidences to prove the first decree evidences, wherein only the source is to be proved. However, the second decree evidences, which is known, as source of the source, have never been submitted by the assessee before the Ld.PCIT. Therefore, considering the facts and circumstances, we are of the view that one more opportunity should be given to the assessee to plead his case before the ld. PCIT to prove the source of the source.

Therefore, considering the above facts, we are of the view, that this matter should be remitted back to the file of the Ld. PCIT with the direction to the assessee to submitted all details and documents to prove the source of the source. Some of the documents, that is, balance sheets of 55 shareholders, to prove the first decree of evidences are absent before the Ld. PCIT. We also find that the second decree evidences to prove the source of the source in respect of share capital have not been furnished by the assessee before the Ld. PCIT. Therefore, we are of the view that one more opportunity should be given to the assessee to furnish the required documents and evidences to prove the source of the source before the Ld. PCIT. We note that it is settled law that principles of natural justice and fair play require that the affected party is granted sufficient opportunity of being heard to contest his case. Therefore, without delving much deeper into the merits of the case, in the interest of justice, we restore the matter back to the file of Ld. PCIT for de novo adjudication and pass a speaking order after affording sufficient opportunity of being heard to the assessee, who in turn, is also directed to contest his stand forthwith. Therefore, we deem it fit and proper to set aside the order of the PCIT and remit the matter back to the file of the ld. PCIT to adjudicate the issue afresh on merits. For statistical purposes, the appeal of the assessee is treated as allowed.