ABROAD VITRIFIED PVT LTD,MORBI vs. THE PR. CIT-1, RAJKOT, RAJKOT

Succinctly, the factual panorama of the case is that assessee before us is a private limited company.The assessee had e-filed return of income for assessment year(AY)) 2018-19, on 29.10.2018, declaring total income at Rs. NIL. Thereafter, the assessee`s case was selected for complete scrutiny through CASS for the reasons to verify (i) Purchases shown in the ITR is less than the invoice value of imports shown in the export -import data and (i) Introduction of large capital or share capital in the year of incorporation. The assessment was completed, u/s143(3) r.w.s. 143(3A) & 143(3B) of the Income Tax Act, on 16.03.2021, without making any modifications in the Income Tax Return.

Later on, Learned Principal Commissioner of Income-Tax-1, (in short “Ld PCIT”), exercised his jurisdiction, under section 263 of the Income-Tax Act, 1961.On verification of records, it was observed by Ld. PCIT that the assessee had introduced huge amount in the company in the form of Share Application Page | 2 Money amounting to Rs.12,10,00,000/-. One of the reasons for selection of case under scrutiny was introduction of large capital or share capital in the year of incorporation. Perusal of records revealed that the assessee had submitted details to prove the genuineness of the share capital so introduced. The share capital and unsecured loans received by the assessee from 61 persons and out of 61 persons, some 29 persons "did not have sufficient creditworthiness to make such huge capital and unsecured loan and the total amount of such investment comes to Rs. 10,94,85,000/- (Rs.2,33,90,000/- Unsecured loan + Rs.8,60,95,000/-Share capital). Their capital contribution is as high as 6 to 27 times of their income. Further analysis revealed that in some case, the bank statements of the investors have no any major transactions other than the transaction with the assessee- company. Although this verification/inquiry is applicable to all the 61 persons, however, in the 29 cases (mentioned in the notice issued vide letter dated 23.03.2023), it is clear that there is no creditworthiness to make such huge capital. The total amount of such investment in the company from 29 persons comes to Rs.10,94,85,000/- (Rs.2,33,90,000/- Unsecured loan + Rs.8,60,95,000/- Share capital). As per the proviso to section 68 of the Income Tax Act, it is mandatory (as per law) to verify the source of the source and the assessing officer failed to verify the source of the source of the capital contributed and hence, there is clear violation of section 68 of the Income Tax Act and therefore, the aggregate amount of Rs. 10,94,85,000/- was required to be disallowed u/s 68 r.w.s.115BBE of the Act and added to the total income of the assessee while finalizing the assessment proceedings u/s. 143(3) of the Act, which has not been done, by the assessing officer.

Therefore, Ld. PCIT noticed that assessing officer had passed the assessment order without making proper enquiry and verification on the above issue, it is thus, apparent that the order passed by the then assessing officer in assessee's Page | 3 case for AY 2018-19 u/s.143(3) r.w.s. 143(3A) & 143(3B) of the Act, dated 16.03.2021 is erroneous, in so far as it is prejudicial to the interest of revenue. Considering such facts, a notice u/s 263 of the Act was issued by Ld. PCIT, vide notice dated 09/03/2023, to the assessee, which is reproduced by the learned PCIT, vide page Nos. 3 to 19 of the revision order under section 263 of the Act.

In response to the above show- cause notice, the assessee submitted its reply dated 20.03.2023 in support of the amount of Rs.10,94,85,000/- ( Rs.2,33,90,000+ Rs.8,60,95,000) unsecured loan and share capital received from 29 persons. The assessee had submitted that it has furnished all the details during the course of assessment proceedings, duly supported by the Income Tax Returns, with annual accounts for 3 years and the bank statements of all the parties, except in 2 cases where Income Tax Returns were not filed, being non- filers. From the return of income and annual financial statements, it can be seen that the investment with the assessee-company reflects therein. The bank statement of the shareholders, reflect the loan and borrowing by them, wherever applicable, with the details of cheque number, RTGS, share subscribers name and address, PAN number and bank statement etc. Since the credits in the cases of shareholders are through banking channel and duly supported with evidence of source of the source .The assessee had discharged the burden and duty, on him, as per the provisions of subsection 68 of the Act. The prospective shareholders have managed their financial affairs by obtaining the funds from the friends and relatives, who were in position to lend to assist the assessee to raise the funds for the purpose of launching a big venture. In the assessee`s case, the assessing officer has passed the order in great detail, after due application of mind therefore, the clause (a) of Explanation 2 to section 263 does not spoil the assessment process in the facts and in the context of the case. Hence, the foundation for exercise of revisional jurisdiction by invoking the clause (a) of Explanation -2 to section 263 is missing. The assessee had also relied on various Page | 4 judicial pronouncements, as mentioned in its reply, furnished on 20.03. 2023, before the learned PCIT.

However, learned PCIT rejected the above arguments of the assessee and observed that with effect from 01/06/2015, clause (a) of Explanation 2 to section 263(1) has been inserted by which scope of section 263 of the Act, has been expanded by incorporating the concept of "deemed to be erroneous". The same is reproduced as under: “Explanation 2.-For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, (a) The order is passed without making inquiries or verification which should have been made; (b) The order is passed allowing any relief without inquiring into the claim; (c) The order has not been made in accordance with any order direction or instruction issued by the Board under section 119; or (d) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

Aggrieved by the order of Ld. PCIT, assessee is in appeal before us.

Learned Counsel for the assessee, argued that during the assessment proceedings, assessee has explained the source of source of the share application money in respect of share applicants,by submitting their individual balance-sheet, income tax return, PAN, bank statement and their complete addresses and second degree evidences in those cases, where the shareholders took loan from other persons, to prove the source of the source.The Assessing Officer, during the assessment proceedings not only conducted initial enquiry but further enquiry was also conducted by the assessing officer The Ld. Counsel for the assessee submitted that assessee has also furnished, the third party evidences, from whom share -applicants have taken loan for investment in the assessee-company. Therefore, assessee has not only explained the source, but the ‘source of the source’ was explained by the assessee, by furnishing details and documents to the satisfaction of the assessing officer. The assessing officer, having examined all the documents and evidences, which were submitted by the assessee and after applying his mind, framed the assessment order, which should not be erroneous and prejudicial to the interest of the revenue. During the revision proceedings under Section 263 of the Act, assessee has submitted entire documents and evidences, before learned PCIT, which were submitted before the Assessing Officer. However, Ld. PCIT did not give any specific findings on these documents and evidences and just remitted the issue back to the file of Assessing Officer for fresh enquiry and fresh adjudication, which is not the scheme of section 263 of the Act, hence order passed by the learned PCIT may be quashed.

On the other hand, Ld.CIT-DR for the Revenue submitted that assessee has miserably failed to explain the “source of the source” in respect of share capital. The Ld.CIT-DR pointed out that assessee has not explained its source of the source, particularly for 29 persons, however, in case of other persons “source of the source” have been explained by the assessee. Total 61 persons/ share subscribers,have applied for shares however, in the case of 29share subscribers, there is no creditworthiness to make such capital contribution to purchase the shares. The assessing officer also did not examine the “source of the source” in respect of share capital. In case of 29 shareholders, there, capital contribution to the assessee-company do not match with their income and their individual source of income. Besides, unsecured loan to the tune Rs.2,33,90,000/-, has not been verified properly by the assessing officer. Therefore, order passed by the assessing officer is erroneous and prejudicial to the interest of the revenue, and hence, order passed by the Ld. PCIT may be upheld.

In rejoinder, the Ld. Counsel for the assessee submitted that assessee has explained“source of the source”in respect of cash deposited in the bank account, in case of some shareholders, by way of submitting audited financial statement and the cashbook. The Ld. Counsel further submitted that some shareholders, for examplein case of Shri Bhudarbhai S Vamza, the said shareholder took the loan from bank and has invested in the assessee-company, which is genuine transaction and therefore should not be doubted.

We heard both sides in detail and also perused the records of the case including the paper book filed by the assesses- company running in to 251 page. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case. We note that during the assessment proceedings,the detailed notice u/s 142(1) of the Act dated 26.11.2020 was issued to the assessee, wherein the assessing officer, vide para 7 has stated the following:

In respect of unsecured loans, the assessee need not to prove the source of the source, however assessee submitted sufficient documents and evidences before the assessing officer, such as, copies of ITR, Bank statements, confirmation, name and address and PAN number.

In this regard it may be observed from the return of income (ROI) and the annual financial statements that the investment with the assessee-company reflects, in the bank statement of the shareholders. The shareholders bank statements also reflect the loan/ borrowing by them [wherever applicable] with the details of cheque No. RTGS, party's name etc, and all these persons are assessed to tax and capable to give money to the shareholders to invest in the assessee-company, therefore, second degree evidences to prove the source of the source was on record.As regards the suspicion that the shareholder's income is on lower side, as against the investment made, it is worth to note the background of these persons. In this regard the ld Counsel submitted that basically the promoters of the company are coming from the rural background having relatives staying in the surrounding villages. The main source of income of these relatives is from agricultural, coupled with business as well. In installation of a manufacturing unit in the field of ceramics, substantial capital and fund is required. Under the circumstances, the promoters have to raise sufficient capital in the form of share application money and also unsecured loans. None of the share holders/depositors had denied the fact. Under the circumstances, the prospective shareholders have managed their financial affairs by obtaining the funds from the friends and relatives who were in position to lend to assist the assessee to raise the funds for the purpose of launching a big venture, and to verify their credit worthiness assessee submitted their bank Page | 9 statement and financial statements to prove the source of the source.The learned PCIT also noticed that some of the shareholders have small income, however they invested in the assessee-company, despite of there small earning per month, in this regard, the ld Counsel stated that monthly income is not a criteria to invest in a company, the shareholder can invest in a company out of his past accumulated savings and out of borrowed funds also.

We also note that the show cause notice of Ld. PCIT is based on the suspicion that the creditworthiness of 29 depositors are under cloud without pinpointing any discrepancies therein nor Id. PCIT has brought on record the details of such 29 persons. Where any sum is found credited in the books of an assessee then there is a duty casted upon the assessee to explain the nature and source of credit found in his books. In the instant case, the credit is in the form of receipt of share capital with premium from share applicants and unsecured loan. The nature of receipt towards share capital is seen from the entries passed in the respective balance sheets of the companies as share capital and investments. In respect of source of credit, the assessee has to prove the three necessary ingredients i.e. identity of share applicants, genuineness of transactions and creditworthiness of share applicants. For proving the identity of share applicants, the assessee furnished the name, address, PAN of share applicants together with the copies of balance sheets and Income Tax Returns. With regard to the creditworthiness of share applicants, as we noted supra, these Companies/Shareholders submitted their bank statements, and bank statement and financial statements of the persons from whom they borrowed the loan/money, to prove the source of the source. These transactions are also duly reflected in the balance sheets of the share applicants, so creditworthiness is proved. Even if there was any doubt if any regarding the creditworthiness of the share applicants was still subsisting, then AO should have made enquiries from the AO of the share subscribers, which has not been done, so no adverse view Page | 10 could have been drawn. Third ingredient is genuineness of the transactions, for which we note that the monies have been directly paid to the assessee company by account payee cheques out of sufficient bank balances available in their bank accounts on behalf of the share applicants. It will be evident from the paper book that the appellant has even demonstrated the source of money deposited into their bank accounts which in turn has been used by them to subscribe to the assessee company as share application. Hence the source of the source is proved by the assessee.

Considering the above facts, we find that order passed by the assessing officer is neither erroneous nor prejudicial to the interest of the revenue. In Para No.8 of the order of the ld PCIT, under section 263 of the Act, the learned PCIT observed that the assessing officer has not made any conscious attempt to examine the issue on the basis of the material on record. Therefore, from the above statement of the learned PCIT, we find that main grievance of the learned PCIT was not that the assessing officer has not examined the issue under consideration, as per ld. PCIT, the assessing officer, of course, has examined the issue under consideration but the assessing officer did not make any conscious attempt to examine the issue on the basis of the material on record.We note that there is difference between ‘Lack of enquiry’ and ‘inadequate enquiry’. It is for the AO to decide the extent of enquiry to be made as it is his satisfaction as what is required under law. Reliance is placed on the decision of CIT v. Sunbeam Auto Ltd. [(2010) 332 ITR 167], wherein Hon’ble Delhi High Court has held that if there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass order u/s 263 of the Act, merely because the Commissioner has a different opinion in the matter and that only in cases where there is no enquiry, the power u/s 263 of the Act can be exercised. The ld. PCIT cannot pass the order u/s 263 of the Act on the ground that further/thorough enquiry should have been made by AO. Further, it was settled Page | 11 by Hon`ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT [(2000) 243 ITR 83 (SC)] wherein it was held that if the A.O. adopts one of the possible courses available in the scheme of the I.T. Act which results in any loss of revenue or when two views are possible and the A.O. adopts one of them with which the C.I.T. does not agree, then it would not be an order prejudicial to the interest of revenue for invoking the jurisdiction u/s. 263 of the Act. For better appreciation, the relevant portion of the judgment in the case of Malabar Industrial Co. Ltd. vs. CIT (supra) is quoted below : “The phrase “prejudicial to the interests of the Revenue” has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law”.

Considering the aforesaid facts it is seen that AO had made full inquiries by raising the queries with respect to the issue under consideration and the same were also replied by the assessee and on receipt of the replies accepted the claim of the assessee. We further find that Hon'ble Apex Court in the case of CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188 (SC) has held that where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of Revenue, unless the view taken by the ITO is unsustainable in law. We also draw support from the decision of Hon'ble Delhi High Court in the case of CIT v. Honda Siel Power Products Ltd. [2011] 333 ITR 547 [2010] 194 Taxman 175 where it has been held that when a regular assessment is made u/s 143(3) a presumption can be raised that the order has been passed upon on application of mind. Before us, Revenue has not brought any material on record to demonstrate that the view taken by the AO was an impermissible view and was contrary to law or was upon erroneous application of legal principles necessitating the exercising of Revisionary powers u/s 263 of the Act.If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately.In the instant case, the Ld Pr. CIT has simply expressed the view that the assessing officer should have conducted enquiry in a particular manner as desired by him. Such a course of action of the Ld Pr. CIT is not in accordance with the mandate of the provisions of section 263 of the Act. A mere observation that no proper details have been obtained, cannot be sufficient to come to a conclusion that the AO did not make proper and adequate inquiries which he ought to have made in the given facts and circumstances of this case. In the conclusion we are of the view that none of the reasons set out by the ld PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. We accordingly quash the order u/s 263 of the Act and allow the appeal of the assessee.

In the result, appeal of assessee is allowed.