ETAL ENSER PVT. LTD.,KOLKATA vs. ITO, WARD 5(3), KOLKATA, KOLKATA

आदेश /O R D E R PER S.S.Godara, Judicial Member:- This assessee’s appeal for assessment year 2010-11 arises against the Commissioner of Income Tax(Appeals)-8 Kolkata’s order dated 14.02.2017 passed in case No.8/10201/2013-14 involving proceedings u/s 143(3) of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file perused.

No.1]: 1(a). That the Ld. AO is wrong and unjustified in holding share capital received from three corporate entities as not real by relying on irrelevant and extraneous consideration. 1(b). That the observation of Learned. AO that creditworthiness of share holders is not established is contrary to the ratio of decisions in CIT vs. Steller Investment Ltd. 192 ITR 287 (Del) and CIT vs. Sophia Finance Ltd 205 ITR

98. (Del) 1© That on the facts and in respect to the circumstances of the case, Learned. AO has proceeded on erroneous belief and misconception on law in considering share capital of Rs.25,00,000/- received from 3 corporate entities as unexplained cash credit u/s/s 68 of IT Act, 1961. 5.1 The relevant facts of the issue are that during the relevant previous year the appellant’s paid-up share capital had increased by ₹2,50,00/- along with share premium thereto at ₹22,50,000/-. There are 3 purported parties – being private limited companies – who had purported to have made subscription to share capital along with premium thereon as hereunder: Sl. Name of the Towards share Towards share Total paid [₹] private limited capital [at₹100/- premium company per share] [at₹900/- per share]

1. Fasttrack 60,000/- 5,40,000/- 6,00,000/- Vincom Pvt. Ltd.

2. Space Tradev 75,000/- 6,75,000/- 7,50,000/- Pvt. Ltd

3. Tirupati 1,15,000/- 10,35,000/- 11,50,000/- Marketing Pvt. Ltd. Total 2,50,000/- 22,50,000/- 25,00,000/- 5.2 The ITO AO, for detailed reasons in the assessment order, had viewed the purported private companies to be bogus/fictitious non-existent private limited companies only having name on paper with only purpose to facilitate laundering of undisclosed / siphoned off incomes-via maze of circuitous network layering amongst myriad of such other bogus/fictitious private limited companies. The reasons of the ITO AO, synopsized are hereunder: (i) that the furnishing of the details sought for were delayed; and later on were submitted through office dak. (ii) On the stereo-type characteristics of the application forms/acknowledgements. (iii) On the shareholders – that a purported shareholder [Uday Shankar Hait] in one of the company was an employee of the AR appearing in respect to the assessment proceedings; as also that in another company that shareholders/Directors [Rintu Mitruka and K K Mitruka] are sister-in-law and elder brother of the AR. (iv) That Uday Shankar Hait – who t is also claimed by the appellant to have being paid for doing labour job works, that from his deposition u/s.131, unit is evident that no such labour work had been done by him. (v) That the written replies from all the other shareholders – our ditto, as also in provision forma and font. (vi) That form th9e bank statements it is seen that immediately before issue of the cheque to the assessee three is deposit of sums. (vii) That thus the purported 3 private limited companies – were nothing, but paper companies for ‘Jama Kharchi’ entries routing. (viii) And that this being the case of the creditworthiness of the purported parties as also the genuineness of the transactions – being definitely doubtful, the ITO AO relied on the decision of the Hon'ble Calcutta High Court in the case of Bhola Shankar Cold Storage (Pvt) Ltd Vs. JCIT [2005] 144 taxmann.899 (Cal)

Etal Enser Pvt. Ltd.. Vs. ITO Wd-5(3), Kol. Page 3 5.3 The ld. AR, this issue being the main major issue as also quantum, had submitted lengthy written submissions being from page 2 to page 12 of the written submissions, and in the paper-book copies of documents being from page 1 to 103 of the paper-book. The ld. AR in the submissions has argued on: • Counter-argued all the observations and reasons of the ITO AO • And relied on various many judicial decisions – most which cited the pronouncement of the Hon'ble Supreme Court in Lovely exports P Ltd. [2008] 216 CTR 195 (SC) 5.4 Deliberation, Discussion, and, Appellate Decision: 5.4.1. Arguments – will only be arguments only, a plenty; what is core to this issue is simply – is it believable of the purported private subscription to share capital with astronomical premium thereon? This instant case depends crucially on the ‘creditworthiness’ of the purported 3 private limited companies, as also on the ‘genuineness’ of the purported transactions; not so much on ‘identity’. The much oft cited case of Lovely Exports [supra] is actually in essence – only on the limb of ‘identity’. ‘Identity’ is the most easiest and can easily be made - in which ever form and manner required. It is, plainly put – just a name – a mask. And even on the identity aspect – what is essential is to go deeper beyond just the name –whether the identity itself is real. Then to the more further crucial tests of creditworthiness of the purported parties as also the genuineness of the purported transactions – are the purported transactions rationale, logical, believable. Thus, following are the touchstone’s that must be put to this test; A. Is the worth, the tract-record, the future prospect, of the appellant private limited company so much as to command and demand for the per share premium at ₹900/- as compared to the face-value per share of ₹1100/- only? B. Why has the purported subscription been only by private placement? C. Are the purported 3 private companies worth by themselves, and so as to be creditworthy by themselves. A. Is the worth, the track-record, the future prospect, of the appellant private limited company so much as to command and demand for the per share-premium at ₹900/- as compared to the face-value per share of ₹100/- only? The necessary financials to adjudge so, are: “Note: I have taken only the financials of the instant AY 2009-10 as they are in the Paper Book. These 2 years financials adequately serve the analysis purpose here. On performance: AY 2010-11 AY 2009-10 Profit before tax 4,51,452/- 4,55,247/- Sales 6,51,48,799/- 8,54,26,424/-

On Worth: AY 2010-11 AY 2009-10 ‘Share Capital’ 23,02,000/- 20,52,000/- ‘Reserves’ & Surplus ‘Securities Premium Account’ 34,50,000/- 12,00,000/- Profit & Loss Account 11,99,263/- 9,35,640/- Net current assets 1,01,77,521/- 98,96,908/- There is really – no need to explain. It is plain common sense. Prominent salient obvious oddities are: • Is it just not believable that a private company earning profit before tax of just around ₹4 lakhs in AY 2009-10 could demand share premium at 9 times the share face value.

Etal Enser Pvt. Ltd.. Vs. ITO Wd-5(3), Kol. Page 4 • Is it just not believable that a private company having accumulated profits at only 9,35,640/- as on 31.03.2009 could demand share premium at 9 times the share face value. • Is it just not believable that as on 311.03.2009, as compared to accumulate profits at only 9,35,640/-, the ‘share premium’ is at ₹12,00,000/- • The sales are at only around ₹8 crore for the FY 2008-09, and around ₹ 6 crore for the FY 2009-10; and most pertinently, the profit is infinitesimal at only a few lakh rupees. • Then, just how has the ‘share premium’ be determined? There is just no basis. So – it is just not believable that the appellant private limited company could have commanded and got ‘share premium’ at ₹900/- per share; 9 times more the face- value per share. And so, it is just not believable that any sane person would have purchased the shares; even an idiot would not succumb so. And so obviously, the purported purchase of the shares with premium is nothing but subterfuge of the appellant company itself introducing its own undisclosed income/siphoned off profits [by way of bogus claim/inflated claim of expenditures. This aspect will also be discussed in a late issue hereafter regarding labour charges claimed to have been paid to Uday Shakar Hait, who also s shown as a shareholder/Director in one of the purported private limited company.] B. Why has the purported subscription been only by private placement, and only with the 3 purported private limited companies? This too- but only reveals the obvious clandestine layering and routing. C. Are the purported 3 private companies worth by themselves, and so as to be creditworthy by themselves. Relevant figures from purported ‘financials’ ‘return of income’ of these purported 3 private limited companies are:

‘Return of ‘Income’ as ‘Balance Income’ per P&L ‘Balance Sheet’ [‘Sources of Funds’] sheet’ a/c’ [Applications of Funds’] ‘share ‘share ‘accumulated ‘Investments capital’ premium’ profit’ in Unquoted shares’ 61,00,000 [in AY [n.a] 4,120 7,90,000 62,10,000 7 number of 09-10 ‘Pvt.Ltd.Co’s] Fastrack 1,07,00,000 Vincom AY 21,878 3,60,991 9,73,750 1,33,91,367 15,117 [in 10 Pvt.Ltd. 10-11 number of ‘Pvt. Ltd. Co’s] 35,00,000 [in Space AY [n.a] 4,068 7,85,000 61,65,000 4 number of Tradev 09-10 ‘Pvt. Ltd. Pvt. Ltd. Co’s] AY 1,39,50,000 10-11 4,30 11,05,205 11,45,000 1,48,05,000 3,020 [in 15 number of ‘Pvt. Ltd. Co’s] 84,50,000 [in Tirupati AY [n.a] 1,78,260 15,13,500 91,21,500 (2,32,856) 15 number of Marketing 09-10 ‘Pvt Ltd. Pvt. Ltd. Co’s] 0 89,00,000 [in AY 8,88,848 18,38,500 1,52,96,500 (1,74,602) 10 number of 10-11 ‘Pvt. Ltd. Co’s] From the above Table is very evident:

Etal Enser Pvt. Ltd.. Vs. ITO Wd-5(3), Kol. Page 5 Thus, I hold that it is that these purported companies are fictitious/bogus/non-existent. The Companies Act has been misused to create thee bogus companies – by mere simply creating a company only in name and filing hoax documents. The ‘PAN’ obtained, the ‘return of income’ of the purported companies are also hoax – taking advantage of provisions of the Act to create hoax fictitious entities. 5.4.2 Coming to the many judicial decisions cited by the ld. AR, firstly as stated earlier – the judicial decisions are only on the limb of ‘identity’, and that too only on the face of it. There is more than just the ace of identity. Secondly, I have distinguished on facts by going into the very analysis of the purported companies – that they are but hoax non-existent companies, solely existing only on paper only for money laundering purposes. Thirdly, as they are non- existent, three just does not arise the issue of taxing in their hands – for there are no hands at all. It is the appellant company that is existing and doing business. It is the appellant company itself only that has generated the purported funds. The purported funds have clandestinely been introduced in its accounts as ‘share capital’; and ‘share premium’. 5.4.3. Thus I hold that the 3 purported private limited companies are hoax companies in the web of money-laundering. The purported ‘share capital’ and purported astronomical ‘share premium’ without any conceivable basis and which defies logic- is nothing but the appellant’s own undisclosed income/siphoned off income that is being introduced. My discussion here is in addition to the many observations of the ITO AO in his detailed discussion in the assessment order. 5.4.4 Thus, Ground of Appeal

No.1 is Dismissed.”

3. It emerges from a perusal of the CIT(A)’s above extracted detailed discussion that the assessee had not only filed all the relevant details of its share application / premium of the three investor party(ies), but also produced the corresponding directors before the Assessing Officer for the purpose of cross-examination. Learned departmental representative invited our attention to the assessment findings contained in para 5.2 in lower appellate order that one of the Shri Uday Shakar Hait in one of the company turns only to “employee” of the AR appearing in the assessment. And also another company’s shareholders / directors are sister-in-law and elder brother of the AR (supra). Both the lower authorities appear to have drawn adverse inference against the assessee keeping in mind the above relation and financials of the three investors entity(es).

4. Learned counsel representing assessee vehemently contends during the course of hearing that both the lower authorities have erred in law and on facts in rejecting the assessee’s explanation on foregoing technical grounds despite the fact that it had proved identity, genuineness and creditworthiness of the three investor party(ies). And also that in case the assessee had Etal Enser Pvt. Ltd.. Vs. ITO Wd-5(3), Kol. Page 6 satisfied all the three parameters hereinabove, it was not for the lower authorities to comment upon the investor director(s) / promoter(s) and their personal relation with the authorized representative.

5. Learned departmental representative fails to dispute that neither of the lower authority has put the assessee on notice before drawing the above adverse inference. Be that as it may, the fact also remains that this assessee is a trader in iron and steel goods as well as manufacturer of machinery components having regular business activities and stock-in-trade. The typical features of a jama kharchi company are prima facie in the given facts. We therefore deem it appropriate that larger interest of justice would be met in case the instant first issue is restored back to the file of the Assessing Officer for afresh factual verification as per law within three effective opportunities of hearing. It shall be open for the assessee to raise all factual / legal arguments in support of the impugned share application / premium as per law. This first substantive ground is treated as accepted for statistical purposes.

6. Next comes disallowance of labour charges amounting to ₹7,21,245/-. Suffice to say, both the lower authorities draw yet another adverse inference against the assessee that Shri Hait happens to be one of the name lender regarding labour charges. The Assessing Officer and the CIT(A) therefore treat the impugned labour charges as bogus. The fact also remains that neither the Assessing Officer nor the CIT(A) have taken note of the fact that assessee’s labour charges do not indicate any abnormal trend vis-à-vis its sale turnover as compared to the preceding and succeeding assessment years. The fact also remains that assessee has not proved the actual labour services availed wholly and exclusively for the purpose of its business. We therefore deem it appropriate in these peculiar facts that a lump sum disallowance of ₹ 2 lakh out of the total sum of ₹7,21,245/-; keeping in mind the assessee’s line of business, would be just and proper with a rider that same shall not be treated as a precedent in any other assessment year. The Etal Enser Pvt. Ltd.. Vs. ITO Wd-5(3), Kol. Page 7 assessee gets part relief of ₹ 5,21,245/- therefore. Consequential computation to follow.

7. Next comes u/s69C of unexplained expenditure disallowance of ₹1.30 lakh paid to M/s Three-Kin-Enterprises in cash. We find although that the Assessing Officer had issued u/s 133(6) process and other side supported the assessee’s case, he went to disallow the impugned claim as involving cash payments u/s.40A(3) of the Act. The CIT(A) holds that the latter provision does not apply since the assessee had not recorded expenditure in its books of account. We notice in this backdrop that neither of the lower authority has given credit of the cash-in-hand available to the assessee during the relevant previous year. We deem it appropriate in these facts and circumstances that a lump sum of ₹50,00/- out of ₹1.30 lakh would meet the ends of justice with a rider that the same shall not be treated as a precedent in any preceding or succeeding assessment year. The assessee gets part relief of ₹80,000/-. Consequential computation to follow. Learned counsel does not press for the assessee’s fourth substantive ground seeking to delete disallowance of interest payment of ₹5,171/- of delayed deposit of TDS liability keeping in mind smallness of the amount.