DCIT 4(3)(1), MUMBAI vs. PATODIA FILAMENTS P. LTD, MUMBAI

3 M/s. Patodia Filaments P. Ltd. in the process of expansion of its business and facilitation working capital in furtherance of its business has issued equity share capital amounting to Rs.68,00,000/- of face value of Rs.10/- each at a premium of Rs.60/- each amounting to Rs.4,08,00,000/-, thus aggregating to sum of Rs.4,76,00,000/- and no share application money is outstanding from the said five parties at the yearend as on 31/03/2010.

6.3.2. During the course of appellate proceedings, the Id. AR appellant had submitted that details of the said nine parties containing copy of acknowledgement of return of income filed for the AY 2010-11, audited balance sheet and copy of bank statements evidencing amount of share application received through banking channels and copy of same have also been submitted during the appellate proceedings. On going through the details submitted it is observed that all the nine companies have filed their respective return of income and the balance sheet which show substantial net worth. The investment amount made in the appellant company by the respective said nine companies is very small as compared to the net worth. The said companies have declared income in their return and have paid taxes. Further, it has been explained that in none of the company Mr. Pravin Kumar Jain is a director. The above documents are either filed with the Department or are available on the public domain of Ministry of Corporate affairs except to bank statement. The most important thing that it is seen that all the parties have replied to the notices issued by the A.O. during the course of assessment proceedings. Hence, their identity is proved.

6.3.3. On the face of the balance sheet and details submitted mere is nothing incriminating that can be drawn to infer that the said transactions is merely accommodating entries and not genuine. More importantly, no direct and corroborative evidence has been brought on record by the AO. No nexus is established as to circulating of funds or that cash was paid by the appellant company to obtain the cheques for share application.

6.3.4. The appellant has provided the identification of the parties. The same is supported by the income tax returns filed by the respective parties. The allegation of the AO that PAN is issued without verification of the applicant is not correct. The AO could have verified the jurisdiction of the respective parties and could have made enquiries with the respective AO's about the said nine parties from the PAN available with him.

6.3.5. The appellant has submitted balance sheet and details of the said nine parties to prove credentials and genuineness of the transactions. The three ingredients viz. identity, credentials and genuineness cannot be doubted.

6.3.6. The AO has heavily relied on information received from DDIT (Inv), Mumbai and that of the statement of Mr. Pravin Kumar Jain. The AO has not carried out independent enquiries to prove the case. On reading from the assessment order there is nothing corroborative brought on record to prove that the share application money received are accommodating entries or received from bogus share holders. It is submitted by the applicant that on giving the names of the share

4 M/s. Patodia Filaments P. Ltd. holders than the onus on the part of the applicant is discharged and that addition, if any to be made is to be in the hands of the investor and not applicant. In the case of CIT v. Lovely Exports (P) Ltd [2008] 216 CTR 195 it has been held that;

"If share application money is received by assessee-company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company."

6.3.7. In the case of CIT vs. Creative World Telefilms Ltd. [2011](333 ITR 100)(Bombay) the court has held as under:-

"In the case in hand, it was not disputed that the assessee had given the details of name and address of the shareholder, their PAN/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the Assessing Officer to make proper investigation and reach the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement 'not traceable'. The Assessing Officer ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer, In the above circumstances, the view taken by the Tribunal could not be faulted. No substantial question of law was involved in the appeal. In the result, the revenue's appeal was to be dismissed in limine. (para 2}"

6.3.8. The A.O. has merely based on the information received from the DDIT and the statement of third party Mr Praveen Kumar Jain has formed opinion that the appellant is one of the beneficiaries who has taken alleged accommodation entry. It is not shown mat copy of the statement of Mr. Paveen Kumar Jain has been provided to the appellant and that opportunity of cross examining has been granted. There is no mention in the assessment order that Shri Praveen Kumar Jain has categorically stated having provided accommodation entry to the appellant.

6.3.9. In the case of M/s. SDB Estate Pvt Ltd vs. ITO-(5)(3)(2) in on similar ground it has been decided that:-

In view of the above stated legal position and in the light of reliable evidences brought on record by assessee to substantiate identity, genuineness and creditworthiness of shareholders, which have not been controverted by the Revenue, the additions made solely on the basis of general statement of Shri Mukesh Chokshi cannot be held to be justified and the same are accordingly ordered to be deleted.

5 M/s. Patodia Filaments P. Ltd. 6.3.10. As regards issue involving addition of share premium amount along with share application money/share capital money, the jurisdictional ITAT, Mumbai has decided in many cases that it cannot be added. Further, the Hon'ble High court has also decided the issue that the addition of share premium amount cannot be made in earlier years prior to amendment in the relevant provisions in the I.T. Act, 1961. In this regard, reference is made and reliance is placed to the various Judicial Pronouncements on the issue related to additions for share premium amount included in the share application money/share capital money. These are as under:

(i) In the case of M/s. Vodafone India Services Pvt. Ltd vs. Addl. CIT reported in 368 ITR 001, Hon'ble Bombay High Court decided that:-

The amounts received on issue of share capital including the premium are undoubtedly on capital account. Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. Court finds considerable substance in the Petitioner's case that neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non- resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act.

(ii) The CBDT vide instructions No- 02/2015 dated 29/1/2015 directed the revenue not to file the SLP before Hon'ble to Supreme Court and directed AOs to accept the High Court order. The relevant instructions is as under:-

In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case of Vodafone India Services Pvt. Ltd for A.Y. 2009-IO (WP No.871/20I4) = 20I4-TH-I9-HC-MUM-TP, wherein in the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. .. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgement, it is directed that the ratio decided of the judgement must be adhered to by the field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CslT (Appeals).

(iii) In the case of ACIT vs. Gagandeep Infrastructure Pvt. Ltd bearing ITA No., 578VMum/2011 dated 23/^2014, Hon'ble Mumbai ITAT decided that:

"We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision

6 M/s. Patodia Filaments P. Ltd. which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec.78 of the Companies Act, I 956. Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipts and is not income for its ordinary sense... .... The entire dispute revolves around the fact that the assessee has charged a premium of Rs. 190/-per share. No doubt a non-est company or a zero balance sheet company asking for Rs.190/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. The amendment has been brought in the Income Tax Act under the head "Income from other sources" by inserting Clause (viib) to Sec.56 of the Act wherein it has been provided that any consideration for issue of shares, that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair marker value of the shares shall be treated as the income of the assessee but the legislature in its wisdom has made this provision applicable w.e.f 1.4.2013 i.e. on and from A.Y 2013-14. In so far as the year under consideration is concerned, the transaction has to be considered in the light of the provision of Sec.68 of the Act. There is no dispute that the assessee has given details of names and addresses of the share holders, their PAN Nos, the bank details and the confirmatory letters ... Considering all these undisputed facts, it can be safely concluded that the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee. Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt. The receipt is not in the revenue field. What is to be probed by the AO is whether the identity of the assessee is proved or not. In the case of share capital, if the identity is proved, no addition can be made u/s.68 of the Act. We draw support from the decision of the Hon 'We Supreme Court in the case of Lovely Exports Pvt Ltd. 317ITR 218. We, therefore do not find any error or infirmity in the findings of the Ld. CIT(A). Ground No.1 is accordingly dismissed. "

(iv) In the case of Green Infra Ltd vs. ITO reported in 38 taxmann.com 253 (Mum- ITAT) dated 23/8/2013, Hon'ble Mumbai ITAT decided that:

"During previous year ending on 31-3-2009, it had collected share premium on allotment of shares of face value of Rs. 10 each at a premium of Rs. 490 per share - It had credited said amount in balance-sheet under head share premium account- It claimed that share premium was a capital receipt not exigible to tax-Assessing Officer had taxed share premium under section 56(1) as assessee's income from other sources - Whether since expenditure and receipts directly relating to share capital of a company are of capital in nature, share premium collected by assessee could not be taxed under section 56(1) as income from other sources - Held, yes - Whether since entire transaction relating to allotment of shares had been done through banking channel and assessee had invested share premium in its three subsidiary companies, provisions of section 68 as suggested by revenue had also not applicable to instant case- Held, yes .... No doubt a non est company or a zero

7 M/s. Patodia Filaments P. Ltd. balance company asking for a share premium of Rs.490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a vely premium. The revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land "

(v) In the case of CIT vs. Goa Sponge and Power Ltd reported in Appeal No. 16 of 2012, Hon'ble Bombay High Court decided that:

"Once the authorities have got all the details, including the name and addresses of the shareholders, their PAN/GIR number, so also the name of the Bank from which the alleged investors received money as share application, then, it cannot be termed as "bogus". The controversy is covered by the judgements rendered by the Hon'ble Supreme Court in the case of Lovely Exports Pvt. Ltd, vs. CIT, (2008) 216 CTR (SC) 195, as also by this Court in CIT vs. Creative World Telefilms Ltd, (2011) 333 ITR 100 (Bom). In such circumstances, we are of the view that the Tribunal's finding that there is no justification in the addition made under Section 68 of the Income Tax Act, 1961 neither suffers from any perversity nor gives rise to any substantial question of law."

(vi) In the case of CIT vs. Creative World Telefilms Ltd repotted in 333 ITR 100. Hon'ble Bombay High Court decided that:

...the Tribunal was pleased to follow the judgment of the apex Court in the case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR (SC) 195: (2008) 6 DTR (SC) 308: (2009) 319 ITR 5 (St.) wherein the apex Court observed that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the AO, then the Department can always proceed against them and if necessary reopen their individual assessments. In the case in hand, it is not disputed that the assessee had given the details of name and address of the shareholder, their PANIGIR number and had also given the cheque number, name of the bank, it was expected on the part of the AO to make proper investigation and reach the shareholders. The AO did nothing except issuing summons which were, were ultimately returned back with an endorsement not traceable". In our considered view, the AO ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the AO. In the above circumstances, the view taken by the Tribunal cannot be faulted."

(vii) In the case of CIT vs. Lovely Hon'ble Apex court decided that:

If the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance -with law, but it cannot be regarded as undisclosed income of assessee company

That the increase in subscribed capital of the respondent-company could not be a device of converting black money into white with the help of formation of an investment company, on the round that, even if it be assumed that the subscribers to the increased capital were not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income, an appeal was taken by the Department to the Supreme Court. The Supreme Court dismissed the appeal holding that the Tribunal had come to a conclusion on facts and no interference was called for.

(ix) In the case of CIT v. Vacmet Packaging (India) Pvt Ltd reported in Hon'ble Allahabad High Court decided that:

Held, assessee had filed documentary evidence to prove genuineness of share application money consisting of (i) share application forms; (ii) copies of bank accounts of share applicants; (iii) copies of income tax returns of share allottees; (iv)balance sheets; and (v) copies of share allotment certificates and of Board's resolution of the share applicants- Identity of applicants was established by production of copies of PAN cards and registration certificate with the Registrar of Companies — Financial capacity was also proved by filing of copies of the bank accounts ji-0111 where the share application money was transferred through banking channels to the assessee- Assessee had discharged onus placed upon him by 68-Concurrent finding of facts also rendered by CIT(A) and tribunal in this regard- No substantial question of law arises- Revenue's appeal Dismissed (x) In the case of Jaya Securities Ltd. vs. CIT reported in 166 Taxman 7 (SLP filed by department dismissed), Hon'ble Allahabad High Court decided that:

Whether any addition under section 68 can be made in respect of investment made by different persons in share capital of assessee company, limited by shares, whether public or private- Held, no.

6.3.11. Thus, in the light of the above factual narration, various references and Judicial m Pronouncements as well as binding decisions of Jurisdictional High Court of Bombay and Hon'ble ITAT, Mumbai, it will be difficult to sustain the addition made by the AO u/s. 68 of the Act on account of share application money and the appellant hay established the genuineness of the transaction and that the same cannot be treated as unexplained credits. Therefore, the addition made by the AO of Rs.4,76,00,000/- is to be deleted.”

9 M/s. Patodia Filaments P. Ltd. judicial forums/courts. The Ld. D.R. submitted that assessee raised a sum of Rs.4.76 crores from 9 private companies related to Shri Pravin Kumar Jain group who were part of hawala racket which came to light during search on the said person and his associated concerns that the entire business being run and operated by the Pravin Kumar Jain group was only bogus/hawala as they were engaged in providing accommodation entries in the form of unsecured loan, share application money and long term capital gain etc. The ld DR contended that mere fact that all the lenders companies were registered companies and have been filing their returns of income regularly before the Income Tax as well as ROC or filed confirmations, PANs, bank statements and annual audited accounts etc would not make the bogus transactions as genuine ones. The ld DR argued that findings of the Ld. CIT(A) that AO has not conducted any enquiry despite assessee having filed various documents such as PANs, confirmation letters, copies of bank statements, copy of ITRs etc is not of any legal significance as Praveen Kumar Jain group was a hawala operator. The Ld. D.R. submitted that the decisions relied upon by the ld CIT(A) are distinguishable on facts and therefore should not be followed. The Ld. D.R. heavily relied on the decision of Hon’ble Delhi High Court in the case of M/s. Jansampark Advertising & Marketing P Ltd. 56 Taxman 286 wherein the Hon’ble Court held that Ld. CIT(A) should have made proper enquiry if AO fails to make enquiries. The Ld. D.R. submitted that Ld. CIT(A) merely relied upon the fact that assessee filed bank statements, ITRs, PAN numbers and confirmations. The Ld. D.R. contended that mere filing all these documents would not prove the identity,

10 M/s. Patodia Filaments P. Ltd. genuineness of the transactions and creditworthiness of the lenders automatically. Finally, the Ld. D.R. prayed before the Bench that in view of the detailed submissions and arguments, the order passed by the Ld. CIT(A) may be reversed.

Finally, the Ld. A.R. submitted that in view of the facts of the case of the assessee and various judicial pronouncements as considered by the Ld. CIT(A) and as brought before the Bench during the course of hearing, the order of Ld. CIT(A) does not require any interference as he has rightly deleted the addition which was made solely on the basis of a statement which has been retracted just 3 days after recording thereof and in view of the fact that despite assessee discharging its onus by filing all the necessary evidences , the AO has not done anything to verify the evidences filed by the assessee by conducting any further investigation/enquiry during the assessment proceedings. Therefore, the order of Ld. CIT(A) may be confirmed.