ASST.C.I.T., BANGALORE vs. M/S SINGHI HOLDINGS PVT. LTD.,, BANGALORE

“UNEXPLAINED INVESTMENT IN SHARES APPLICATION MONEY i. During search it was found that company by name M/s.BPO Finance and Investments Private Limited (BPO), Kolkatta has issued and subscribed shares of Rs 10 per Rs.1,99,98,700/–. Further it was found that during the year the assessee and his wife have acquired 100% of the above issued and subscribed share capital. The shares were purchased from various parties by the assessee as listed in page 2 to 4 of the assessment order. The assessee in total has acquired 60% of the total shares issued and subscribed. In view of the acquisition of 100% of the issued and subscribed share capital of the above company, took over reserves and surplus of the above company at Rs.125,40,64,500/– as on 31/3/2010. ii. Similarly another company by name M/s.Panchamukhi Properties Private Limited (PPPL) Kolkatta issued and subscribed shares of Rs10 per share aggregating to Rs.2,22,91,950/–. The assessee purchased 60% of the shares and his wife purchased remaining 40% of the issued and subscribed shares. The details are tabulated in page 5 and 6 of the assessment order. In view of the acquisition of 100% of the issued and subscribed share capital of the above company, took over reserves and surplus of the above company at Rs .101,39,38,050/– as on 31/3/2010. iii. The close relatives of the assessee acquired 50 shares out of 22,29,195 shares. iv. The assessee and his wife by acquiring hundred percent of shares by paying a sum of Rs.1,99,98,700/– acquired control over an amount of Rs.125,40,64,500/– in respect of M/s.BPO Finance and Investments Private Limited. Similarly by paying a sum of Rs.2,22,91,450/– acquired control over an amount of Rs.101,39,38,050/–. v. In view of the disproportionate cost of purchase, enquiries were conducted regarding genuiness of the above transactions. During the course of search proceedings it was found that four companies owned and controlled by the assessee and his wife received share application money from M/s.BPO Finance and Investments Private Limited and M/s.Panchamukhi Properties Private Limited during the financial years 2009–10 and 2010–11 totalling to Rs 142.45 crores. vi. During the search proceedings the assessee was requested to give details of the companies which provided the share application money and the directors of the companies. The assessee failed to provide details of the companies and the directors. Summons issued to the assessee did not yield any result. Despite the assessee and his wife being 100% shareholders of the above two companies, the same was not revealed at any point of investigation. The post-search investigation revealed 100% shares being owned by the assessee and his wife. vii. The enquiries conducted by the revenue regarding genuiness of the about two companies has resulted as under: – a) companies are not located in the address given b) Companies were not existing at the registered address for mission to ROC. c) No directors of the companies were available at the given address. d) No books of accounts found at the address. e) No director of the companies appeared during course of survey proceedings. f) From the balance sheets obtained from the ROC about two companies revealed that companies do not have any fixed assets, no business activities for number of years and are involved only in fund transfer. viii. On the basis of the above material the companies BPO and the PPPL were considered as shell entities with no independent business. The above companies were merely used as conduits to plug back unaccounted funds into the four group companies named above. The result of enquiries demonstrated BPO and PPPL are not genuine investors and is modus of bringing in share application money is only a smoke screen. ix. Though assessee did not cooperate in providing details of the directors of the above said to companies, the Department obtained the same from the ROC and it was found that Ms.Soma Dutta, Mr.Ranjeet Singh Kothari and Nemichand Jain are directors of the PPPL and Mr.Radhakant Tiwari and Ms.Soma Dutt are directors of BPO. The assessee and his wife were also directors in both the companies during the Assessment Year 2010–11. The enquiries revealed that some of the directors or employees of Mr.Sagarmal Nahata was arranging funds at Kolkatta. One of the director was found to be watchmen. The directors were not residing at the addresses provided. The signed blank cheques of the companies were found in the possession of Mr.Sagarmal Nahata. x. In view of the disproportionate investment of acquiring to companies worth Rs 226 crores by paying a sum of Rs 4.02 Assessing Officer. At the time of search a document containing notings regarding payments made to various parties including Kolkatta a/c was seized from the residence of the assessee. The details reflected at page 18 of the assessment order. In total sum of Rs.5,02,00,000/– has been shifted from Karnataka to some accounts in Kolkatta and the assessee failed to offer an explanation about the nature and source of the entries. Ledger accounts of the share application money received from BPO and PPPL in the books of M/s.BMM Ispat were obtained and examined. xi. On examination of the seized material and the Ledger accounts of BPO and PPPL the Assessing Officer arrived at a conclusion that the assessee has shifted money to the about two companies at Kolkatta to facilitate the investment of the Rs 5 crores into M/s.BMM ISPAT Ltd through the above shell companies. Further examination of the bank account of BMM Ispat Ltd revealed that Rs.5 crores has been received by the assessee and that establishes clear link to the content’s recorded in the seized page. The cash of Rs.5 crores is sent to Kolkatta along with commission of Rs.2 lakhs during 8th to 12th April 2010 and the amounts received by way of cheque in the bank accounts of BMM Ispat Ltd on 13/4/2010. This clearly indicates that the assessee own cash has been routed back to family owned four companies through BPO and PPP L and other associate companies in the form of share application money. xii. The notices issued to BPO and PPPL and to the parties who have sold shares to the assessee and his wife were returned by postal authorities unserved. The above aspect would clearly demonstrate the dubious nature of the purchase of shares by the assessee and his wife. The assessee was issued show cause notice proposing to treat share application money paid into four companies belonging to the assessee’s group to be treated as money introduced by the assessee. The assessee merely submitted that the entire transaction is taken place through cheque and at arms length price. xiii. The Assessing Officer considering the entire transaction treated 60% of share application money in BPO and PPPL as unaccounted investment by the assessee under section 69 of the Act. xiv. The Assessing Officer was correct in looking at the real transaction with respect to the share application money by lifting the veil and creating nexus with the investment to the payments made by the assessee as found and reflected in the seized documents. The failure on the part of the assessee to demonstrate the issues raised by the Assessing Officer in the course of post-search investigation or during the assessment proceedings would further justify the devise adopted by the assessee for investing his own unaccounted money into the subsidiaries.

A. REPLY TO ASSESSEE CONTENTIONS i. The contention of the assessee that the existence of BPO and PPPL cannot be doubted in view of the long existence before the assessee acquired the shares and the bank accounts maintained by the said companies. The failure on the part of the assessee being holder of 60% of the shares and 40% of shares by his wife to identify the genuiness of the company and also the directors of the company would demonstrate the object of the said two companies owned by the assessee and his wife. The Hon’ble Supreme Court in the case of Vodafone has clearly held that the companies without any business being carried out, being used as a conduit for device for avoidance of tax to be treated as shell companies and direct nexus to be created. ii. In view of the seized material reflecting payments towards Kolkatta account and the same amounts being reflected in BMM Ispat private limited and the same amounts being reflected as investment by the BPO and PPPL in the group companies of the assessee would establish the nexus beyond doubt and the same has been rightly taxed as an investment of the assessee. iii. As admitted by the assessee at page 16 of the written submissions, share application money has been considered in the hands of the shareholders, the assessee and his wife being 100% shareholders as unexplained investment.” The above addition has been made on protective basis in the hands of the assessee and on substantive basis in the case of Shri Dinesh Kumar Singhi and Mrs Snehalatha Singhi for the Assessment Year 2010 – 11. The Appellate Commissioner in view of the conforming of the same in the hands of Shri Dinesh Kumar Singhi and Mrs Snehalatha Singhi deleted the protective addition in the hands of the assessee company. It is submitted that the above controversy is involved before this Hon’ble Tribunal in the batch of appeals which have been heard along with this appeal. Subject to result of appeal in the case of Sri Dinesh Kumar Singhi and Mrs Snehalatha Singhi for the Assessment Year 2010–11 pending before this Hon’ble Tribunal, it is prayed to confirm the addition.” 4.2 Per contra, the ld AR for the assessee contended that the addition of Rs.18 Crores should not have been made in this case either on protective or substantive basis and in this regard filed written submissions which are as under :

“ The assessee for the above assessment year filed its return of income on 15.10.2010 admitting loss of Rs. 44,679/-. Notice u/s 143(2) was issued on 06.09.2011 and subsequent notices u/s 142(1) were issued and the assessee company appeared from time to time and furnished the details called for. The assessee has submitted all the details sought for and clarified on the issues raised in the notices. The assessing officer has completed the assessment u/s 143(3) by making arbitrary addition of Rs. 18 Crore as unexplained cash credit on protective basis. The reason given by the AO in page 5 of the assessment order is as under: ‘’The total share application money introduced is Rs.18.00 crores. In the present case the onus of proving the source, their credit worthiness and the genuineness of the transactions has not been discharged by the assessee. Accordingly the sum of Rs.18.00 crores is treated as unexplained cash credit of the assessee, as provided u/s 68 of the Act and added to the returned income on protective basis.’’ The assessee is dismayed by the additions especially when requisite opportunity was not given. The assessee objected for the addition and filed reply dt.09.03.2013 (PB page 52) explaining that all transactions were done through bank transactions, account payee cheques/RTGS, all details of the payee such as certificate of incorporation, bank statements, PAN number, Income tax returns, their balance sheets, assessment orders, etc were provided to establish not only the identity but also financial ability for making such investment. Inspite of the above details being furnished, the AO made the said disallowance. The assessee filed appeal before the CIT-A and filed its written submissions vide replies dt.21.10.2013, 06.11.2013,27.12.2013, 21.01.2015 and 02.02.2015 (available at PB pages 18 to 43) and relied on the following case laws: 1) CIT v. Lovely Exports (P) Ltd (216 CTR (SC) 195) 2) CIT & Anr v. Arunananda Textiles (P) Ltd. (333 ITR 116) 3) CIT & Anr v. Mulberry Silk International Ltd (68 DTR 149) wherein it has been held that share application money/share capital cannot be regarded as undisclosed income in the hands of the assessee (recipient company). The Ld CIT-A deleted the addition based on the submissions made by the assessee and for the reasons recorded in the para 8.7 of the CIT-A order. Before the ITAT it is the contention of the assessee that the facts relating to addition of Rs.18cr is covered by the decision of the Supreme Court mentioned supra. Before the Hon’ble ITAT the assessee relies on the submissions made before the lower authorities. In addition to the above, the assessee relies on the following case laws: 1) Pr.CIT vs Laxman Industrial Resources Ltd - ITA 169/2017 - Delhi HC. 2) CIT vs Gagandeep Infrastructure Pvt Ltd - ITA 1613/2014 - Bom HC. 3) CIT vs Orchid Industries Pvt Ltd - ITA 1433/2014 - Bom HC. 4) ITO vs Nishit Fincap (P) Ltd - 46 CCH 365 - Delhi ITAT. The uniform view taken by the Supreme Court and various High Courts including the jurisdictional High Court is that the issue of share application/share capital should be considered in the hands of the shareholder and not in the hands of the recipient. In view of the above, the department appeal may kindly be dismissed in the interest of justice.”

4.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. From the appraisal of the records before us, it emerges that the assessee received share application money from two companies Rs.8 Crores from M/s BPO Finance & Investment Pvt. Ltd., Kolkata and Rs.10.00 Crores from M/s Panchmukhi Properties Pvt. Ltd., Kolkata, totaling to Rs.18.00 Crores routed through normal banking channels. Investigations by the Departments authorities below reveal that Shri Dinesh Kumar Singhi and Snehalatha Singhi are owners and 100% share holders of the aforesaid two companies who introduced the share application money in the assessee company and it was in this context that the investments in the assessee company and its 4 group companies i.e M/s BMM, M/s BMM Cements Ltd., M/s Ranjitpura Infrastructure Pvt. Ltd., and M/s Singhi Holdings Pvt. Ltd., was brought to tax in the hands of Smt. Snehalatha Singhi and Shri Dinesh Kumar Singhi in the ratio of their share holding in the two aforesaid companies M/s BPO Finance & Investments Pvt. Ltd., and M/s Panchmukhi Properties Pvt. Ltd., on substantive basis u/s 69 of the Act. It is in this factual matrix of the case that the ld CIT(A) deleted the protective additions made u/s 68 in the case on hand.

4.3.2 With regard to the issue of share application money while dismissing the SLP filed by the Revenue, the Hon’ble Apex Court in the case of CIT Vs. Lovely Exports Pvt. Ltd., (Supra) has observed that:-

68 of the IT Act, 1961? We find no merit in the Special Leave Petition for the simple reason 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 re-open their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”

4.3.3 The Hon’ble Karnataka High Court in the case of CIT & Another Vs. Arunananda Textiles Pvt. Ltd., (323 ITR 116) held as under at paras 5 and 6 of its order:-

“5. The short question that arises for our consideration in this appeal is "If the company has received share amount from the intending shareholders, is it required for the respondent- assessee to identify and establish the creditworthiness of the depositors." The question raised in this appeal is squarely covered by several judgments of the Supreme Court and also the judgment of this court passed in CIT v. ASK Brothers Ltd. [2011] 333 ITR 111 (Karn) wherein this court following the judgments of the Supreme Court in the case of CIT v. Lovely Exports P. Ltd. reported in [2008] 216 CTR (SC) 195; [2009] 319 ITR (St.) 5 (SC) and also in the case of CIT v. Steller Investment Ltd. [2001] 251 ITR 263 (SC) has ruled that it is not for the assessee to place material before the Assessing Officer in regard to the creditworthiness of the shareholders. If the company has given the addresses of the shareholders and their identity is not in dispute, whether they were capable of investing, the Assessing Officer shall investigate. It is not for the assessee -company to establish but it is for the Department to enquire with the investors about their capacity to invest the amount in the shares. Therefore, we are of the view that the substantial questions of law Revenue and in favour of the assessee. Accordingly this appeal is dismissed.” 4.3.4 Respectfully following the decision of the Hon’ble Apex Court in the case of Lovely Exports Pvt. Ltd., (Supra) which was followed by the jurisdictional High Court in the case of CIT Vs. Arunananda Textile Pvt. Ltd., (Supra), the addition made by the AO in respect of share application money on protective basis as unexplained cash credits u/s 68 of the Act and deleted by the ld CIT(A) in the impugned order cannot be treated as unexplained cash credits in the hands of the assessee. Consequently, the grounds (i) and (ii) raised by Revenue are dismissed.