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Income Tax Appellate Tribunal, MUMBAI BENCHES “I”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, Accountant Member
This appeal filed by the Revenue is directed against order of the CIT(A)-13, Mumbai, dated 12.07.2016, and it pertains to assessment year 2012-13. The Revenue has raised following grounds of appeal:-
On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting addition of Rs.3,14,50,000/- in respect of huge share premium charged @490/- from seven different subscribing companies u/s. 68 of the Income Tax Act without appreciating that the same shares were allotted to the directors, their close relatives and associate concerns at par and huge cash deposits were identified in the three subscriber companies accounts.
The brief facts of the case are that the assessee is a private limited company engaged in the business of trading in Textile, Fabrics, Investment and Trading in Lisha Trading Private Ltd. Securities. It filed its return of income for A.Y. 2012-13 on 11.09.2012 declaring total income at ` 25,68,990/-. The case was selected for scrutiny and notices u/s. 143(2) and 142(1) were issued. In response to notices, the learned AR of the assessee appeared from time to time and furnished the details as called for. During the of assessment proceedings, the Assessing Officer noticed that the assessee has received share application money from seven different applicants and allotted equity shares of ` 10 each at a premium of ` 490 per share. The Assessing Officer further observed that during the same period the company has allotted equity shares to its Directors/Promoters shares holders @ 10 per share. In order to verify the genuineness of share application money received from seven investors, the Assessing Officer called upon the assessee to furnish necessary evidence to prove the identity, genuineness of the transactions and creditworthiness of the investors. In response to notice, the assessee vide its letter dated 28.08.2014 filed various details including application for allotment of equity shares, Board Resolution authorizing issue of shares at premium, balance-sheet of all investor companies to establish the nature and source of investment, Income-tax return acknowledgment copies along with their PAN details, return of allotment filed in Form -2 before ROC. The assessee further filed valuation report, dated 30.08.2011, in support of charging premium of ` 490 per share and as per which value of shares has been determined on net asset value method which works out to about ` 500 per share.
The assessee also filed detailed submissions vide letter dated 23.03.2015 to justify issue of shares at premium and also to argue that it has satisfied all conditions prescribed u/s 68 of the Act to prove genuineness of transactions and creditworthiness of the parties.
The Assessing Officer after considering relevant submissions of the assessee and also analyzing details filed by the assessee like financial statement of investors, observed that although the assessee has filed certain evidences to prove the identity of investors, on perusal of the details filed by the assessee one undoubted fact emerge from these transactions is that the assessee has received huge share capital from seven unknown companies, who are not related to the assessee. The Assessing Officer further observed that from the bank statement of the subscribing companies, it is noticed that the subscribing companies have deposited huge amounts of cash in their bank account, which is over and above the turnover recorded for the relevant financial year. There is no communication on record placed either by the subscribing company or by the assessee to demonstrate as to how whole transaction was conceptualized, discussed and concluded. There is no basis for justification for the premium charged by the assessed. No doubt the assessee has filed various documents to prove the identity including bank statements, but the fact remains that mere production of PAN details and bank account details do not establish the identity of the person. The actual and true identity of the person or a company is the business undertaken by them and in the present case no business activity is being carried out by the investing companies except providing the entries by way of unsecured loan and share application money.
The Assessing Officer has extensively discussed the documents filed by the assessee and observed that none of the seven companies have any credible business to Lisha Trading Private Ltd. establish the source of investment made in the assessee company. Although, the companies are carrying on huge reserves and surplus in their balance sheet, when compared to the nature of business and turnover for the relevant financial year including for the earlier period, it is very clear that all these companies have shown meager turnover of one or two lacs rupees per annum and net profit of less than ` 10,000/-. The Assessing Officer also observed that these companies have deposited huge cash in their bank account and routed the transactions through a web of companies to give accommodation entries to various entities. Therefore, the Assessing Officer opined that the transactions between the assessee company and investors are not genuine transactions and, accordingly, after considering relevant facts and also by following certain judicial precedents including the decision of Hon’ble Delhi High Court in the case of CIT vs. N R Portfolio Pvt. Ltd. (ITA 1018/2011) held that the transactions between the assessee and the investor companies fails on the test of genuineness because the assessee has failed to establish that the investing companies were genuine investors. The Assessing Officer further observed that investing companies have been used by the assessee for introduction of capital into the assessee company through the process of layering transactions and the whole transaction in the grab of share application money is only a colourable device used by the assessee to make the transaction appear genuine. Accordingly, he made addition of ` 3,14,50,000/- u/s. 68 of the Income tax Act, 1961 to the total income of the assessee.
Lisha Trading Private Ltd. 4. Aggrieved, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions on the issue, which has been reproduced in para 4 at pages 10-13 of the order of the learned CIT(A). The assessee also relied upon various judicial precedents including the decision of Hon’ble Supreme Court in the case of CIT vs. Lovely Exports (P) Ltd. (2008)216 CTR 195. The assessee reiterated its arguments made before the Assessing Officer to argue that it has proved the identity, genuineness of transactions and creditworthiness of the parties by filing various documents including financial details of the subscribing company, PAN, bank statements along with assessee’s financial statements to justify charging premium of ` 490/- per share. The assessee has also taken a plea that once the assessee has discharged its initial burden cast upon u/s. 68 of the Act, then the burden shifts to the Revenue to prove otherwise. In this case, the Assessing Officer rejecting all evidences filed by the assessee made addition u/s. 68 of the Act, only on the ground that the transaction between the assessee and the investor company are non-genuine transactions.
5. The CIT(A) after considering relevant submissions of the assessee and also relying upon various judicial precedents held that the assessee has furnished sufficient material to prove the identity, genuineness of transactions and creditworthiness of the subscribing companies. The CIT(A) further observed that the assessee has also filed various details to justify charging of share premium of ` 490 per share including valuation report taken from two independent valuers as per which the assessee’s share value is approximately ` 500 per share. The CIT(A) has discussed the issue at length and negated all observations made by the Assessing Officer including applicability of proviso to section 68 of the Income tax Act, 1961.
According to the CIT(A), proviso inserted to section 68 of the Income tax Act, 1961 has no application for the impugned assessment year as it came into force from 01.04.2013. Accordingly, he held that the Assessing Officer has erred in making addition towards share premium charged by the assessee. The relevant portion of the order of CIT(A) is extracted below:
Decision - I have carefully considered the AO's order as well as the detailed submissions made by the AR. I have already summarized their arguments in the preceding paragraphs. Broadly, the AO felt that the modus and the factum of investment would go on to show that the share premium received by the appellant would be assessable under section 68 of the Act. Per contra, the AR argued that there was nothing irregular about the appellant's collection of share premium, which cannot be subjected to addition under section 68 of the Act. Further, he argued that share premium by its very definition is a capital receipt and as such not chargeable to tax.
5.1 For the sake of clarity and ease of understanding, I would like to deal with the points raised by the AO and rebutted by the AR in the same order that they have been presented in the preceding two paragraphs. The first point made by the AO was about the fact that the appellant was a closely held private limited company, alleging thereby that it would be easier to accept share premium even when it was not required to be paid. I am unable to accept this proposition. It is not that by its very definition every listed company is above board and every closely held private limited company a target of suspicion. All told, companies are by themselves mere legal constructs and are run by people who can take companies either way, regardless of whether are listed or not.
5.2 The second point made by the AO is about the Directors or the persons behind the investing companies not being related to the appellant. The AO has basically indicated his incredulity at a Mumbai- based private limited company being able to obtain investments with substantial premium from Kolkata-based entities. The AR has pointed out that he had filed before the AO the details of the common directorships of two of the appellant's Directors viz. S/Shri R. K. Saraswat and Nirmal
Lisha Trading Private Ltd. Kumar Manna. Not only were these two gentlemen Directors in the appellant-company, either they or their relatives were Directors in the investor-companies. I am accordingly unable to give much credence to this particular observation of the AO.
5.3 Thirdly, the AO has reproduced partial bank accounts of the relevant previous year of two of the investor-companies viz. Sprint and Sreehari in his order. He appears to have also examined the bank accounts of Swapnapuri and Larica, though they have not been reproduced in the order. He has concluded that cash deposits to the tune of ` 6.67 lakhs, ` 15.17 lakhs and ` 28.04 lakhs respectively had been made in the cases of Sprint, Swapnapuri and Larica. Before me, the AR argued that the general transactions of any of the investor- companies should not be the subject-matter of the AO's inquiry, as he was not assessing the investor-companies. Insofar as the investments in the appellant-company are concerned, he submitted that even if there had been some cash deposits in the bank accounts of some of the investor- companies, there is ho one-to-one relationship of any of the investments in the appellant-company with any cash deposits. In fact the preceding payments in the two bank accounts reproduced by the AO in his order have been necessarily by cheque and not a single preceding deposit had been by cash.
5.4 The fourth point made by the AO was that no copies of communication made between the appellant and the investor-companies had been placed before the AO. What the AO meant was that he doubted the investments as they appeared to have materialized out of thin air. Here, the AR made a dual submission. Firstly, the commonality of Directors / their relatives in the investor and investee companies makes this issue of communication redundant. Secondly, the AO had never sought this particular information from the appellant, who had not filed it before him either. After careful consideration, find myself in agreement with the AR.
5.5 The fifth point made by the AO was that no basis or justification for charge o premium has been produced by the appellant. On this count, the AR sought to aggressively defend the appellant, stating that valuation reports of the appellant-company which had been duly filed before the AO (they having beer placed on the appellate order too) would indicate that the premium charged was in order. The first valuation was done in terms of rule 11UA of the Rules which has computed the value of the appellant's shares at ` 462/- per share. The second; valuation done by M/s Maheshwari & Co., CAs had pegged the valuation of shares of the appellant at ` 1,583/- per share as per the DCF (Discounted Cash Flow) method, while as per the P/E (Price / Earnings) method it came to `
Lisha Trading Private Ltd. 417/- per share. On this background, the appellant's own valuation of ` 500/- per share certainly does not appear to be excessive.
5.6 The sixth point made by the AO was that no justification was provided by the appellant for the shares issued at par after issuing shares at premium. Once more, the AR pointed out that due submissions had indeed made before the AO, which he had simply glossed over. While the investor-companies were willing to invest in the appellant-company, they wanted the Directors of the appellant-company, other key personnel and their associated entities whip would be executing the appellant's projects to also have a stake in the appellant. Accordingly, shares had been issued at par to those persons. 5.7 The seventh point made by the AO was about investments in the appellant company not having been made without a profit motive. The AO meant that a company like the appellant which had no proven track record would hardly merit any investments. Before me, the AR stated that the AO had observed in this fashion as he was trying to get into the shoes of the investors - which the AR respectfully submitted - was not supposed to be done. The investors had put in their money as they had found the proposed projects of the appellant to be sufficiently lucrative. This is a business decision and can possibly not be questioned. The AR pointed out that the details of the projects had been filed before the AO, who had dismissed them as glossy brochures. While the first project of the appellant was known as 'Emerald Water Front' whereby a real estate project across 20 acres was to come up at Anklav, Vadodara in Gujarat on the banks of Mahi river. The second project was another real estate project of Vishnupuram which was to come on a 30 acre area at Palghar, near Mumbai. The third and fourth projects were joint ventures with M/s Petromar Engineering Solutions Pvt. Ltd. (hereinafter referred to as 'Petromar') and M/s Methodex Systems Ltd. (hereinafter referred to as 'Methodex') which were seeking to expand their capacities through joint ventures with the appellant for manufacturing oil filters and currency handling equipment. The appellant had already invested a total amount of ` 5.73 crores in Emerald Water Front during the relevant previous year and the following two previous years. Investments to the tune of ` 0.33 crore, ` 3.8 crores and ` 0.95 crore too had been made in Vishnupuram and the joint ventures with Petromar and Methodex respectively, across the same period. After going through the above data, I am of the considered view that the AO's observations in this regard need to be discounted.
5.8 The eighth point made by the AO was that the investor- companies were mere name-lenders with no business receipts. In this context, the AR has observed that the AO had collected certain information from the RoC and from the investors' banks. That did not give him sufficient information to understand the business of the investors. Given the sources and the extent of the AO's information, I am unable to agree with the AO's observations in this regard.
5.9 The ninth point too is a related one. The AO had. held that mere production of PANs and bank account details of the investors did not establish their identity, which could only be established through their business receipts. The AR pointed out that he had duly filed before the AO extensive documentation to prove the identity and the genuineness of the investors. The only way to ascertain details of their businesses and their receipts would be by stepping into the shoes of their AOs. After careful consideration, I feel compelled to see the logic of this averment.
5.10 Coming to the case-laws relied on and extracted by the AO in his order, the AR stated that the AO was in error in relying on them as their facts spoke for themselves. He submitted that the extract of the AO was self-serving in that it did not bring out the crucial differences in the case of the appellant and those of the two assessees. In the case of CIT v. N. R. Portfolio Pvt. Ltd. (supra), the AR submitted that the Department had received information from the Investigation Wing that the assessee was one of the beneficiaries who had procured share application money from 24 entry-providers. In that case, the assessee had not at all co- operated with the Department. The sole activity of the share-applicants, too was deposit of cash into the bank account and direct issue of cheques as share application money. No supporting documents whatsoever - except for PANs of the applicants - had been submitted to the Department. No audited accounts of the investor-companies were submitted to the Department either. The Director of the assessee- company too was not able to give satisfactory replies to queries about the shareholders. Lastly, most of the summonses to the share-applicants remained unserved for want of correct addresses. According to the AR, each and every one of these issues had been differently dealt with by the appellant, whose compliance and documentation had been immaculate and whose co-operation absolute. Coming to the second and last case relied on by the AO viz. Onassis Axles Pvt. Ltd. v. CIT (supra), the AR pointed out the following distinguishing factors. In spite of being asked, the assessee failed to provide information about the investors. It had failed to submit details of the bank accounts of the investor- companies, names of their Directors and copies of their audited accounts in spite of being specifically asked to do so. Further, it was found out that the share-applicants had no bank accounts at all on the date of issue of the pay orders for the share-applications, the said accounts having been opened later to regularize the matter. Most of the summonses issued to the share-applicants too went unserved for want of correct addresses. Once more, the AR was at pains to point out the complete contrast in the cases; of that assessee and the appellant. After careful consideration, it is clear that the reliance of the AO on the aforecited decisions is misplaced, their facts being at complete variance with the facts of the appeal under consideration.
5.11 After carefully considering the order of the AO and the submissions of the AR, I have come to the conclusion that sufficient material has been put forth by the AR to compellingly prove the provenance as well as the genuineness of the share-application money received by the appellant by way of premium. I am also satisfied that the identity, creditworthiness and the genuineness of the share-applicants has been adequately substantiated. Even the decisions relied on by the AO and discussed in the preceding sub-paragraph stand distinguished on facts.
5.12 Coming to the case-laws cited by the AR on the issue chargeability of share premium to tax, the Hon'ble Supreme Court had approved the decision of the Hon'ble High Court of Delhi in the case of CIT v. Stellar Investment Ltd. (supra)'. The Hon'ble High Court of Delhi (in its decision reported in 192 ITR 287) had held that even if the subscription to the share-capital was not genuine, the said amount could not be regarded as the undisclosed income of the assessee-company. The Hon'ble High Court of Madras had held similarly in its decision in the case of CIT v. Electro Polychem Ltd. (supra). Further, the Mumbai Bench Of the Hon'ble Tribunal - in the case of Green Infra Ltd. v. ITO (supra) - had held that the share premium realized from the issue of shares was capital in nature and that it formed part of the share capital of the company and could therefore not be taxed as a revenue receipt. It is hence clear the issue of chargeability of share premium to tax has been consistently held in the assessee's favour by various superior judicial authorities which have observed that it is a receipt on capital account. Here is also noteworthy that the amendment by way of insertion of clause (viib) in Explanation to section 56(2) of the Act - whereby share premium has made been chargeable to tax under certain circumstances - has come into force with effect from 1st April 2013 and is hence not applicable to the assessment year under consideration.
5.13 In view of the discussion in the preceding sub-paragraphs and after respectfully following the aforecited decisions of the superior judicial authorities, it is held that the share premium of ` 3,14,50,000/- received by the appellant is not chargeable to tax. The addition made by the AO on this count is accordingly deleted.
The learned DR submitted that the learned CIT (A) erred in deleting the additions made by the Assessing Officer towards unexplained credit u/s. 68 of the Income tax Act, 1961 in respect of share application money received by the assessee without appreciating the fact that the Assessing Officer has brought out clear facts in the light of evidence filed by the assessee that these transactions are non-genuine transactions. The assessee has circulated capital using layered transactions through various companies. The DR further submitted that mere production of certain evidence to prove the identity or bank statement to prove that said transactions is routed through bank account is not sufficient to come out of the clutches of section 68 of the Income tax Act, 1961 and what needs to be ascertained is whether the transactions are genuine and the subscriber companies have enough source to establish amount invested in the assessee’s company. In this case, the Assessing Officer has brought out clear facts to the affect that the assessee has failed to pass the test of genuineness as all seven investor companies does not have any credible business activity to prove that they are having capacity to subscribe share capital of the assessee company. The CIT(A) without appreciating these facts simply deleted the additions made by the Assessing Officer.
7. The learned AR for the assessee, on the other hand strongly supported the order of the CIT(A) and submitted that the CIT(A) has appraised the facts in right perspective in the light of the evidences placed by the assessee including financial position of seven companies who subscribed to share capital of the assessee company which prove the capacity of the investors and genuineness of transactions.
The Assessing Officer never doubted identity of investors. This is evident from the fact that he accepted enormous details filed by the assessee to prove the identity and also he himself has obtained necessary details from the companies by issuing notice u/s. 133(6) in response to which all the seven investors have filed details as was called for by the Assessing Officer. The Assessing Officer has only pointed out that these transactions are not genuine in nature on the basis of his own appraisal of facts. But fact remains that assessee has filed various documents to prove that these transactions are genuine and that the assessee company has entered into investment agreement with all seven companies for expansion of existing business for which necessary evidences have been placed before the Assessing Officer in the form of feasibility report. The AR further submitted that once the assessee has discharged initial burden by filing necessary evidence, the onus shifts on the Revenue to prove otherwise. In this case, the Assessing Officer ignoring all evidences filed by the assessee made addition towards share capital u/s. 68 of the Act, 1961, only on suspicion and surmises by doubting the genuineness of transactions merely for a simple reason that the investment company does not have regular business income and they are involved in providing accommodation entries.
But, fact remains that all these companies are having regular business and they are active companies filing regular return before the income tax authorities as well as ROC for which assessee has filed a report obtained as per which all these companies are active in the website of ROC and filed financial statements up to F.Y. 2016-17.
Therefore, the learned AR contended there is no reason for the Assessing Officer to make additions and, accordingly, the CIT(A) has rightly deleted the additions made by the Assessing Officer and his order should be upheld. To support his arguments, the learned AR relied upon the following case laws: • CIT vs. Lovely Exports (P.) Ltd. [2008] 216 CTR 195 (SC) dated 11th January 2008
Lisha Trading Private Ltd. • CIT vs. Gagandeep Infrastructure Pvt Ltd. of 2014 (Bombay High Court dated 20th March 2017 • CIT vs. Orchid Industries Pvt. Ltd. ITA No. 1433 of 2014 (Bombay High Court dated 5th July 2017 • Jasamrit Construction Private Ltd. vs. ITO ITA No. 1091/Mum/2011 (ITAT, Mumbai) order dated 8th February 2018 • Pr CIT vs. M/s. Apeak Infotech, Nagpur, ITA No.26/2017 (Bombay High Court) dated 8th July 2017 • Umbrella Projects Pvt. Ltd. vs. ITO ITA No.5955/Del/2014 (ITAT Delhi) order dated 23rd February 2018 • Pr. CIT vs. M/s. Paradise Inland Shipping Pvt. Ltd. ITA No.66 of 2016 (Bombay High Court) dated 10th April 2017 • DCIT vs. Alcon Biosciences P. LTd. ITA No.1946/Mum/2016 (ITAT Mumbai) dated 28th February 2018 • Pr CIT vs. Royal Finvest Pvt Ltd ITA No.359/2018 & CM Appl 11642 (Delhi High Court) dated 23rd March, 2018 • CIT vs. Green Infra Ltd. ITA No.1162 of 2014 (Bombay High Court) dated 16th January 2017 • ITO vs. M/s. Sringeri Technologies Pvt. Ltd. ITA No.3924/Mum/2014 (ITAT- Mumbai Bench ‘E’) dated 29th December 2017 • Arceli Realty Limited (formerly known as Ellora Electrical Ltd. ) vs. ITO ITA No.6492/Mum/2016 (ITAT Mumbai Bench ‘A’) dated 21st April 2017 • PCIT vs. Veedhata Tower Pvt LTd ITA No.819 of 2015 (Bombay High Court) dated 17th April 2018 • PCIT vs. M/s. TRN Energy Pvt. LTd. CO No.96/Del/2016 arising out of ITA No.543/Del/2016 (ITAT-Delhi Bench ‘B’ , order dated 1st January 2018
We have heard both the parties, perused materials available on record and gone through the orders of authorities below. The only issue that needs to be resolved is whether, on the facts and in the circumstances of the case, share application money received from 7 companies is unexplained cash credit u/s 68 of the Income-tax Act, 1961. The AO has made addition of Rs. 3,14,50,000/- towards share capital from 7 companies as unexplained cash credit u/s 68 of the Act, on the ground that the assessee has established identity of subscriber to the share capital, but failed to prove genuineness of transaction and creditworthiness of the parties. The AO has brought out various reasons to come to the conclusion that the alleged subscriber to the share capital are paper companies and they did not have any business activity to substantiate subscription of huge share capital to the assessee company. According to the AO, all these companies are paper companies, did not have any actual business activity. The AO further observed that these companies did not have any capacity to establish creditworthiness to prove subscription of share capital. The AO further observed that the assessee is also not justified in issuing share capital at a premium of Rs.490 per share for shares having face value of Rs.10 per share.
According to the AO, all these sequence of events proves an undoubted fact that these companies are paper companies and the assessee is not able to prove the genuineness of transaction and creditworthiness of the parties and hence, he opined that the alleged share capital received from 7 companies is unexplained cash credit which represents unaccounted income of the assessee and accordingly, made additions u/s 68 of the Act.
The AO made addition towards share capital u/s 68 of the Act, on the ground that the assessee has failed to offer any explanation with regard to the credits found in the nature of share capital and share premium. The provisions of section 68, deals with a case, where any sum found credited in the books of account of the assessee in the financial year for which the assessee, offers no explanation or explanation offered by the assessee, in the opinion of the AO is not satisfactory, then sum found credited may be treated as income of the assessee of that previous year. A plain reading of section 68, makes it very clear that to fix any credit within the ambit of section 68 of the Act, the AO has to examine 3 ingredients, i.e. Identity, genuineness of transaction and creditworthiness of the parties. If, the assessee proves all 3 ingredients, then the onus shifts to the AO to prove otherwise. Similarly, the Proviso inserted by the Finance Act, 2012 wef 01-04-2013 deals with the case where the sum so credited consists of share application money, share capital, share premium, by whatever name called and explanation offered by such assessee shall be deemed to be not satisfactory unless such person being a recipient in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited. As per the Proviso, if the assessee fails to explain the source of source of share capital or share application money, then the addition can be made towards share capital, and share application money in the hands of the assessee u/s 68 of the Income-tax Act, 1961.
Whether Proviso inserted by the Finance Act w.e.f. 01-04-2013 is applicable prospectively or retrospectively, has been decided by various courts. According to the ratio laid down by the Hon’ble Bombay High Court in the case of CIT vs Gagandeep Infrastructure Ltd (2017) 394 ITR 680 (Bom), the Hon’ble Court observed that Proviso inserted to section 68 w.e.f. 01-04-2013 is considered to be prospective in nature and applicable from A.Y.2013-14 onwards. Therefore, we are of the view that no addition can be made u/s 68 of the Income-tax Act, 1961 in respect of share capital and share application money or share premium before insertion of Proviso to section 68, if source of source is not explained by the assessee.
Having said so, let us examine whether the assessee has discharged burden cast upon it under section 68 of the Income-tax Act, 1961 in respect of share capital received from subscribers. The AO has not disputed the fact that the assessee has furnished various evidences to prove identity of the subscribers. The AO categorically admitted in his assessment order that the assessee has filed various details including PAN, CIN master data and IT acknowledgement receipt of subscribers to prove the identity. The AO has disputed genuineness of transactions and creditworthiness of the parties. According to the AO, the subscribers to the share capital are not having capacity to prove creditworthiness and also the transaction with the assessee company are not genuine. The AO has given various reasons to come to the conclusion that the assessee has failed to discharge genuineness of transaction and creditworthiness of the parties. According to the AO, mere furnishing of income-tax returns and balance-sheets of subscribers would not be sufficient compliance of discharging genuineness of transactions, that too, in a case where notice issued u/s 133(6) to the subscribers to their given addresses were remain un served. The AO also doubted confirmation filed by the assessee and also share application forms. The AO has doubted application form for issue of share and audit reports to come to the conclusion that the share application forms issued by the assessee are stereotyped. The AO further held that the transactions between the assessee and the investor companies fail on the test of genuineness because the assessee has failed to establish that the investing companies were genuine investors. The Assessing Officer further observed that investing companies have been used by the assessee for introduction of capital into the assessee company through the process of layering transactions and the whole transaction in the grab of share application money is only a colorable device used by the assessee to make the transaction appear genuine.
Having considered arguments of both the sides and materials available on record, we do not find any merit in the reasons given by the AO to come to the conclusion that the assessee has failed to prove the genuineness of transaction and creditworthiness of the parties on the ground that the assessee has filed enormous details in respect of 7 companies including their PAN details, CIN master data, bank statements, audited financial statements, form 2 filed with ROC and status report of companies. The AO also issued notices u/s 133(6) to all 7 companies for which all seven companies have filed necessary details and confirmed purchase of shares. The assessee also filed a certificate from a Chartered Accountant, certifying the active status of the company in the website of Ministry of Corporate Affairs. On going through various detailed filed by the assessee, we find that there is no reason for the AO to doubt the genuineness of transactions and creditworthiness of the parties. We, further notice that all 7 companies are active in the website of ROC and also they have filed their balance- sheet up to 31-03-2016 and in some cases up to 31-03-2017. We further notice that the assessee has filed balance-sheet of all 7 subscribers wherein they have huge share capital and reserves and surplus to establish creditworthiness of the parties. On perusal of the balance-sheet filed by the assessee, we find that the aggregate of share capital and reserves of 7 companies is at Rs.142.16 crores, whereas investment in assessee company is only Rs.3,14,50,000/-. We further notice that all companies are having regular business activities and they are filing regular income tax returns. All these evidences go to prove an undoubted fact that these companies are not paper companies and are actively involved in business activity. We, further observe that the assessee also filed confirmation from all seven parties and in fact they have responded to 133(6) notices and filed necessary case details. We, further notice that the assessee has furnished bank statement of subscribers wherein we do not find any instance of cash deposits or transfer from other companies prior to the date of transfer to the assessee company, except one or two cash deposits. Therefore, we are of the view that the AO was incorrect in treating share capital along with share premium as unexplained cash credit u/s 68 of the Income-tax Act, 1961.
Coming to the observation of the AO with regard to the issue of shares at a premium. The AO has questioned the issue of shares at a premium of Rs.490 per share with a face value of Rs.10 per share on the ground that the assessee is new company without any business, not able to justify issue of shares at a premium of Rs.490 per share. We do not find any merit in the findings of the AO for the reason that the issue of shares at a premium and subscription to such shares is within the knowledge of the company and the subscribers to the share capital and the AO does not have any role to play as long as the assessee has prove the genuineness of transactions. In this case, the assessee has filed valuation report from two independent values who had determined value of share at Rs. 500 to Rs. 1500 per share on NAV method and DCF method. Therefore, we are of the considered view that the AO cannot question the issue of shares at a premium and also cannot bring to tax such share premium within the provisions of section 68 of the Act, before insertion of Proviso to section 68 by the Finance Act, 2012 wef 01-04- 2013 which is evident from the fact that the Hon’ble Bombay High Court has held that Proviso inserted to section 68 is not prospective in nature. Therefore, we are of the considered view that the AO was erred in treating share capital and share premium as unexplained credit u/s 68 of the Act, on flimsy grounds ignoring all evidences filed by the assessee.
The primary onus to prove credits found in the books of account is on the assessee. Whether the assessee has discharged its onus or not is depends upon the facts of each case. It depends upon whether the two parties are related or known to each other; the manner in which parties approach each other; whether the transaction was entered into through written documentation to protect the investment; whether the investor professes and was an angel investor; the quantum of money, creditworthiness of the recipient and the object and purpose for which payment/investment was made etc. If you collectively examine these aspects in the light of evidences filed by the assessee including certificate of incorporation of company, payment by banking channel, PAN and their income tax return, establishes the fact that the assessee has proved identity, genuineness of transactions and creditworthiness of the creditors. The fact of the preset case noticed above speaks about these aspects. In this case, no doubt, the assessee has proved identity by filing various documents and in fact the Assessing Officer never disputed identity of seven investor companies. The assessee also filed evidences like bank statements to prove that these transactions were touted through banking channels. On perusal of the details filed by the assessee, one thing clearly emerges is that transaction is genuine and they pass the test of genuineness. Therefore, we are of the considered view that the assessee has discharged its burden cast u/s. 68 of the Act to prove identity, genuineness of transaction and creditworthiness of the parties. The Assessing Officer has made addition towards share capital u/s. 68 of the Act simply on suspicious and surmise manner.
Coming to the case laws relied upon by the assessee. The assessee has relied upon plethora of judgements including the decision of Hon’ble Supreme Court in the case of CIT vs Lovely Exports Pvt Ltd (2008) 216 CTR 195 (SC). In the case laws relied upon by the assessee, the issue has been dealt as under:-
CIT vs. Goa Sponge and Power Ltd (13/02/2012) Tax Appeal No. 16 of 2012 (High Court-Bombay)
"Once the authorities have got all the details, inc luding 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 canno t be termed as "bogus". The controversy is covered by the judgements rendered b y 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 Tele films Ltd, (2011) 333 ITR 100 (Bom). In such circumstances, we are of theview 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."
CIT vs. Creative World Tele films Ltd (2011) 333 ITR 100 (Born-High Court)
"The question sought to be raised in the appeal was also raised before the Tribunal and 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. wherein the apex Court observed that if the share application money is rec eived by the assessee-company from alleged bogus shareholders, w hose 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 PAN/GIR number and had also given the cheque number, name of the bank. It was expected onthe part of the AO to make proper investigation and reach the shareholders. The AO did nothing except issuing summons which 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."
CIT vs. Lovely Exports (P) Ltd (2008) 216 CTR 195 (SC)
"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."
CIT vs. Steller Investment Ltd (2001) 251 ITR 263 (SC) (civil appeal)
"That the increase in subscribed capital of the respondentcompany 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, tinder no circumstances could the amount of share capital be regarded as un disclosed income, an appeal was taken by the Department to th e 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."
CIT vs. Nav Bharat Duolex Ltd (2013) 35 Taxmann.com289 (All-High Court)
"We have considered the arguments of the counsel for the parties. CIT(A) found that five companies subscribing the equity shares amounting to Rs. 25,00.000/- were identified and they had submitted their bank statements, cash extracts and returns filing receipts. As such identity of the share applicant c ompanies and purchase of share had been proved by the assessee. Supreme Court in the cases of CIT v. Steller Investments Ltd. [2001] 251 ITR 263 and Lovely Exports case (supra), has held that the identity of the shareholder alone is requi red to be proved, in case of the capital contributed by the shareholders. Accordingly CIT(A) and the Tribunal has not committed any illegality in allowing the appeal of the assessee. We do not find any illegality in the judgment of the CIT(A) and the Tribunal."
CIT vs. JayDee Securities & Finance Ltd (2013) 32 Taxmann.com91 (All-High Court)
"The Tribunal recorded findings that the assessee had produced the return of income filed by the relevant shareholders who had paid share application money. The assessee had also produced the confirmation of share holders indicating the details of addresses, PAN and particulars of cheques through which the amount was paid towards the share application money. The Tribunal thereafter relied upon the judgment of the Supreme Court in CIT V. Lovely Exports (P.) Ltd wherein it was held that if the assessee produces the names, addresses, PAN details of the share holders then the onus on the assessee to prove the source o f share application money stands discharged. If the Assessi ng Authority was not satisfied with the creditworthiness of the shareholders, it was open to the Assessing Authority to verify the same in the hands of the shareholders concerned, The Tribunal has relied upon an order of the Supreme Court in case o f CIT v. Divine Leasing & Finance Ltd. In view of the decision 'of the Supreme Court, we dismiss the appeals with observations that the department is free to proceed to reopen their individual assessments of the shareholders whose names and details were given to the Assessing Officer."
ACIT vs. Venkateshwarlspat Pvt Ltd (2009) 319 ITR 393 (Chhatisgarh-High Court)
"If the share applications are received by the assessee from alleged bogus shareholders, whose names are given to the Assessing Officer, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as the undisclosed income of the assessee."
Mod Creations Pvt Ltd vs. /TO (2013) 354 ITR 282 (Del-High Court)
"Held, allowing the appeal, (i) that the assessee had discharged the initial onus placed on it. In the event the Revenue still had a doubt with regard to the genuineness of the transac tions in is sue or as r egards the creditworthiness of the creditors, it would have had to discharge the onus which had shifted on to it. A bald assertion by the Assessing Officer that the credits were a circular route adopted by the assessee to plough back its own undisclosed income into its accounts, could be of n o avail. The Revenue was required to prove this allegation. An allegation by itself which is based on assumption will not pass muster in law. The Revenue would be required to bridge the gap between the suspicions and proof in order to bring home this allegation. The Tribunal without adverting to the principle laid stress on the fact that despite opportunities, the assessee and/or the creditors had not proved the genuineness of the transaction. Based on this it construed the intentions of the assessee as being mala fide. The Tribunal ought to have analysed the material rather than be burdened by the fact that some of the creditors had chosen not to make a personal appearance before the Assessing Officer. If the Assessing Officer had any doubt about the material placed on record, which was largely bank statements of the cr editors and their income-tax returns, it could gather the neces sary information from the sources to which the information was attributable......If it had any doubts with regard to their creditworthiness, the Revenue could always bring the sum in question to tax in the hands of the creditors or sub- creditors."
CIT vs. Al Anam Agro Foods (P.) Ltd (2013) 38 Taxmann.corn 375 (All-High Court)
Tr ib u n a l, h o we v e r , h e ld th a t s in c e id e n tity o f s h a r e h o ld e r s s to o d p r o v e d o n record, amount of shar e application money could not be added to income of a ssessee. According to Tribunal, in such a case amount could be taxed in hands of persons who had invested"
CIT vs. Dwarkadhish Investment (P) Ltd (2011) 330 ITR 298 (Del-High Court)
"Just because the creditors/share applicants could not be found at the address given, it would not give the Revenue the right to invoke s. 68— Revenue has all the powe r and wherewithal to trace any person—Moreover, it is settled law that the assessee need not to prove the 'source of source'— In the instant case, the Tribunal has confirmed the or der of the CIT(A) deleting the impugned addition holding t hat the assessee has been able to prove the identity of the share applicants and the share application money has beenreceived by way of account payee cheques."
CIT vs. Namastey Chemicals Pvt Ltd (2013) 33 Taxmann.com271 (Guj-High Court)
"In the present case also, the respondent assessee has received share application money from different sub scribers. It was found that large number of subscribers had r esponded to the letters issued by the Assessing Officer or s ummons issued by him and submitted their affidavits. In so me cases such replies were not received through posts. Rs. 9 lacs represented those assessees who denied having made any investment altogether. The issue thus would fall sq uarely within the ambit of the judgment of the Supreme court in the case nf Lovely Exports (supra). No error of law can be stated to have been committed by the Tribunal. Tax Appeal is therefore dismissed."
CIT vs. Peoples General Hospital Ltd (2013) 356 ITR 65 (MP-High Court)
" Held , d is mis s in g th e a p p ea ls , th a t it th e a s s e s s ee h a d r e ce iv ed subscriptions to the public or rights issu e through banking channels and furnished complete det ails of the shareholders, no addition could be made tinder section 68 of the Income-tax Act, 1961, in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part o f the share capital represented the company's own income from undisclosed sources. It was nobody's case that the nonresident Indian company was a bogus or non-existentcompany or that the amount subscribed by the compan y by way of share subscription was in fact the money of the assessee. The assessee had established the identity of the investor who had provided the share subscription an d that the transaction was genuine. Though the assessee's cont ention was that the creditworthiness of the creditor was a lso established, in this case, the establishment of theidentity of the investor alone was to be seen. Thus, the addition was rightly deleted."
CIT vs. Shree Rama Multi Tech Ltd (2013) 34 Taxmann.com177 (Guj-HC)
"It is noted that Commissioner (Appeals) as well as the Tribunal have duly considered issue and having found complete details of the receipts of share application money, a/on gwith the form names and addresses, PAN and other requisite details, they found complete absence of the grounds noted for invoking the provision of section 68. Moreover, both rightly had applied the decision of CIT vs. Lovely Exports (P) Ltd to the case of the assessee. Therefore, no reason was found in absence of any illegality much less any perversity too to interfere with the order of the both these authorities, who had concurrently held the due details having been proved. The assessee company had presented the necessary worth proof bef ore both the authorities and it was not expected by the assesseecompany to further prove the source of the deceased."
CIT vs. Nikunj Eximp Enterprises (P.) Ltd (2013) 35 Taxrnann.com384 (Bom)
"Whether merely because suppliers had not appeared before Assessing Officer or Commissioner (Appeals), it cou ld not be concluded that purchases were not made by assessee - Held, Yes.... Further, there were confirmation letters filed by the suppliers, copies of invoices for purchases as well as copies of bank statement all of which would indicate that the purchases were in fact made. In our view, merely because the suppliers have not appeared before the Assessing Officer or the CIT(A), one cannot conclude that the purchases were not made by the respon dent- ass essee"
CIT vs. Samir Bio- Tech Pvt Ltd (2010) 325 ITR 294 (Del-High Court)
"Identities of the subscribers are not in doubt. The transactions have also been undertaken through banking channels inasmuch as the application money for the shares was given through account payee cheques. The creditworthiness has also been established, as indicated by the Tribunal. The subscribers have given their complete details with regard to their tax returns and assessments. In these circumstances, the Department could not dr aw an adverse inference against the assessee only because the sub scribers did not initially respond to the summons. The subscribers, however, subsequently gave their confirmation letters as would be apparent from the impugned order. The identity of the subscribers stands established and it is also a fact that they have shown the said amounts in their audited balance sheets and have also filed returns before the IT authorities. The decision of the Tribunal deleting the addition cannot befaulted.”
The assessee has also relied upon the decision of ITAT, Mumbai ‘H’Bench in case of M/s Alcon Bioscience Private Limited in wherein the coordinate bench has considered similar issue and after following the decision of Hon’ble Bombay High Court in case of CIT vs. Gagandeep Infrastructure Private Limited (2017) 394 ITR 680(Bom) and also the decision of Hon’ble Supreme Court in the case CIT vs. Lovely Exports Pvt Ltd(2008) 216 CTR 195 (SC) held as under.
We have heard both the parties, perused the materials available on record and gone
through the orders of the authorities below. The AO made additions towards share application money u/s 68 of the Act on the ground that the assessee has failed to discharge identity, genuineness of transaction and creditworthiness of the parties which is evident from the fact that the AO has brought out certain facts with regard to the share applicants by issuing notice u/s 133(6) of the Income-tax Act, 1961. According to the AO, the assessee has raised share application money from three companies and all the three companies are having bank accounts in Bank of Baroda where a single person has operated the accounts of all the companies. The AO further observed that the share applicants have received money from certain individuals before the date of transfer of money to the assessee company and those individuals have deposited cash on the same day or a day before the date on which the money has been transferred to share applicants’ bank account. The AO further observed that notice u/s 133(6) were not served and the parties refused to accept the notice. The AO also observed that the assessee failed to explain how it has issued share having face value of Rs.10 with a huge premium of Rs.990 per share when it was an unlisted company. Therefore, the AO opined that the assessee has obtained accommodation entries from so-called share applicants to convert its own undisclosed income in the guise of share application money. Accordingly treated share application money received from all the three parties as unexplained credit and brought to tax u/s 68 of the Act.
8. The AO has made addition towards share application money on the basis of analysis
of bank statements of share applicants and the source of applicants’ bank accounts. The assessee has filed various details including share application forms, incorporation certificate of the share applicants and their bank statement. The assessee also furnished copy of income-tax return acknowledgment in respect of M/s Hemang Fincap Services
Pvt Ltd. On verification of details filed by the assesse, we find that the share applicants have paid share application money to the assessee through bank accounts and also disclosed investments in their financial statements for the relevant financial year.
Though two share applicants have not filed their income-tax returns, furnished copy of PAN and their bank statements. Once the assessee has discharged its initial burden cast u/s 68 by filing documents to prove identity, genuineness of transactions and creditworthiness of the parties, then the burden shifts to the revenue to prove otherwise. In this case, the AO does not have any evidence which could rebut the documents produced by the assessee. The AO made addition only on the basis of suspicion and surmises on the ground that the share applicants do not have any capacity to explain amount transferred to their account.
9. Having considered facts, we do not find any merit in the arguments of the revenue
for the reason that once the assessee has furnished necessary evidence to prove the identity of the share applicants and their PAN details 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 the assessee. This legal proposition is supported by the decision of Hon’ble Supreme Court in the case of CIT vs Lovely
Exports Pvt Ltd (supra), wherein it was categorically held that the AO cannot make addition towards share application money, if the names and addresses and PAN of the creditors have been furnished to the AO. This legal proposition is supported by the judgment of Hon’ble Supreme Court in the case of CIT vs Orissa Corporation Ltd
(supra). The jurisdictional High Court of Bombay in the case of CIT vs M/s Gagandeep
Infrastructure Pvt Ltd (supra) and CIT vs Paradise Inland Shipping Pvt Ltd in ITA No. 66 of 2016 dated 10-04- 2017, has reiterated the legal position laid down by the Hon’ble
Supreme Court in the case of CIT vs Lovely Exports Pvt Ltd (supra). The sum and substance of the ratios of the Hon’ble Supreme Court and jurisdictional High Court, is that once the assessee has furnished names and addresses alongwith PAN of subscribers, then the AO is free to reopen the assessment of subscribers in accordance with law, but the share application money cannot be regarded as undisclosed income of the assessee.
10. Insofar as the argument of the Ld.DR in the light of Company Master Data taken
from ROC website that the names of two companies have been struck off by the ROC, we find that the ROC has struck off the names of two companies for the reason that those two companies have not filed their annual accounts for few years, but fact remains that the assessee has furnished letters from those two companies wherein they have admitted that their names have been struck off by the ROC for non filing of annual accounts, but they are in the process of restoring the names by filing an application before NCLT. As regards the AOs observation with regard to the issue of shares at a face value of Rs.10/- issued at a premium of Rs.990 per share, we find that there is no merit in the findings of the AO for the reason that the issue of shares at a premium and subscription to such shares is within the knowledge of the company and the subscribers to the share application money and the AO does not have any role to play as long as the assessee has proved genuineness of transactions. We further notice that the AO cannot question issue of shares at a premium and also cannot bring to tax such share premium within the provisions of section 68 of the Act, before insertion of Proviso to section 68 by the Finance Act, 2012 w.e.f. 1-04- 2013 as the Hon’ble Bombay High Court in the case of CIT vs M/s Gagandeep Infrastructure Pvt Ltd (supra) held that Proviso inserted to section 68 is prospective in nature.
11. In this view of the matter and considering the ratios of the case laws discussed above, we are of the considered view that the assessee has proved identity, genuineness of transaction and creditworthiness of the parties insofar as 3 share applicants are concerned. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal filed by the revenue is dismissed.
Coming to the case laws relied upon by the Revenue. The Assessing Officer has relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs. N R Portfolio Pvt. Ltd. (supra), wherein facts are exactly similar to the facts of the present case and the Hon’ble High Court, after considering the facts, held that mere furnishing of certain evidences to prove identity is not sufficient compliance to overcome the clutches of the provisions of section 68 of the Act and what needs to be done is to prove beyond doubt identity, creditworthiness and genuineness of transactions. The Revenue has also relied upon the decision of Hon’ble Bombay High Court in the case of Konark Structural Engineering (P) Ltd. 90 Taxmann.com
The Hon’ble High Court, on similar set of facts held that where assessee company receives certain amount as share capital from various share holders, in view of fact that summons served to shareholders under section 131 were unserved with remark that addresses were not available, and, moreover, those shareholders were first time assessees and were not earning enough income to make deposits in question, impugned addition made by Assessing Officer under section 68 was to be confirmed. We have gone through case laws relied upon by the revenue in the light of facts of present case and find that facts of this case is altogether different from those cases and hence, the case laws relied upon by the revenue are not followed.
In this view of the matter and considering the ratios of the case laws Discussed above, we are of the considered view that the assessee has proved identity, genuineness of transaction and creditworthiness of parties insofar as 7 share applicants are concerned. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold findings of the CIT(A) and dismiss appeal filed by the revenue.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on this day of 23rd August, 2018.