ITO, WD-12(2), KOLKATA, KOLKATA vs. M/S GOODLUCK MERCHANTS P LTD., KOLKATA

Appearances by: Shri Miraj D. Shah, FCA, appeared on behalf of the assessee. Shri Sankar Halder, Addl. CIT Sr. D/R. appearing on behalf of the Revenue. Date of concluding the hearing : November 6th, 2018 Date of pronouncing the order : November 16th , 2018 ORDER Per J. Sudhakar Reddy, AM :- This appeal filed by the revenue is directed against the order of the Learned Commissioner of Income Tax (Appeals)-4, Kolkata, (hereinafter the ‘Ld. CIT(A)’), dt. 23/06/2016, passed u/s 250 of the Income Tax Act, 1961 (hereinafter the ‘Act’), relating to Assessment Year 2012-13.

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. 4. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:-

b) M/s. Tricon Business Pvt. Ltd.:- This company invested an amount of Rs.15,00,000/-, in the assessee company. The source of investment was explained as refund of advances against purchase and sale of shares. We find that the investible fund available with this company is Rs.9,92,61,898/- as against the investment of Rs.15 Lakhs/- only. In our view, the ld. CIT(A) was right in holding that this company has proved its identity, creditworthiness and genuineness of the transactions. Merely because this company raised capital during the year, the addition cannot be made in the hands of the assessee company, specifically when M/s. Tricon Business Pvt. Ltd, is also assessed to tax. c) M/s. Wilco Finexim Pvt. Ltd.:- This company invested an amount of Rs.20,00,000/-, in the assessee company. The source of investment was explained as refund of advances against purchase and sale of shares. We find that the investible surplus available with this company is Rs.20,00,90,645/- as against the investment of Rs.20 Lakhs/- only. In our view, the ld. CIT(A) was right in holding that this company has proved its identity, creditworthiness and genuineness of the transactions. Merely because this company raised capital during the year, the addition cannot be made in the hands of the assessee company, specifically whenM/s. Wilco Finexim Pvt. Ltd, is also assessed to tax. d) M/s. Alavel Finvest Pvt. Ltd.:- This company invested an amount of Rs.20,00,000/-, in the assessee company. The source of investment was Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. explained as sale profits from shares and refund of share application money. We find that the investible surplus available with this company is Rs.29,68,04,516/- as against the investment of Rs.20 Lakhs/- only. In our view, the ld. CIT(A) was right in holding that this company has proved its identity, creditworthiness and genuineness of the transactions. Merely because this company raised capital during the year, the addition cannot be made in the hands of the assessee company, specifically when M/s. Alavel Finvest Pvt. Ltd., is also assessed to tax. e) M/s. Ideal Barter Pvt. Ltd.:- This company invested an amount of Rs.25,00,000/-, in the assessee company. We find that the investible surplus available with this company is Rs.30,22,22,930/- as against the investment of Rs.20 Lakhs/- only. In our view, the ld. CIT(A) was right in holding that this company has proved its identity, creditworthiness and genuineness of the transactions. Merely because this company raised capital during the year, the addition cannot be made in the hands of the assessee company, specifically when M/s. Ideal Barter Pvt. Ltd, is also assessed to tax. f) M/s. Ritz Agencies Pvt. Ltd.:- This company invested an amount of Rs.15,00,000/-, in the assessee company. The source of investment was explained as share application money received from M/s. Vilasini Sales Pvt. Ltd. We find that the investible surplus available with this company is Rs.21,02,19,710/- as against the investment of Rs.15 Lakhs/- only. In our view, the ld. CIT(A) was right in holding that this company has proved its identity, creditworthiness and genuineness of the transactions. Merely because this company raised capital during the year, the addition cannot be made in the hands of the assessee company, specifically when M/s. Alavel Finvest Pvt. Ltd., is also assessed to tax.

5.1. From the above, the ld. CIT(A), at para 4.6., held as follows:- “4.6. In the appellant’s case I find that the assessee had filed copies of the audited accounts for the FY 2011-12 of all the six subscriber companies. Examination of these accounts revealed that each share subscribing company was having substantial own

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. funds in the form of capital & reserves which were several times more than the share subscription amount paid to the appellant. For example in the case of Alavel Finvest P Ltd. the company’s own funds were Rs.2968.04 lacs whereas the amount invested in the assessee’s shares was only Rs 20 lacs which in percentage terms was 0.67%. In case of PleasantSales P Ltd. the company’s net owned funds were Rs.768.54 lacs whereas investment in appellant share was Rs.15 lacs, which in percentage terms of 1.95%. In case of Ritz Agencies P Ltd and Tricon Business P Ltd the investment was Rs.15 lacs & 15 lacs respectively as opposed to their net owned funds of Rs.2102.19 lacs & 992.62 lacs respectively. In percentage terms it was about 0.71% and 1.51% respectively. In the case of Wilco Finexim Pvt. Ltd. & Ideal Barter P Ltd. the net owned funds were Rs.2000.90 lacs and Rs.3022.21 lacs whereas investment in appellant’s share was Rs.20 lacs and 25 lacs, which in percentage terms only 1% and o0.82% respectively. From these fact I find that only a fraction of the net owned funds of the respective subscribing companies was investment in assessee’s equity shares.”

5.2. Thereafter, at from para 4.9 to 4.11, the ld. CIT(A) held as follows:- “4.9. From the impugned order I note that the assessee had provided to the AO the complete details of six share subscribing companies who had contributed the equity Capital of the assessee. On receipt of these details, the AO had chosen to issue notices u/s 133(6) to share applicants and each notice was complied with. I also find that on receiving replies to notices u/s 133(6) in no case the AO considered it necessary to issue notice u/s 131 of the Act for personal appearance of the subscribers. Since the notices u/s 133(6) were served on all parties, the identity of the share applicants was established. In response to notices u/s 133(6), all share applicants furnished the documents requisitioned in the notices. Even in the impugned order the AO has not al1eged non-compliance to his notices by any of them. Each of the share applicants was an independent income-tax assessee and for AY 2012-13 had filed tax returns and evidence thereof was filed before the AO. The audited financial statements of each of the share applicant proved that each of them had sufficiently large investible funds from which the share application monies were paid. Each share applicant had admitted subscribing to the share capital of the appellant by account payee cheques, No falsity or infirmity in these documents was proved. In view of these facts therefore I have no hesitation in holding that the assessee had discharged the onus cost on him proving creditworthiness of the share applicants. 4.10. From the A/R's submissions it is noted that the only summons issued u/s 131 by the AO was upon the Director of the appellant. In that summons, the AO had required him to produce the Directors of each of the six share applicant companies. It is noted that although the AO made direct enquiries from them u/s. 133(6) but he chose not to issue personal summons u/s 131 upon them. Instead the AO required the appellant to enforce their attendance. The AO having been vested with statutory powers was expected to enforce personal attendance of share applicants and not the appellant. In my considered view therefore such action of the AO was completely uncalled for and unjustified. I further find that the AO had not stated the reason or purpose for which the Directors of share applicants were required to be present. From the details available on record, I find that the information ordinarily required to be furnished by the share applicant in support of their subscription to appellant's share capital had already been provided in response to notice u/s 133(6). In view of these facts therefore I have no hesitation in holding that the assessee had discharged its onus of establishing the identity, creditworthiness & genuineness of the share applicants.

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd.

4.11. The PAN Details and IT Acknowledgments of the share subscribing companies also proved that each share subscribing company was assessed to tax and for AY 2012-13 being the year under consideration they were assessed in their own right. The facts and documents therefore supported the AR's contention that the assessee had established identity of all the six share subscribing companies. The A.R of the appellant also furnished copies of the bank statements of the respective share subscribing companies. Referring to the copies of the bank statements, the AR established that payment of subscription amounts were recorded in the bank statements of the respective companies. The entries in the bank statement proved that the share subscription amount was transacted through banking channel. Besides the entries in the bank statements also substantiated that before payment of share subscription amounts, no cash was deposited in the bank accounts of the subscribing companies. The AR further pointed out that appellant had furnished explanations before the AO with regard to immediate sources from which share transaction amounts were paid. On these facts therefore I find that in terms of Section 106 of the Evidence Act, the creditworthiness of the share subscribers and the genuineness of the transactions could not have been doubted by the AO merely on the ground that the appellant had failed to produce the share subscribers for his verification.” 5.3. This Bench of the Tribunal under similar circumstances, in the case of ITO vs. M/s. Adventa Stock Management Ltd.; Assessment Year 2011- 12, order dt. 28th September, 2018, had held as follows:- “4. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of the authorities below as well as case law cited, we hold as follows:- 4.1. The assessee is engaged in the business of trading in shares and securities. This is not a case of paper company. The premium charged i.e. Rs.40/- per share of face value of Rs.10/- each, is also not excessive or abnormal on the facts of this case. From the audited financial statements, it could be seen that the assessee has gross income of Rs.5,59,283/- and has shareholder funds of Rs.12,91,40,498/-. It had advanced long term loans and advances of Rs.4,73,00,140/-. The total assets are Rs.14,45,98,802/-. Thus, the premium charged per share cannot be said to be not genuine or exorbitant. In this case, four companies are the share applicants. These are Jai Hind Promoters Pvt. Ltd., Ninachal Barter Pvt. Ltd., Dynamo Infrastructures Pvt. Ltd., Dhanraksha Investment Consultants Pvt. Ltd. All these companies which have subscribed for the shares of the assessee company are also active companies. They are not paper companies. This is clear from the financial statements filed by them. In case of Dhanraksha Investment Consultants Pvt. Ltd., the assets are about Rs.47.20 Lakhs and the investment in the assessee company is about Rs.5 Lakhs. In the case of Dynamo Infrastructures Pvt. Ltd., the assets are to the extent of Rs.2,44,57,638/- and the investment in the assessee company is around Rs.88 Lakhs/-. In the case of Jai Hind Promoters Pvt. Ltd., the total assets are to the tune of Rs.2,18,34,717/-, and the investment of the assessee company is around Rs.1,25,00,000/-. In the case of Ninachal Barter Pvt. Ltd., the total assets are Rs.2,32,26,565/- and the investment in the assessee company is around

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. Rs.46.20 Lakhs/-. As brought out by the ld. CIT(A), all these companies have given replies to the statutory notice u/s 133(6) of the Act. They have furnished copies of the income tax acknowledgements evidencing filing of the return of income by each one of them. Copy of the audited books of accounts including balance sheet, wherein such investments are reflected etc. have been filed as evidence After taking all these facts into account, the ld. CIT(A) at para 4.12. as concluded as follows:- “4.12. Considering the totality of the facts and circumstances of the case. I find substance in the arguments of the AR that the appellant has made its case that the identity of the share applicants are established beyond doubt and on enquiries made by the AO there was no adverse finding on this aspect. Admittedly, all the share applicants are existing assessees under the Act and that some of them were subject to scrutiny assessment during the same period establishes he fact that the identity and authenticity of the share applicants were not in doubt. About the genuineness of the transactions, there is neither any adverse finding in the assessment order nor which is subversive to the facts brought on record by the appellant during the course of assessment proceeding to this effect. The creditworthiness of the share applicants as regards their subscription to the share capital is proved by the submission their return, audited annual accounts, their bank statement and replies to notices u/s 133(6) of the Act as depicted in the foregoing. The net worth of such subscribers is in excess of the amount invested by each of them as explained hereinabove. The addition made by AO is based on extraneous parameters not germane for deciding the issue. The AO had not dealt with the issue judiciously and consistently with the evidences adduced during the course of the assessment proceedings by the appellant and the replies of the share applicants in respect of the share capital which does not warrant the inference that such share application monies received in unaccounted cash credit. Hence, I am inclined to accept the arguments tendered by the AR of the appellant in this respect. In view of the foregoing, I have no hesitation to hold that the impugned addition of Rs.2,64,20,000/- made by the AO u/s 68 of the Act is not justified in the circumstances and accordingly such addition is directed to be deleted in respect of the four shareholders. Therefore, Ground Nos. 3 to 6 of the appeal are accordingly allowed.” 4.2. The ground on which the addition has been made by the Assessing Officer is that there is not compliance to the summons issued to the share subscribers u/s 131 of the Act. The share applicant companies, as well as the assessee company, belong to the same group of companies, with a common director Mr. Sanjay Kumar Khemka. When all the information as required by law, is given, an addition cannot be made solely on the ground that the directors failed to appear in response to summons issued u/s 131 of the Act. The Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Orissa Corporation Pvt. Ltd. 159 ITR 78 SC and the Hon’ble Bombay High Court in the case of Commissioner of Income Tax v. Orchid Industries Pvt. Ltd. 397 ITR 136, have held that an addition cannot be made simply because a person has not appeared in compliance to notice u/s 131of the Act, when all the other requirements of the notices u/s 133(6) of the Act, has been complied with. Similar are the decision of this Bench of the Tribunal in the case of Income Tax Officer vs. Wiz-Tech Solutions Pvt. Ltd., and Hon’ble

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. Jurisdictional High Court in the case of Pr. CIT-1 vs. M/s. Steel Emporium Ltd., GA No. 3275 of 2016 in ITAT 354 of 2016.

This Bench of the Tribunal under identical circumstances, discussed the issue at length, in the case of Five Star Vanijya Pvt. Ltd v. Deputy Commissioner of Income Tax, Circle-8, Kolkata in Assessment Year: 2010- 11, order dt. July 31st, 2018, and by relying upon a number of judgement of various Courts of law, held as follows:- “5. After hearing rival contention, perusing the papers on record, orders of the authorities below as well as case-law cited, we hold as follows:- The assessee in this case is not a paper company and is engaged in international and inland trading of iron ores and minerals. It has a turnover of about Rs.15 Crores during the year 31/03/2010. It has profits and taxation of about Rs.33.84 Lakhs. The share holders in this company are also not paper companies or Jamakharchi companies. They are individuals who are also the directors of the company. The assessee company has only three Directors and the said application money has been received from these three Directors. Hence, the identity of the payees is proved. The Directors have furnished their annual statement of accounts and explained their sources of funds for the investments in the share capital. When the Director are themselves the shareholders, and have confirmed the transaction, the proposition of law laid down by the Hon’ble Supreme Court in the case of Lovely Exports Ltd. (supra), apply. The share holders are not paper companies or ‘jamakharchi’ companies as in other cases. The assessee company is a genuine company and the valuation of shares is supported by material. The shareholder/directors have explained their sources. On these facts we examine the case-law.

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. tries to explain the source of this amount of Rs.55,50,000 by furnishing copies of share application money, balance sheet, etc. of the parties mentioned above and asserted that the question of addition in the income of the assessee does not arise. This explanation of the assessee has been duly considered and found not acceptable. This entry remains unexplained in the hands of the assessee as has been arrived by the Investigation wing of the department. As such entries of Rs.55,50,000 received by the assessee are treated as an unexplained cash credit in the hands of the assessee and added to its income. Since I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under Section 271(1)(c ) are being initiated separately. " The facts of Nova Promoters and Finlease (P) Ltd. (supra) fall in the former category and that is why this Court decided in favour of the revenue in that case. However, the facts of the present case are clearly distinguishable and fall in the second category and are more in line with facts of Lovely Exports (P) Ltd. (supra). There was a clear lack of inquiry on the part of the Assessing Officer once the assessee had furnished all the material which we have already referred to above. In such an eventuality no addition can be made under Section 68 of the Income Tax Act, 1961. Consequently, the question is answered in the negative. The decision of the Tribunal is correct in law. " 6.6. In the case of CIT vs. Fair Finvest Ltd., (2013) 357 ITR 146 (Del.) at para 6 held as follows. "6. This Court has considered the submissions of the parties. In this case the discussion by the Commissioner of Income Tax (Appeals) would reveal that the assessee has filed documents including certified copies issued by the ROC in relation to the share application, affidavits for the directors, form 2 filed with the ROC by such applicants confirmations by the applicant for company's shares, certificates by auditors etc. Unfortunately, the Assessing Officer chose to base himself merely on the general inference to be drawn from the reading of the investigation report and the statement of Mr.Mahes Garg. To elevate the inference which can be drawn on the basis of reading of such material into judicial conclusions would be improper, more so when the assessee produced material. The least that the Assessing Officer ought to have done was to enquire into the matter by, if necessary, invoking his powers under Section 131 summoning the share applicants or directors. No effort was made in that regard. In the absence of any such finding that the material disclosed was untrustworthy or lacked credibility the Assessing Officer merely concluded on the basis of enquiry report, which collected certain facts and the statements of Mr. Mahesh Garg that the income sought to be added fell within the description of S. 68 of the Income Tax Act, 1961. 6.7 The Hon'ble Calcutta High Court in the case of CIT v. Roseberry Mercantile (P.) Ltd. GA No. 3296 of 2010 ITAT No. 241 of 2010 dated 10.1.2011, wherein the questions raised before their lordships and decision rendered thereon is as under:— "On the facts and in the circumstances of the case, Ld. CIT(A) ought to have upheld the assessment order as the transaction entered into by the assessee was a scheme for laundering black money into white money or accounted money and Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. the Ld. CIT(A) ought to have held that the assessee had not established the genuineness of the transaction." Held After hearing the learned counsel for the appellant and after going through the decision of the Supreme Court in the case of CIT v. M/s Lovely Exports Pvt Ltd, we are at one with the tribunal below that the point involved in this appeal is covered by the said Supreme Court decision in favour of the assessee and thus, no substantial question of law is involved in this appeal. The appeal is devoid of any substance and is dismissed." 6.8. The Hon’ble Andhra Pradesh High Court in the case CIT vs. Lanco Industries Ltd. [2000] 242 ITR 357 (Andhra Pradesh), held as follows:- “Moreover, we fail to see how merely by reason of unsatisfactory explanation relating to the source of investment by the shareholders, the money invested on shares should be treated as income of the assessee. If the ostensible shareholders failed to explain the means of investment, that should have been treated as unexplained income in their hands. In order to add it to the income of the assessee there must be a further finding that in fact the shareholders were mere name-lenders and the money allegedly invested by them really belonged to the directors of the assessee-company. In the absence of a finding that the persons to whom the share certificates were issued on receipt of consideration as per the book entries were in fact dummies or stooges of the directors of the assessee- company, the same cannot be treated as unaccounted income of the assessee. There was no such finding by the assessing authority. In this view of the matter, the ultimate conclusion of the Tribunal cannot be faulted in any case. We, therefore, see no ground to admit this appeal as no substantial question of law arises for consideration. The income-tax Tribunal appeal is dismissed.” 6.3. Applying the proposition of law laid down in the case law to the facts of this case, we find that the Assessing Officer has simply disbelieved the evidence filed by the assessee. He has not conducted any verification, let alone investigation, before coming to the conclusion that the confirmations and evidence filed by the Directors cannot be admitted as evidence. As the share applicants are the Directors of the assessee Company and have confirmed the transactions and have also filed their source of funds for the investment. When statement of final accounts were filed giving sources of funds for making the investment, the Assessing Officer has not given any reason as to why he is not able to accept the same. If at all the creditworthiness of the directors is not proved, then an addition can be made only in their hands and not in the hands of the company as held by the Hon’ble A.P. High Court in the case of Lanco Industries Ltd. (supra). No contrary evidence to controvert the evidence produced by the assessee, is brought on record. Simply because the directors/shareholders did not present themselves before the Assessing Officer, an addition u/s 68 of the Act, cannot be made. In view of the above circumstances, we cannot uphold this addition made u/s 68 of the Act. Under these circumstances, we delete the addition and allow this appeal of the assessee.

7. In the result, appeal of the assessee is allowed.

Assessment Year: 2012-13 M/s. Goodluck Merchants P. Ltd. 5. In view of the above discussion, we uphold the order of the ld. First Appellate Authority and dismiss this appeal of the revenue.”

5.4. The ‘B’ Bench of the Kolkata Tribunal in the case of ITO vs. M/s. Splendour Villa Makers Pvt. Ltd., in Assessment Year 2012-13, order dt. 05/09/2018, under identical circumstances has taken a similar view.

6. Consistent with the view taken therein, we uphold the order of the ld. First Appellate Authority and dismissing this appeal of the revenue.