LEADING AGE DEVELOPERS PRIVATE LIMITED,MUMBAI vs. CENTRAL CIRCLE 2(2), CENTRAL BUILDING

“1) The Ld CIT(A) failed to appreciate that reopening is bad in law as A.O. had no reason to believe that any income had escaped assessment as reopening was done on the basis of wrong fact that the Bogus Accommodation entries from Mahalaxmi Impex and hence, reopening is bad in law.

2) The Ld CIT(A) failed to appreciate that reopening is bad in law as recorded reasons do not record escaped income. NO ADDITION CAN BE MADE U/S 68 2 The Ld CIT(A) erred in making addition u/s 68 of Rs 45,00,000/- being Loan creditors without appreciating that Assessee had proved that money was received through banking channels and repaid the money of Rs.45,00,000/- through banking channels , bank statement were filed during the Assessment Proceeding u/s.143 rws 147 hence, addition u/s 68 ought to be deleted. 3) The Ld CIT(A) initiated penalty proceedings u/s 271(1)(c) of the I.T.Act.

3.1. During the year under consideration, assessee issued 8,88,000 number of equity shares with face value of Rs. 10/- and premium of Rs. 190/- per share, aggregating to Rs. 17,76,00,000/- which was subscribed as partly paid. Assessee received Rs. 39,00,000/- towards face value and Rs. 9,41,00,000/-, totalling to Rs. 9,80,00,000/-. Assessee furnished details in respect of total share capital and premium raised, amount received and receivable from each of the investor companies which is tabulated below:

3.2. Share subscribing companies to whom equity shares were allotted is tabulated as under:

3.3. Ld. Assessing Officer called for details and documents for the aforesaid transaction. Assessee vide letter dated 16.06.2017 filed detailed submission with respect to each share applicant and also submitted that no additions can be made u/s 68. Ld. Assessing Officer being not convinced by the details and documentary evidence furnished by the assessee, applied the test of human probabilities and held that identity and creditworthiness of the shareholders is not proved, nor the genuineness of the transaction for introduction of share capital by the assessee is established. According to him, existence of the share subscribing companies and source of their funds for making investment in the assessee could not be established. Accordingly, he completed the assessment by making an addition of ₹ 9,80,00,000/- towards share capital and share premium raised during the year by treating it as unexplained cash credit u/s. 68 of the Act. Aggrieved, assessee went in appeal before the Ld. CIT(A) who confirmed the addition so made. Aggrieved, assessee is in appeal before the Tribunal contesting on the aforesaid three dimensions of section 68.

5.1. Ld. Counsel submitted that the share subscribers are body corporate, registered with ROC and assessed to income-tax. He, further stated that these share subscribing companies had confirmed the transactions, filed relevant papers and documents and also explained the source of their funds for making investment in the assessee company. He thus, emphasised that assessee had discharged its primary onus casted upon it, u/s. 68 of the Act. According to him, the onus thus shifted to the Ld. Assessing Officer to disprove the material placed before him. Without doing so, the addition made by the Ld. Assessing Officer is based on conjectures and surmises and, therefore, cannot be sustained.

5.2. He also emphasised on the fact that in the submissions made by the assessee which included ITRs, audit reports, share application details, etc., as listed above, ld. Assessing Officer has not found fault in any of the details so submitted and has simply proceeded to make addition in respect of the amount of share capital and share premium. According to him, documents furnished are to be prima facie considered as correct unless evidences brought on record to falsify the claim made therein.

5.3. On the three basic ingredients for section 68 relating to cash credit viz, identity, creditworthiness of the subscribers and the genuineness of transactions, ld. Counsel submitted that all of these are fulfilled by the assessee. In this respect he submitted as under:

I. To prove the identity A. Assessee submitted the addresses, PAN and certificate of incorporation of the above subscribers who subscribed to the shares alongwith:- a. Company's Master Data like company name, Company Identification Number (CIN), date of incorporation, registered address, e-mail ID downloaded from www.mca.gov.in; b. Name, Address, PAN, Income-tax Jurisdiction; c. Certificate of Incorporation; d. Form of application for equity shares filled; e. Copy of Audit Report and Balance Sheet.

B. Company's Master Data, Income-tax Jurisdiction details and financials of the investor companies proved their identity as well as financial capacity i.e. creditworthiness.

II. To prove the creditworthiness of the subscribers: Assessee submitted Balance Sheet, Profit & Loss a/c and Return of Income of the share applicants. Further, details of share capital, reserve and surplus, net worth of the investor companies were furnished as under to demonstrate the positive net worth available with all the investor companies for making investment in the share capital of the assessee:

III. To prove the Genuineness of the above share transaction: Assessee submitted extract of bank statement of all the share subscribers, duly highlighting the entries of share capital and premium money paid by them to the assessee along with copy of board resolution, resolving the decision of investment into assessee company.

7.1. For the aforesaid observations, we draw our force from the decision of the Hon’ble jurisdictional High Court of Bombay in the case of PCIT v. Paradise Inland Shipping Pvt. Ltd. [2017] 84 taxmann.com 58 (Bom) wherein it was held that once the assessee has produced documentary evidence to establish the existence of the subscriber companies, the burden would shift on the revenue to establish its case.

7.2. We also draw our force from the decision of Hon’ble Jurisdictional High Court of Bombay in the case of CIT vs. Orchid Industries Pvt. Ltd. 397 ITR 136 (Bom) wherein it was held that mere non-compliance of summon under section 131 would not disprove the transaction and other documents filed on record cannot be brushed aside by the Ld. Assessing Officer. The relevant extract from the said decision is reproduced as under:

"The Assessing Officer added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the ground that the parties to whom the share certificates were issued and who had paid the share money had not appeared before the Assessing Officer and the summons could not be served on the addresses given as they were not traced and in respect of some of the parties who had appeared, it was observed that just before issuance of cheques, the amount was deposited in their account. The Tribunal has considered that the Assessee has produced on record the documents to establish the genuineness of the party such as PAN of all the creditors along with the confirmation, their bank statements showing payment of share application money It was also observed by the Tribunal that the Assessee has also produced the entire record regarding issuance of shares ie allotment of shares to these parties, their share application forms, allotment letters and share certificates, so also the books of account. The balance sheet and profit and loss account of these persons discloses that these persons had sufficient funds in their accounts for investing in the shares of the Assessee. In view of these voluminous documentary evidence, only because those persons had not appeared before the Assessing Officer would not negate the case of the Assessee. The judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be applicable in the facts and circumstances of the present case.”

7.3. Ld. Assessing Officer has not bothered to discuss or point out any defect or deficiency in the documents of the share subscribing companies, furnished by the assessee. These evidences furnished have been neither controverted by the Ld. AO during the assessment proceedings nor anything substantive brought on record to justify the addition made by him. Ld. AO has added the amount of share capital and share premium on the ground that assessee has not produced the directors. In para 9.B. of the impugned assessment order, ld. Assessing Officer observed that notice u/s 133(6) issued on the address provided by the assessee, the same were received unserved. To this effect, reasons to believe recorded prior to issuing notice u/s 148 was referred to point out that this fact is stated in the reasons so recorded, meaning thereby that such an exercise of issuing notice u/s 133(6) was undertaken prior to the invocation of impugned proceedings and not during the course of reassessment proceedings. Going by the records placed by the assessee of all the share subscribing companies, it can be safely held that the assessee has discharged its initial burden and the burden shifted on the Ld. AO to enquire further into the matter which he failed to do so. It is also noted from their audited financial statement that all the investing companies have sufficient own funds available with them to make investment in the assessee.

7.4. Our attention was invited to the decision of coordinate bench of ITAT Mumbai in the case of Abhijavala Developers (P) Ltd v. ITO [2021] 124 taxmann.com 72 (Mum) wherein similar issue was dealt with and one of the investor companies viz., Kings Merchants Pvt. Ltd. was an investor in this case also for which addition made was deleted.

which were ultimately returned back with an endorsement "not traceable". The Assessing Officer ought to have found out their details through PAN cards, bank account details or from their bankers so as to reach the shareholders since all the relevant material details and particulars were given by the assessee to the Assessing Officer. In the above circumstances, the view taken by the Tribunal could not be faulted. No substantial question of law was involved in the appeal.'' 8.1. Similar view was taken by the Hon’ble High Court of Madras in the case of Pranav foundations Ltd. (2015) 229 Taxman 58 (Mad) wherein it was held as under: “In view of the fact that all the four parties, who are subscribers of the shares, are limited companies and enquiries were made and received from the four companies and all the companies accepted their investment. Thus, the assessee has categorically established the nature and source of the said sum and discharged the onus that lies on it in terms of section 68. When the nature and source of the amount so invested is known, it cannot be said to undisclosed income. Therefore, the addition of such subscriptions as unexplained credit under section 68 is unwarranted.”

8.2. Further, reliance is placed on the decision of Hon’ble Supreme Court in the case of CIT v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC) wherein it was held as under: “In this case the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the revenue that the said creditors were the income-tax assessees. Their index number was in the file of the revenue. The revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee had discharged the burden that lay on him, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion was based on some evidence on which a conclusion could be arrived at, no question of law as such could arise. The High Court was, therefore, right in refusing to refer the questions sought for. Decision of the High Court affirmed.”

“8.2 As per settled law, the initial onus is on the Assessee to establish by cogent evidence the genuineness of the transaction, and credit-worthiness of the investors under Section 68 of the Act.

The assessee is expected to establish to the satisfaction of the Assessing Officer CIT v. Precision Finance (P) Ltd. [1995) 82 Taxman 31/[1994]208 ITR 465 (Cal.):

Proof of Identity of the creditors;

Capacity of creditors to advance money; and Genuineness of transaction

This Court in the land mark case of Kale Khan Mohammed Hanif v. CIT [1963] 50 ITR 1 (SC) and Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit- worthiness, then the AO must conduct an inquiry, and call for more details before invoking Section 68. If the Assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the Revenue to hold that it is the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source."

11.1. Further, in para 9 of the said decision, Hon'ble Supreme Court has observed as under:

"9. The Judgments cited hold that the Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries.

In the present case, the Assessing Officer made an independent and detailed enquiry, including survey of the so-called investor companies from Mumbai, Kolkata and Guwahati to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the share-holders were either non-existent, or lacked credit- worthiness."

11.2. Thereafter, Hon'ble Supreme Court summed up the principles which emerged by deliberating upon various case laws as under:

"11. The principles which emerge where sums of money are credited as Share Capital/Premium are: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit-worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Office is duty bound to investigate the credit-worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of namelenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act.” 11.3. Hon'ble Supreme Court, thus, held that once the assessee has submitted the documents relating to identity, genuineness of the transaction, and credit-worthiness of the subscribers, then, AO is duty bound to conduct an independent enquiry to verify the same. However, as noted above, ld. AO in this case has not made any independent enquiry in the course of impugned reassessment proceedings to verify the genuineness of the transactions. Assessee, having furnished all the details and documents before the ld. AO and the ld. AO has not pointed out any discrepancy or insufficiency in the said evidences and details furnished by the assessee before him. As observed above, the assessee having discharged its initial burden casted upon it to furnish the evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction, it shifted on the ld. AO to examine the evidences furnished and make independent inquiries and thereafter to state that on what account he was not satisfied with the details and evidences furnished by the assessee by confronting with the same to the assessee. In view of this, the aforesaid decision of the Hon'ble Supreme Court in the case of PCIT vs. NRA Iron and Steel Pvt. Ltd., in our humble view, is not applicable to the facts and circumstances of the case in hand.

14.1. Case of the assessee was reopened on the basis of information received from the Investigation Wing, Surat about assessee taking bogus accommodation entry from M/s. Mahalaxmi Impex amounting to Rs.45,00,000/- for which notice u/s. 148 was issued on 28.03.2018. Ld. Assessing Officer called for details relating to the said transaction which assessee could not furnish owing to change in its management. Assessment was completed ex-parte u/s. 144 r.w.s. 147 of the Act.

16.1. In this respect, decision in the case of Hon’ble jurisdictional High Court of Bombay in case of Pr. CIT v. Skylark Build in IT Appeal No. 616 of 2016, dated 24-8-2018 observed on the repayment aspect of the unsecured loans as “In addition, there is a subsequent development and namely that each of these creditors from whom the assessee borrowed moneys or who advanced it the moneys, were repaid the sums borrowed. This would establish that there were indeed real creditors; that they had indeed the funds available with them and that the transactions were genuine.”