M/S KESAR BIOTECH PVT. LTD.,,NEW DELHI vs. ITO, NEW DELHI

ORDER This appeal is filed by assessee against the order dated 31.3.2016 passed by the Ld. CIT(A)-5, Delhi relating to Assessment Year 2007-08 on the following grounds:-

On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the following actions of the AO

1. In conducting the assessment proceedings arbitrarily in haste on presumption basis and contrary to the principle of natural justice.

2. In making addition of Rs. 5 lacs to the returned income u/s. 68 of the Income Tax Act, 1961 on account of share application money received. The above action being arbitrary, erroneous, misconceived and unjust must be quashed with directions for relief.

“Affidavit

I, Dinesh Gupta son of Late Sri Ganpati Rai about 67 years, resident of D-802, New Friends

Colony, New Delhi-110 025 do hereby solemnly state and affirm as under:-

2. That I had appeared before the said CIT(A)-5, New Delhi, in appeal number 887/2014-15 for AY 2007- 07; 3. That during the said proceedings, the said CIT(A) never confronted me in any manner, the particulars as form part of para 6.2 to para 6.7 of the order dated 07.4.2016. DEPONENT

VERIFICATION

I, Dinesh Gupta, the above named deponent, hereby state that the above contents are true and correct to the best of my knowledge and belief.

Verified today on the 23rd day of November, 2016.

DEPONENT”

5.1 For further clarity, the relevant para no. 6.2 to 6.7 of the impugned order is also required to be reproduced hereunder:-

“6.2 It is in this background where the courts have held that the onus is cast on the assessee to prove to the satisfaction of the A.O., the source of the cash credit that the facts of the present case need to be analyzed. It is noted that Sh. Rajvir Singh was the director of BSA Fincap (P) Ltd. and it was his confirmation that was filed during the assessment proceedings. In the undated confirmation letter available in the assessment folder, the address of the company was furnished as Flat No. 54, Chetan Apartment, Patparganj, New Delhi-ll0092. The bank statement filed before the AO with ABN Amro Bank showed the address as A-163, 1st Floor, Ramprastha, Ghaziabad, U.P. In the appellate proceedings, the letter of Sh. Rajvir Singh, Director BSA Fincap (P) Ltd. dated 28.06.2014 addressed to the AO mentions the address of the company as 27/53, 2nd floor, Old Rajinder Nagar, New Delhi. In the application form for equity shares the PAN of the said company mentioned as AABCB8568N whereas the PAN card filed with• the AO shows the PAN to be AAACB8895P. In other words, in view of the conflicting address and PAN provided to the AO and in the present proceedings, the identity of the share applicant company is not proved. One of the contentions raised before the AO and during the present proceedings is that the AO does not appear to be aware as to whether there was a search or survey conducted by the Investigation Wing, whether the directors of the said company were interrogated or not and whether the AO was in possession of the confessional statement of the director of the said company or not. This aspect has not been discussed by the AO in the assessment order but it is seen from the record that the AO replied to the appellant in the letter dated 27.06.2014, meeting his objections to the reopening, stating that the survey operations revealed that Sh. Nirbhay S. Gupta Sh, Rajiv Gupta, Sh. Shyam Shankar Gupta and Sh. Madan Gupta were involved in providing bogus accommodation entries in their respective statements before the Investigation Wing. The information received from the wing that the appellant had received an accommodation entry of Rs. 5 lacs through cheque no. 502563 dated 12.12.2006 drawn on ABN Amro Bank was corroborated from the return of income filed which revealed that the issued capital had been enhanced by Rs. 10 lacs with the security premium of Rs. 40 lacs, included in this amount was the share capital of Rs. 1 lac and premium of Rs. 12 lacs received from BSA Fincap (P) Ltd. Perusal of the record does show that the surveys carried out on 23.08.2008 at different premises conclusively established that the modus operandi that was adopted by the entry providers Sh. Nirbhay S. Gupta Sh. Rajiv Gupta, Sh. Shyam Shankar Gupta and Sh. Madan Gupta and the beneficiary companies such as the appellant, was to create a web of bogus private limited companies, proprietary concerns and other such entities and transfer the unaccounted money through a maze of transfers from one entity to the other in order to camouflage the impugned transactions. BSA Fincap (P) Ltd. is one of the share investors in the appellant company included in the list of companies that were created and managed by these persons and one Sh. Rajvir Singh was placed as director of the said company. Moreover, the confessional statement of Sh. Rajvir Singh, has evidentiary value even though it was recorded . during survey proceedings and, to the best of my knowledge, has not been retracted so far.

6.3 In his statement that 01.12.2008 recorded u/s 131(1A), Sh. Rajvir Singh deposed that he was Director in two companies M/s Uri Civil Engineers Pvt. Ltd. & M/s BSA Fincap Pvt. Ltd. alongwith his wife Smt. Kiran Singh and that there was no business carried out by these companies. He admitted that these companies had no real business but were used to provide accommodation entries. With reference to the question no. 6, he clarified that the pages 1 to 6 of the seized documents Annexure-A-1 contain the details of the bogus billing receipts given to another company M/s Ever- like Buildcon Pvt. Ltd. He mentioned that the bogus billing was around Rs. 41,00,000/- on which he received commission. Further in his reply to question no. 6, at page 4 of the statement, Sh. Singh clarified that he arranges accommodation entry for those beneficiary companies, paper companies and mediator companies who require such entries. In the subsequent statement recorded on 08.12.2008, Sh. Rajvir Singh correlated all the seized material available in Annexures A-12 to A-20 with Annexures B-10 to B-18 to conclusively reveal that M/s SLF Finlease Pvt. Ltd., M/s Panwaria Real Estate Pvt. Ltd., M/s Marrass Industries Pvt. Ltd., M/s Saggi Tru Exim and M/s SG Buildcon Pvt. Ltd. were all paper companies. The appellant has not only failed to produce Sh. Rajvir so far not sought any opportunity to cross examine Sh. Rajvir Singh who was a Director in the share holding company, particularly when he has clarified on oath that these two companies M/s Uri Civil Engineers Pvt. Ltd. & M/s BSA Fincap Pvt. Ltd. were actually paper companies which had no real business except for providing accommodation entries. It is relevant to mention here that during the course of assessment proceedings, the confirmations of the subscribers of capital to whom shares were not allotted and consequently amounts were refunded have been attached. These confirmations pertain to share holders Smt. Darshan Devi, Sh. Jai Prakash Gupta, Jai Prakash Gupta(HUF), Renu Gupta, Seema Gupta and Shashi Gupta. The name of BSA Fincap (P) Ltd. does not figure in the list of shares subscribers who were not allotted shares. In my view therefore, the objections of the appellant that Sh. Rajvir Singh has not named its own name in the statement recorded nor revealed the nature of the transactions between the appellant and its shareholders, or that it had no continued contact with M/s. BSA Fincap (P) Ltd. are not justified.

6.4 The issue relating to accommodation entries provided by the very same company M/s BSA Fincap (P) Ltd. arose in the appellate proceedings before the undersigned in the case of Mis. Lam Holdings (P) Ltd. in Appeal No. Del/CIT(A)- S/0133/2013-14 and a detailed order was passed based on the assessment record and further enquiries made through the AO. It was found that BSA Fincap (P) Ltd. along with some of the other companies managed by the entry operators had no real business although the transactions in their bank account ran into crores of rupees. Yet these companies were not filing returns of income. It would be useful to reproduce the operative part of the appellate order, hereinafter, which would support my case that the share holding company had no real identity nor creditworthiness:

"3.3.3.2 Moreover, a/though not discussed by the AO in the impugned order, I find that the AO had made enquiries with the Kotak Mahindra Bank, Sarita Vihar Branch wherein he received the bank statements and details regarding opening and closing of account of the impugned share holders which were as under:

S.No. Customer’s A/c name A/c A/c Total funds name opening closing transacted date date 1 BSA Fincap 01722000009311 30.9.2005 3.3.2008 5,01,85,161 Pvt. Ltd. 2 BSA Fincap 01832000000745 07.2.2007 3.10.2009 12,94,99,832

Pvt. Ltd. 3 URI Civil 0172200001202 28.2.2006 16.3.2009 8,89,10,027 Engineers P Ltd. 4 Marrass 01722000010816 19.12.2005 31.3.2008 7,59,04,685 Industries P Ltd. 5 Marrass 0183200000798 30.1.2007 3.3.2009 7,73,24,976 Industries P Ltd.

3.3.3.3 Perusal of the account opening form reveals the following details regarding the directorship of these companies:

S.No. Name Address Erstwhile Directors Directors at the time of opening of Bank A/c 1 Marass F-24, Mahadev Rajvir Industries Second Singh, Singh and Pvt. Ltd. Floor, Manjul Rajkumar Jawahar Kumari Tiwari Park, Singh, Laxmi Mahendra Nagar, Pratap Delhi Singh & Rajesh Kumar Singh 2 Uri Civil F-24, Rajvir Engineers Second Singh and Pvt. Ltd. Floor, Rajvir Jawahar Singh & Park, Rajkumar Laxmi Nagar, Delhi 3 BSA Fincap P A-163,. Suresh Kr. Rajvir Ltd. Ram Singla & Singh and Prastha, Arun Kr. Suchi Ghaziabad Bansal Patwari 3.3.3.4 Perusal of the account opening forms shows that the earlier directors of Marrass Industries Pvt. Ltd. & BSA Fincap P. Ltd. resigned w.e.f. 05.09.2005 and 17.03.2005 respectively and the present Directors were appointed from the very next day. The bank statements which were received from the Kotak Mahindra Bank reveal the classic signs of a bogus company wherein funds are received from certain entities and transferred to other entities. The total transaction as per the bank accounts of these companies as per the above mentioned table runs into crores of rupees and yet it seems as if these companies did not transaction any real business. I also find that in the letter enclosing the confirmations the appellant has not enclosed any supporting documents such as the income tax returns, etc and hence the creditworthiness of these companies have not been proved. Enquiries were made through the Addl. CIT, Ranges 14 & 15, New Delhi and it was found that no returns or negligible/nil returns have been filed by these companies for the assessment year under appeal as well as the preceding assessment year. The factual position of the returns filed are as under:

S.N PAN Name of the AO Returned Returned case income income 2007-08 2008-09 1 AACCP8523E Panwaria Ward No return No return Real Estate 19(3) 2 AAACU0860D Uri Civil Centra Nil No return Engineering l Circle- 6 3 AACCM3761B Marrass Ward Nil No return Industries 16(2) Pvt. Ltd. 4 AABCB8568N) BSA Fincap Ward Rs. 180/- No return Pvt. Ltd. 4(1)

6.5 Coming to the facts of the case, it is seen from the record that the AO has made no addition in respect of those share holders whose confirmations he received but limited the addition made only to the company in respect of which no reply was received and whose creditworthiness were not proved by the appellant. Moreover, it is seen that out of the total share holding that has been treated as unexplained cash credit by the AO, 80% of the same represents premium paid on shares. That means for every share of the face value of Rs. 10, premium of Rs. 40 has been received. When we examine the history of the appellant's financial status, it is found that the appellant is in receipt of commission income, and interest income to the extent of only Rs.3,05,OOO/-. Hence, it is not in the realm of human probabilities that share premium would be paid by other companies to make investments in a small company having no track record in business. In this regard the Delhi High Court in the case of Nipun Builders and Developers Pvt. Ltd (30 taxmann.com 292), held that in view of the continuing contact and relationship between a Private Limited Company and its share holders, it was in the assessee's own interest to have actively participated and cooperated in the assessment proceedings by producing the principal officers of the subscribing companies. In the present case also, the AO did call upon the appellant to produce the shareholder company for personal deposition during the course of assessment proceedings. The appellant's contention is that further enquiries should have been conducted by the AO to examine the genuineness of assessee's claim viz-a-viz information received from the Investigation Wing and that the AO should have made attempt to enforce the attendance of share holder. This contention is without any basis as it is seen from the record, the inquiry letter issued was not complied with nor did the appellant produce the 'Directors of the company for personal deposition despite due opportunities. Therefore, for the appellant to state that the AO has not done due diligence is completely unjustified as the identity of the per-sons have not been proved by the appellant. The appellant is a private limited company and would depend upon persons known to its directors/shareholders directly or indirectly to buy its shares. It cannot be said that there is no existing relationship between it and its shareholders once the shares have been issued. The amounts due on shares have to be paid and in case dividends are declared the warrants have to be sent to the shareholders, therefore to say that the AO is duty bound to enforce their attendance is unreasonable since the onus rests on the appellant to provide the basic minimum- identity of the shareholders. Rather, the results of the investigation done by the Wing coupled with the facts relating to the failure on the part of the appellant to establish the creditworthiness and genuineness of the share holder company show that the share holder M/s BSA Fincap P. Ltd. could be conclusively said to be a dummy company floated by the Guptas' in order to accommodate the appellant company in the dubious transaction of arranging share holding from out of its own unaccounted funds.

6.6 In the case of Nova Promoters and Finlease Pvt. Ltd. (342 ITR 169) the Hon'ble Delhi High Court was seized with facts which stood on a better footing that the appellant's case as the affidavits of the entry providers and the Directors of the bogus companies had been filed before the AO to support the stand that the share holding monies had been received from genuine sources. The High Court held that the fact that the share holding amounts were received by account payee cheques and the share holding companies were duly registered by ROC were neutral facts which did not make the transactions genuine. The relevant observations of the High Court are as under:

“Where the complete particulars of the share applicants such 'as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under section 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. However, the Court cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material that discredits and impeaches the particulars furnished' by the assessee and also establishes the link between self-confessed 'accommodation entry providers', whose business it is to help assessees bring into their books of account their unaccounted monies through the medium of share subscription, and the assessee. The ratio is inapplicable to a case, again such as the present one, where the involvement of the' assessee in such modus operandi is clearly indicated by valid material made available to the Assessing Officer as a result of investigations carried out by the revenue authorities into the activities of such 'entry providers'. The existence with the Assessing Officer of material showing that the share subscriptions were collected as part of a pre- meditated plan - a smokescreen - conceived and executed with the connivance or involvement of the assessee excludes the applicability of the ratio. The ratio is attracted to a case where it is a simple question of whether the assessee has discharged the burden placed upon him under section 68 to prove and establish the identity and creditworthiness of the share applicant and the genuineness of the transaction. In such a case, the Assessing Officer cannot sit back with folded hands till the assessee exhausts all the evidence or material in his possession and then come forward to merely reject the same, without carrying out any verification or enquiry into the material placed before him. The instant case does not fall under this category and it would be a travesty of truth and justice to express a view to the contrary. [Para 381]

6.6.1 In a subsequent decision, the Delhi High Court in the case of N.Tarika Property Investments (P) Ltd (221 Taxman 14) reiterated its earlier decision in the case of CITv. NR Portfolio (P.) Ltd [IT Appeal No. 1018 of 2011 and 1019 of 2011] vide Judgment dated 22nd November, 2013 that mere production of PAN Number or assessment particulars does not establish the identity of a person. The identification of a person includes the ,place of work, the staff and the fact that it was actually carrying on business and further recognition of the said company/individual in the eyes of public. The relevant part of the order reads as under:

"As we have held that PAN Numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertainment of the active nature of business activity. PAN Number is allotted as a facility to revenue to keep track of transactions. The PAN Number cannot be blindly and without consideration of surrounding circumstances treated as sufficiently disclosing the identity of the individual. The mere filing of share application is not enough as the said application is not an unimpeachable document and does not on its own prove the genuineness or authenticity of the transaction. It can at best be treated as a corroborative document. Since the share application form is not an unimpeachable document, it cannot on its own be treated as sufficient for cross-verification of the transaction. We have already held that that mere production of PAN Number or assessment particulars does not establish the identity of a person. The identification of a person includes the place of work, the staff and the fact that it was actually carrying on business and further recognition of the said company/individual in the eyes of public.

6.6.2 In the present case, the plea taken is that the shareholding had changed and hence, it had discharged its obligation. This plea supports the stand of the AO and my finding that the impugned transactions are not genuine. No reasonable investor would invest in shares at a premium which is equal to the face value of the share and thereafter, disinvest in the shares at par. This shows that the share holders are not genuine share holders but have been used as a front to utilize the assessee's own funds. The appellant has taken the convenient plea during assessment proceedings that the share holder had divested itself from the shares and hence, expressed its inability to produce the directors of this company. Suffice it to say that the appellant company has failed to discharge its onus of proving the identity, genuineness and creditworthiness of the impugned share holder. When the AO tried to make inquiries under the provisions of section 133(6) dated 11.07.2014, from the share holder, M/s. BSA Fincap (P) Ltd. as per the address furnished in the confirmation, namely Flat no. 54, Chetan Apartment, Patparganj, Delhi-110092, it yielded no reply. I am unable to accept the appellant's plea that the assessment has been completed in a hurry without waiting for the reply from the share holder which was duly dispatched to the AO, although belatedly. The reasons for the same are that firstly, the so called confirmation of this company is dated 28.06.2014, which is prior to the issuance of the query letter of the AO and secondly, because the said letter has been dispatched as per record on 25.08.2014, 'after the assessment order was passed on 31.07.2014 and received by the appellant. It is curious to note that, simultaneous to the dispatch of this confirmation letter signed by Sh. Rajvir Singh to the AO on 25.08.2014, the appellant filed the appeal on the very same date on 25.08.2014. It is very clear from . the conduct of the appellant that it has undertaken every trick in the trade in order to stave/ward off any enquiries by the AO into the actual conduct of affairs at the end of the share' holder, in order to come to a conclusion whether the amount paid inclusive of premium', by way of' share application money was explained, genuine and creditworthy. Therefore, the onus that lay on the appellant is found to have not been discharged; There is also a clear nexus between the adverse material found by the Investigation Wing in the form of the admission of Sh. Rajvir Singh, which clearly indicates the involvement of the appellant company in the entire modus operandi of arranging bogus accommodation entries in exchange of commission, which as the Delhi High Court held in the case of Nova Promoters and Finlease Pvt. Ltd. (supra) is part of a pre meditated plan. The nexus between the receipt of share holding money inclusive of premium and the adverse material in the form of the statement is thus established.

6.7 India has been grappling with the problem of black money since the last several decades. The government has set up various committees to ascertain the extent and nature of the generation of black money and to suggest measures to tackle the same. While the exact quantification of the black money present in the economy has varied form committee to committee, there has been unanimous political as well as public opinion that the menace of black money has to be attacked at the ground level. The problem regarding use of shell companies to provide accommodation entries to launder black money has been under consideration of the CBDT Committee on "Measures to tackle Black Money in India and Abroad" and also the Special Investigation Team (SIT) formed by the Govt. of India for providing effective deterrence to those indulging in the creation of these companies and providing accommodation entries. At pages 73 to 76 of the Third Report submitted, the SIT has made certain recommendations, which are available by way of' a press release by the Govt. of India dated 03.11.2015 as available in the public domain www.finmin.nic.in :

"(i) Proactive detection of creation of shell companies: Serious Frauds investigation office (SFIO) under Ministry of Company needs to actively and regularly mine the MCA 21 database for certain red flag indicators. These red flag indicators could be based on common DIN numbers in multiple companies, companies with same address, same contact numbers, use of only mobile numbers, sudden and unexpected change in turnover declared in returns etc. These indicators are illustrative in nature and the SFIO office can prepare a set of indicators based on its own experienced. consultation with other law enforcement agencies like CBDT, ED and FIU.

(ii) Sharing of information on such high risk companies with law enforcement agencies: Once certain companies are identified through data mining above, the list of such high risk companies should be shared with CBDT and FIU for closer surveillance.

(iii) In case after investigation/assessment by CBDT, a case of creating accommodation entries is clearly established, the matter should be referred to SFIO to proceed under relevant sections of IPC for fraud. SFIO should also refer the matter to Enforcement Directorate for taking action under PMLA for all such cases of money laundering.

(iv) It has also been observed that in many cases of creation of shell companies, the shareholders or directors of such Companies are persons of limited financial means like drivers, cooks or other employees of main persons who intend to launder black money. Section 89(1) and 89(2) of the Companies Act, 2013 provides for persons to declare if they have "beneficial interest" in the shares of the Company or not. Section 89(4) enjoins the Central Government to make rules to provide for the manner of holding and disclosing beneficial interest and beneficial ownership under this section. The Ministry of Company Affairs may frame such rules at the earliest.”

The SIT had requested Ministry of Corporate Affairs to provide the following data: i) Persons who held Directorship in more than one Company ii) Companies who have the same office address

The data was subsequently provided by the Ministry of Corporate Affairs. From a perusal of data given by the Ministry of Corporate, the following points stand out:

(i) There are 2627 persons holding Directorship in more than 20 Companies in violation of Section 165 of the Companies Act, 2013. It may be mentioned this is also in violation of s. 275 of the erstwhile Companies Act, 1956. The total number of Companies involved is 77696.

(ii) A total of 345 addresses have at least 20 Companies operating from the same address. The total number of Companies sharing their address with at least 19 more Companies are 13581 in number. While there is no specific Act/Rule which debars Companies from having the same address, SIT has desired greater vigilance is accorded by law enforcement and intelligence agencies like CBDT, CBEC, ED and FIU while examining the operations of such Companies. The SIT has requested Ministry of Company affairs to take necessary action with respect to violation of the Companies Act noted above.

The SIT has further requested CBDT, CBEC and Enforcement Directorate to undertake due diligence on the Companies data referred to above -:

6.7.1 It may be recalled that the SIT on Black Money was set up as a result of the Hon'ble Supreme Court of India's directions while dealing with a public interest litigation matter' on the subject. The Judiciary as well as the Government are therefore aware of the widespread menace of black money and steps are being taken to provide sufficient deterrence against those found indulging in the practice of converting black money into white. These efforts have taken the shape of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (popularly Black Money Act) passed recently by the Parliament, signing of DTAAs and TIEAs signed with more than 82 countries and so on. The Courts, including the undersigned cannot, therefore remain oblivious of the happenings in real time wherein the public and collective conscience globally is to confront and remove the scourge of black money from the economy. Moreover, on the cumulative consideration of facts available on record, which makes it apparent that the appellant company was a beneficiary in the receipt of accommodation entries from the companies floated and controlled by Sh. Nirbhay Shankar Gupta, Sh.

Shyam Shankar Gupta, Sh. Rajiv Kumar Gupta and Sh. Madan Gupta, the documentary evidences that have been furnished before the AO during the assessment proceedings and the undersigned, in respect of the cash credits in the form of share holder's funds are found to be evidences fabricated in order to make them appear real. Moreover, the appellant is totally silent about the nature and sources of the amount credited in the books of account as well as the rationale for receiving premium which is 80% of the total consideration received. 'From the above discussion, it is thus apparent that neither the genuineness nor the creditworthiness of these companies, the onus of which rested on the appellant, have been proved/discharged. The explanation offered regarding the amounts credited in the books of the appellant has correctly been found to be unsatisfactory by the AO. Accordingly, the addition made by the AD with regard to unexplained cash credit of Rs. 5,00,000/- u/s 68 of the I.T. Act is upheld. Ground no. 3 is dismissed.”

5.2 After perusing the contents of the affidavit as well as relevant paras no. 6.2 to 6.7 of the impugned order, as aforesaid, I find considerable cogency in the contents of the affidavit filed by Sh. Dinesh Gupta, CA of the Assessee, therefore, in my considered opinion, the issue in dispute may be decided afresh at the level of the AO, in terms of the finding given by the Ld. CIT(A) in his order vide para no. 6.2 to 6.7 and AO should verify the contents of the affidavit filed by the Chartered Accountant of the assessee, who appeared before the Ld. CIT(A) on behalf of the assessee. I hold and direct accordingly.