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Income Tax Appellate Tribunal, “SMC” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)
The appeal filed by the Revenue is directed against the order dated 10.2.2017 passed by the learned CIT(A)-9, Mumbai and it pertains to A.Y. 2007-08. The Revenue is aggrieved by the decision of the learned CIT(A) in deletion the addition of ` 45 lakhs made u/s. 68 of the Act.
The assessee-company is engaged in the business of manufacture and sale of clothes. The Assessing Officer received information that the assessee- company has received share application money to the tune of ` 45 lakhs from various companies belonging to Shri Praveen Kumar Jain group. The Revenue had conducted search action in the case of Shri Praveen Kumar Jain group on 1.10.2013 and during the course of search, Shri Praveen Kumar Jain had admitted that his group of companies were giving only accommodation entries by way of share capital and share application money. Hence, the Assessing Officer took the view that the share application money of ` 45 lakhs received by the assessee is assessable to tax and accordingly reopened the assessment by issuing notice u/s. 148 of the Act. Various evidences were furnished by the 2 M/s. Khshboo Exports Pvt. Ltd.
assessee were not accepted by the Assessing Officer and accordingly he added ` 45 lakhs to the total income of the assessee u/s. 68 of the Act. The learned CIT(A) deleted the same and hence the Revenue has filed this appeal before us.
It is pertinent to note that the Assessing Officer has assessed a sum of ` 45 lakhs, but according to the assessee it has received ` 40 lakhs only from the companies belonging to Shri Praveen Kumar Jain group as detailed below:- 1. Java India Impex Ltd - Rs.15.00 lakhs 2. Kush Hindustan Entertainment - Rs.10.00 lakhs 3. Lexus Infotech Ltd - Rs. 5.00 lakhs 4. Vanguard Jewels Ltd - Rs. 5.00 lakhs 5. Yash V Jewels Ltd - Rs. 5.00 lakhs ------------ Rs.40.00 lakhs ======== 4. Learned Departmental Representative submitted that the impugned addition has been made by the Assessing Officer on the basis of admission made by Shri Praveen Kumar Jain in his sworn statement. Though the assessee has furnished details of annual accounts of share applicants, perusal of the income tax return would show that they are declaring only minimal income. The admission of Shri Praveen Kumar Jain would show that these companies have been used to launder the money. Learned AR placed reliance on the decision rendered by the Indore Bench of the ITAT in the case of Agrawal Coal Corporation (P) Ltd. (19 taxmann.com 209), wherein the Tribunal had confirmed the addition of share applications money made u/s. 68 of the Act by distinguishing decision rendered by Hon'ble Supreme Court in the case of Lovely Exports (P) Ltd. (Application No. 11993 of 2007 dated 11.1.2008).
On the contrary, learned AR submitted that the assessee has raised share capital of ` 90 lakhs during the instant year, which consists of share capital amount of ` 18 lakhs and share premium amount of ` 72 lakhs. Out of the amount of ` 90 lakhs; a sum of ` 40 lakhs only received as share capital from the companies belonging to Shri Praveen Kumar Jain and the remaining amounts were received from outsiders. He submitted that the AO has 3 M/s. Khshboo Exports Pvt. Ltd.
accepted the genuineness of the balance amount of Rs.50.00 lakhs. He further submitted that the assessee has fully utilised entire capital for capital work-in- progress purposes. He submitted that the decision rendered by the Indore Bench of the ITAT in the case of Agrawal Coal Corporation (P) Ltd. (supra) would not apply to the facts of the present case, since in the case before the Indore Bench, the identity of share applicants were not proved. Learned AR submitted that the assessee, in the instant case, has discharged the initial burden placed upon it u/s. 68 of the Act by establishing the identity of share applicants, their creditworthiness and genuineness of the transactions. He submitted that the assessee has furnished all documents to prove that three main ingredients in the paper book filed before lower authorities as well as before the Tribunal. Learned AR submitted that Shri Praveen Kumar Jain has given a general statement that he did not particularly implicate the investment made into assessee-company by his group. Hence the Assessing Officer was not justified in placing reliance on the general statement so given by Shri Praveen Kumar Jain. Learned AR further submitted that all the share applicants have again confirmed the genuineness of the investments and said confirmation letters are placed at page No. 128 to 135 of the paper book. These confirmation letters were filed before the learned CIT(A). Learned AR further submitted that the learned CIT(A) has followed decision rendered by Hon'ble Jurisdictional Bombay High Court in the case of Gagandeep Infrastructure (P) Ltd. (2017) 394 ITR 680 in deciding the issue in favour of the assessee. Hon'ble Bombay High Court has also held in the case of Principal CIT Vs. Paradise Inland Shipping (P) Ltd. (84 taxamnn.com 58) that once the assessee had produced documentary evidence to establish the existence of share applicant companies, burden would shift on the Revenue to establish their cases. He further submitted that the identical addition made in the case of M/s. SDB Estate Private Limited (ITA No. 584/Mum/2015) has been deleted by the Mumbai Tribunal vide its order dated 15.4.2015.
4 M/s. Khshboo Exports Pvt. Ltd.
I have heard the rival contentions and perused the record. I noticed that the learned CIT(A) ahs deleted the addition by making following observations :- 6.3.1. I have considered the entire facts and circumstances of the case and have carefully considered the finding of AO, rival submission of the appellant and evidence on record. During the year the appellant in the process of expansion of its business and facilitation working capital in furtherance of its business has issued equity share capital amounting to Rs.18,00,000/- of face value of Rs. 100/- each at a premium of Rs. 400/- each amounting to Rs. 72,00,000/-, thus aggregating to sum of Rs. 90,0,000/-. The funds raised by issue of equity shares at premium were utilized for expansion of business which is evident from the balance sheet submitted that there has been increase in capital work in progress reflected under the head fixed assets amounting to Rs. 1.07 crores.
6.3.2. Of the said sum of Rs. 90,00,000/-, the appellant has issued equity capital including premium amounting to Rs. 40,00,000/- to the above mentioned five parties. The AO has considered sum of Rs. 5,00,0001- received from Lexus Infotech Limited twice and hence, computed sum of Rs. 45,00,000/-. The correct amount received from above parties stands at Rs. 40,00,000/, The appellant company has issued equity shares and that no share application money is outstanding from the said five parties at the yearend as on 31-03-2007.
6.3.3. The appellant has submitted confirmation from the said five parties confirming the investments made along with copy of acknowledgement of return of income filed for the AY 2007-08, audited balance sheet, extracts of diretorship of the said five companies and copy of bank statements evidencing amount of share application received through banking channels. On going through the details submitted it is observed that all the five companies have filed their respective return of income and the balance sheet shows substantial net worth. The investment amount made in the appellant company by the respective said five companies is very small as compared to the net worth. The said companies have declared income in their return and have paid taxes. Further, it is seen that in none of the company Mr. Pravin Kumar Jain is a director. The above documents are either filed with the Department or are available on the public domain of Ministry of Corporate affairs except to bank statement and confirmations.
6.3.4. On the face of the balance sheet and details submitted there is nothing incriminating that can be drawn to infer that the said transactions is merely accommodating entries and not genuine. More importantly there no direct evidence which has been brought on record by the AO. No nexus is established as to circulating of funds or that cash was paid by the appellant company to obtain the cheques for 5 M/s. Khshboo Exports Pvt. Ltd. share application.
6.3.5. The appellant has provided the identification of the parties. The same is supported by the income tax returns filed by the respective parties. The allegation of the AO that PAN is issued without verification of the applicant is not correct. The AO could have verified the jurisdiction of the respective parties and could have made enquiries with the respective AO's about the said five parties from the PAN available with him.
6.3.6. The appellant has submitted balance sheet and details of the said five parties to prove credentials and genuineness of the transactions. The three ingredients viz. identity, credentials and genuineness cannot be doubted.
6.3.7. The AO has heavily relied on information received from DDIT (Inv), Mumbai and that of the statement of Mr. Pravin Kumar Jain. The AO has not carried out independent enquiries to prove the case. On reading from the assessment order there is nothing corroborative brought on record to prove that the share application money received are accommodating entries or received from bogus share holders.
(i) It is submitted by the applicant that on giving the names of the share holders than the onus on the part of the applicant is discharged and that addition, if any to be made is to be in the hands of the investor and not applicant. In the case of CIT v. Lovely Exports (P) Ltd [2008] 216 CTR 195 it has been held that;
"If share application money is received by assessee-company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company (ii) In the case of CIT vs. Creative World Telefilms Ltd. [2011](333 ITR 100)(Bombay) the court has held as under:-
"In the case in hand, it was 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 die que number, name of the bank. It was expected on the part of the Assessing Officer to make proper investigation and reach the shareholders. The Assessing Officer did nothing except issuing summons which were ultimately returned back with an endorsement not traceable'. The Assessing Officer ought to have found out their
6 M/s. Khshboo Exports Pvt. Ltd. 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. In the result, the revenue's appeal was to be dismissed in limine. (para 2)"
(iii) The A.O. has merely based on the information received from the DDIT and the statement of third party Mr Praveen Kumar Jain has formed opinion that the appellant is one of the beneficiaries who has taken alleged accommodation entry. It is not shown that copy of the statement of Mr. Paveen Kumar Jain has been provided to the appellant and that opportunity of cross examining has been granted. There is no mention in the assessment order that Shri Praveen Kumar Jain has categorically stated having provided accommodation entry to the appellant.
(iv) In the case of M/s. SDB Estate Pvt. Ltd vs. ITO-(5)(3.(2) in on similar ground it has been decided that:-
"In view of the above stated legal position and in the light of reliable evidences brought on record by assessee to substantiate identity, genuineness and creditworthiness of shareholders, which have not been controverted by the Revenue, the additions made solely on the basis of general statement of Shri Mukesh Chokshi cannot be held to be justified and the same are accordingly ordered to be deleted"
6.3.8. As regards issue involving addition of share premium amount alongwith share application money/share capital money, the jurisdictional ITAT, Mumbai has decided in many cases that it cannot be added. Further, the Honble High court has also decided the issue that the addition of share premium amount cannot be made in earlier years prior to amendment in the relevant provisions in the I.T.Act, 1961. In this regard, reference is made and reliance is placed 'to the various Judicial Pronouncements on the issue related to additions for share premium amount included in the share application money/share capital money. These are as under:
(i) In the case of M/s. Vodafone India Services Pvt. Ltd vs. Addl. CIT reported in 368 ITR 001, Hon'ble Bombay High Court decided that :
'The amounts received on issue of share capital including the premium are undoubtedly on capital account. Share premium have been made taxable by a legal fiction under Section 562)(viib)
7 M/s. Khshboo Exports Pvt. Ltd. of the Act and the same is enumerated as Income in Section 2(24)('xvi) of the Ac!. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received an application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. Court finds considerable substance in the Petitioner's case that neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a nonresident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act."
(ii) The CBDT vide instructions No - 02/2015 dated 29/1/2015 directed the revenue not to file the SLP before Hon'ble to Supreme Court and directed Ld AOs to accept the High Court order. The relevant instructions is as under :-
"In reference to the above cited subject, I am directed to draw your attention to the decision of the High Court of Bombay in the case Of Vodafone India Services Pvt. Ltd for A.Y. 2009-10 (WP No.871/2014) = 2014-TH-19-HC-MUM-TP, wherein in the Court has held, inter-alia, that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment. .. It is hereby informed that the Board has accepted the decision of the High Court of Bombay in the above mentioned Writ Petition. In view of the acceptance of the above judgement, it is directed that the ratio decided of the judgement must be adhered to by the .field officers in all cases where this issue is involved. This may also be brought to the notice of the ITAT, DRPs and CIT (Appeals)."
(iii) In the case of ACIT vs. Gagandeep Infrastructure Pvt. Ltd bearing 11 dated 23/4/2014, Hon'ble Mumbai ITAT decided that "We have carefully perused the orders of the lower authorities. In our considered view, the issue of shares at premium is always a commercial decision which does not require any justification. Further the premium is a capital receipt which has to be dealt with in accordance with Sec. 78 of the Companies Act, 1956. Further, the company is not required to prove the genuineness, purpose or justification for charging premium of shares, share premium by its very nature in a capital receipts and is not income
8 M/s. Khshboo Exports Pvt. Ltd. for its ordinary sense....... The entire dispute revolves around the fact that the assessee has charged a premium of Rs. 190/- per share. No doubt a non-est company or a zero balance sheet company asking for Rs. I90/- per share defies all commercial prudence but at the same time we cannot ignore the fact that it is a prerogative of the Board of Directors of the company to decide the premium amount and it is the wisdom of the share holders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. The amendment has been brought in the Income Tax Act under the head "Income from other sources" by inserting Clause (viib) to Sec. 56 of the Act wherein it has been provided that any consideration for issue of shares, that exceeds the fair value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be treated as the income of the assessee but the legislature in its wisdom has made this provision applicable w.e.f.1.4.2013 i.e. on and from A. Y. 201 Insofar as the year under consideration is consideration is concerned, the transaction has to be considered in the light of the provision of Sec. 68 of the Act. There is no dispute that the assessee has given details of names and addresses of the share holders, their PAN Nos, the bank details and the confirmatory letters... Considering all these undisputed facts, it can be safely concluded that the initial burden of proof as rested upon the assessee has been successfully discharged by the assessee. Even if it is held that excess premium has been charged, it does not become income as it is a capital receipt. The receipt is not in the revenue field. What is to be probed by the AO is whether the identity of the assessee is proved or not. In the case of share capital, if the identity is proved, no addition can be made u/s.68 of the Act. We draw support from the decision of the Hon'hle Supreme Court in the case of Lovely Exports Pvt Ltd. 317 ITR 218. We, therefore do not find any error or infirmity in the findings of the Ld CIT(A). Ground No.I is accordingly dismissed."
(iv) In the case of Green Infra Ltd vs. ITO reported in 38 taxmann.com 253-ITAT) dated 23/812013, Hon'ble Mumbai ITAT decided that "During previous year ending on 31-3-2009, it had collected share premium on allotment of shares of face value of RS. 10 each at a premium of Rs. 490 per share - It had credited said amount in balance-sheet under head share premium account - It claimed that shore premium was a capital receipt not exigible to tax - Assessing Officer had taxed share premium under section 56(1) as assessee's income from other sources - Whether since expenditure and receipts directly relating to share capital of a 9 M/s. Khshboo Exports Pvt. Ltd. company are of capital in nature, share premium collected by assessee could not be taxed under section 56(1) as income from other sources - Held, yes - Whether since entire transaction relating to allotment of shares had been done through banking channel and assessee had invested share premium in its three subsidiary companies, provisions of section 68 as suggested by revenue had also not applicable to instant case - field, yes.... No doubt a non est company or a zero balance company asking for a share premium of Rs. 490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a very premium. The revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land."
(v) In the case of CIT vs. Goa Sponge and Power Ltd reported in Appeal No. 16 of 2012, Hon'ble Bombay High Court decided that :-
"Once the authorities have got all the details, including 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 cannot 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 Lid, vs. CIT, (2008) 216 CTR (SC) 195, as also by this Court in CIT vs. Creative World Telefilms Ltd, (2011) 333 ITR 100 (Born). In such circumstances, we are of the view 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."
(vi) In the case of CIT vs. Creative World Telefilms Ltd reported in 333 ITR 100. Hon'ble Bombay High Court decided that :-
“……the Tribunal was pleased to follow the judgment of the apex Court in the case of CIT vs. Lovely Exports (P) Lid. (2008) 216 CTR (SC) 195: (2008) 6 DTR (SC) 308: (2009) 319 ITR 5 (St.) wherein the apex Court observed that if the share application money is received by the assessee-company from alleged bogus shareholders, whose names are given to the AG, 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 PAiV/GIR number and had also given the cheque number, name of the bank. It was expected on the part of the AG to make proper investigation and reach the 10 M/s. Khshboo Exports Pvt. Ltd. shareholders. The AG 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 'count 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."
(vii) In the case of CIT vs. Lovely Exports (P) Ltd reported in 216 CTR 195, on'ble Apex court decided that :
If the share application money is received by the assessee company from alleged bogus shareholders, Whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of assessee company."
(viii) In the case of CIT vs. Steller- Investment Ltd reported in 251 ITR 263, Hon'ble Apex court decided that “That the increase in subscribed capital of the respondent- company 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, under no circumstances could the amount of share capital be regarded as undisclosed income, an appeal was taken by the Department to the 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."
(ix) In the case of CIT vs. Expo Globe India Ltd reported in 361 ITR 147, Hon'ble Delhi High Court decided that “It has been held by Hon'ble Supreme Court and various High Courts that no addition can be made on account of share application money once the names of the share applicants are given. In the instant case, identity of these persons are not or doubt and assessment particulars of all the persons are on record and there is no material to hold that creditworthiness of these persons are not established. The judgment of Hon'ble Supreme Court in the case of Lovely Export 216 CTR 195 and also the judgment of Hon'ble Delhi High Court in the case of CIT vs. Value Capital Services Pvt Ltd 307 ITR 334 are relevant on this issue. It was held by Hon'ble Madras High Court in the case of CIT vs. Electro Polychem Ltd. 294 ITR 661 and Hon'ble Allahabad High
11 M/s. Khshboo Exports Pvt. Ltd.
Court in the case of Jaya Securities Ltd 166 Taxman 7 that no addition can be made on account of share application money even if subscriber to capital are not genuine. The above said judgements were challenged by the Department by way of SLP before Supreme Court of India and SLP has been dismissed by Supreme Court in both the cases. In view of above said facts of case and position of law, I hereby direct the AO to delete the addition of Rs.69,75,000/-.
In the case of CIT v. Vacmet Packaging (India) Pvt Ltd reported in (x) 88 CCH 065, Hon'ble Allahabad High Court decided that "Held, assessee had filed documentary evidence to prove genuineness of share application money consisting of N share application forms; (ii) copies of bank accounts of share applicants; (iii) copies of income tax returns of share allottees; (iv)balance sheets; and (v) copies of share allotment certificates and of Board's resolution of the share applicants — Identity of applicants was established by production of copies of PAN cards and registration certificate with the Registrar of Companies — Financial capacity was also proved by filing of copies of the bank accounts from where the share application money was transferred through banking channels to the assessee- Assessee had discharged onus placed upon him by 68- Concurrent finding offacts also rendered by CIT(A) and tribunal in this regard — No substantial question of law arises- Revenue's appeal Dismissed" - (xi) In the case of Jaya Securities Ltd vs. CIT reported in 166 Taxman 7 (SLP filed by department dismissed), Hon'ble Allahabad High Court decided that "Whether any addition under section 68 can be made in respect of investment made by different persons in share capital of assessee company, limited by shares, whether public or private -Held, no."
6.3.9. In the light of the above factual narration, various references and judicial propositions I reach to the,c,91.1thisn that the AO has erred in making addition u/s 68 of the Act on account of share application money. The appellant has established the genuineness of the transaction and that the same cannot be treated as unexplained credits. Therefore, the addition made by the AO of Rs. 45,00,000/- is deleted.
The assessing officer has made the impugned addition u/s 68 of the Act. Under the provisions of sec. 68 of the Act, the assessee is required to discharge initial burden of proof placed upon his shoulders, i.e., the 12 M/s. Khshboo Exports Pvt. Ltd.
assessee has to prove the identity of the creditor, the credit worthiness of the creditor and the genuineness of transactions. A perusal of documents filed before the tax authorities and also the observations made by Ld CIT(A) would show that the assessee has discharged the burden placed upon its shoulders. Once the assessee discharges its primary burden, then the burden to disprove the assessee’s version would shift to the shoulders of the assessing officer. In the instant case, the assessing officer has simply relied upon the general statement given by Shri Praveen Kumar Jain. As contended by Ld A.R, it was not shown that the transactions of the assessee with the above said companies have been declared as accommodation entries. On the contrary, the assessee has furnished confirmation letters obtained from the share applicant companies before the Ld CIT(A), after the sworn statement was given by Shri Praveen Kumar Jain. In my considered view, the AO has failed to discharge the burden shifted to his shoulders. The decision rendered by the Indore bench of ITAT in the case of Agrawal Coal Corporation (P) Ltd, in my view, has been rightly distinguished by Ld A.R. On the contrary, I notice that the Ld CIT(A) has followed the decision rendered by the jurisdictional Hon’ble Bombay High Court in the case of Gagandeep Infrastructure (P) Ltd (supra). The Ld A.R also placed reliance on the decision rendered by Hon’ble Bombay High Court in another case named Paradise Inland shipping (P) Ltd (supra). In these cases, it was held that once the assessee has discharged the initial burden of proof placed upon him u/s 68 of the Act, no addition could be made. It was further held that if the revenue’s case was that the share applicants are bogus shareholders, then it was for the revenue to proceed by reopening of assessments of such shareholders and assessing them to tax in accordance with the law and it would not entitle the revenue to add same in assessee’s hand.
Since the Ld CIT(A) has passed a reasoned order by duly considering all the relevant facts surrounding the issue and since he has followed the binding decision of Hon’ble Bombay High Court, I do not find any reason to interfere with his order.
13 M/s. Khshboo Exports Pvt. Ltd.
In the result, the appeal filed by the revenue is dismissed.
Order has been pronounced in the Court on 21.9.2017.