ITO, NEW DELHI vs. LC FASHION PVT. LTD, DELHI

Date of Hearing 02.08.2016 Date of Pronouncement 01.11.2016 ORDER

The present appeal has been filed by the Revenue assailing the correctness of the order dated 28.04.2015 of CIT(A)-V, New Delhi pertaining to 2009-10 assessment year on the following grounds:-

1. “That on the facts and circumstances of the case & in law, the Ld. C1T(A) has erred in deleting the addition of Rs.40,80,000/- made u/s 68 of the Act, as the assessee company failed to prove the creditworthiness and genuineness of the parties from whom it has received share application money.

2. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law. That the grounds ol appeal are without prejudice to each other. 3. That the grounds of appeal

are without prejudice to each other.

4. That the appellant craves leave to add, alter, amend or forego any grounds of appeal raised above at the time of the hearing.”

I.T.A .No.-4450/Del/2015 The AO required the assessee to explain the receipt of accommodation entries amounting to Rs.40,00,000/- from the following parties:-

Cheque Date From Company Bank Cheque No. Cheque Date Amount 21.04.2008 Lotus Realcon Pvt. Ltd. Axis 120422 21.04.2008 5,00,000 21.04.2008 Humtum Marketing P. Ltd. Axis 120202 21.04.2008 5,00,000 21.04.2008 Eagle Infratech Pvt.Ltd. Axis 094043 21.04.2008 5,00,000 21.04.2008 Victory Software Pvt.Ltd. Axis 094043 21.04.2008 5,00,000 26.04.2008 AD Fin Capital Services Pvt.Ltd. Axis 230842 26.04.2008 5,00,000 26.04.2008 Mani Mala Delhi Pro. Pvt. Ltd. Axis 098297 26.04.2008 5,00,000 26.04.2008 Virgin Capital Services Pvt.Ltd. Axis 102489 26.04.2008 5,00,000 26.04.2008 Euro Asia mercantile P. Ltd. Axis 229825 26.04.2008 5,00,000 2.1. In the course of the assessment proceedings, the AO required the assessee to provide the details and also directly sent notice u/s 133(6) to these parties to file their confirmation alongwith ITR, balance sheets, P&L Accounts and bank statement in respect of transactions amounting to Rs.40,00,000/-. In response to the notice u/s 133(6) confirmation alongwith bank statement, ITR & balance sheet were filed by these parties. Thereafter, the AO issued summons u/s 131 requiring that the directors be produced for their personal deposition and also to furnish the following information:-

2. Copy of your I.T.Return alongiwth computation of income, Balance sheet and P&L A/c for the AY 2009-10. 3. Copy of Bank statement for the period 01.04.2008 to 31.03.2009. 4. Personal Deposition alongwith proof of identity.”

2.2. However, on the said date, no one appeared and the assessee instead filed confirmation from the said parties. In order to facilitate compliance with the requirement of producing the Directors of the above companies the AO provided 5 opportunities. Since these were not produced, the AO concluded that the assessee failed to substantiate its claim in regard to genuineness and creditworthiness of the said companies. As a result thereof addition was made in the hands of the assessee.

I.T.A .No.-4450/Del/2015

The fallacy of the conclusion it was submitted is itself shattered by the CIT(A) who Page 3 of 11

I.T.A .No.-4450/Del/2015 acknowledging the realities that money is transferred from Balance sheet to Balance sheet without paying any taxes in the form of loan on equity requires the AOs in the cases of these companies to examine. The issue it was submitted has been considered superficially by the CIT(A) failing to notice the money laundering indulged into and bringing black money to books of accounts by clandestine and dubious methods. The CIT(A) it was argued has not cared to address the evidence and blindly accepted the written submissions which is contrary to the settled legal position as considered by the jurisdictional High Court in the case of CIT vs NR Portfolio Pvt.Ltd. 2014 2 ITOL 68 (Delhi). Reading from the said decision, it was her submission that when an assessee does not produce evidence it can be presumed that the assessee is trying to avoid appearance before the Assessing Officer. It was submitted it necessarily creates difficulties and prevents ascertainment of true and correct facts as has been held by the Hon’ble High Court in para 14. Inviting attention to the Paras 17, 18 and 19 of the said decision, it was submitted that the assessee was a private limited company. In the facts of the present case as considered by the jurisdictional High Court in the case of NR Portfolio Private Limited also being a closely held company the Hon’ble court had expressed the view that there necessarily would be a proximate relationship between the promoter directors and the shareholders as closely held companies usually receive share capital subscriptions from friends and relatives and not from unrelated/unknown third parties/general public. Thus in order to establish the genuineness the depositions to address the complete details in regard to actual business undertaken and engaged in by these companies and explain how and why these unrelated and unconnected third parties decided to become investors in the absence of public issue or advertisement the Page 4 of 11

I.T.A .No.-4450/Del/2015 specific presence of their directors was required. In the said background, specific reliance was placed upon Paras 18 and 19 by the Ld.Sr.DR to show that identity does not mean, mere mentioning of PAN number or assessment particulars as the PAN does not establish the true identity as these are mere numbers allotted on the basis of applications without actual de-facto verification of the identity or ascertaining active nature of business activity. Thus in order to ascertain the identity and the actual business, it was submitted it is necessary that evidences in support of the claim be placed on record. In the facts of the present case, it was her submission that repeatedly opportunities have been provided which have not been availed of and the CIT(A) has accepted the arguments without any enquiry or considering the findings on record.

Reliance was also placed upon the decision of the Apex Court in the case of Navodaya Castle Private Ltd vs CIT(A) (2015) 56 Taxmann.com 18 (SC) wherein upholding the finding of the Hon’ble High Court the SLP of the assessee had been dismissed. The finding of the Hon’ble High Court that certificate of incorporation, PAN etc were not sufficient for the purposes of identification of subscriber company when there was material to show that subscriber was a paper company and not a genuine investor was thereby upheld. Accordingly it was her prayer that the impugned order be set aside and the addition made by the Assessing Officer be upheld.

I.T.A .No.-4450/Del/2015 business. The Ld.AR submitted that the assessee is in the fashion business and in garments. The nature of business conducted by the companies who have applied for shares, he was unable to state. He was also not able to refer to any fact or reason in order to explain why these companies chose to become shareholders of the assessee.

However, on query, it was his submission that the assessee may not been in a position to produce the directors and the reliance was placed upon the decision of the jurisdictional High Court in the case of CIT & Ors. vs Oasis Hospitalities Pvt. Ltd. in of 2007 and 2093 of 2010 dated 31/01/2011. Relying on the said decision, it was his submission that the assessee by providing identification and the confirmations along with the necessary details has proved identity, genuineness of the transaction, creditworthiness which are the ingredients of the section. Apart from that reliance was also placed upon the decision of the Hon’ble Allahabad High Court dated 11.02.2014 in the case of CIT(Central) vs Vacmet Packaging India Private Limited.

Reliance was also placed upon order dated 07/08/2015 in in the case of Modinagar Rolls Ltd. vs CIT. Accordingly it was his prayer that the impugned order may be upheld.

I.T.A .No.-4450/Del/2015

It had merely given names of the parties without anything more. That would not be sufficient compliance. Even the bank statement of the Assessee which was submitted has not. been proved. 46. For all these reasons, we are of the view that the Assessee had not been able to discharge the onus ptomaine and addition was rightly made. We, therefore, answer the question in the negative and dismiss this appeal of the Assessee.”

Before arriving at a conclusion, it is deemed appropriate to set out the finding of the CIT(A) under challenge in the present proceedings. A perusal of the impugned 5 paged order shows that in the first three and a half pages the written submissions of the assessee are reproduced considering which the CIT(A) deleted the addition on the following reasoning:-

My findings: “I have perused the assessment order, written submission and paper book evidences produced by the AR and discussed the matter with her very carefully. The AR argued that the addition made by the AO on genuine share application money received from eight companies through banking channel of Rs 5 lakhs each treated as bogus accommodation entry is not proper and justified by the Assessing Officer. The Assessing Officer made the addition on the ground that no information was received from these companies nor their Directors appeared for personal deposition. The AO passed the order on 13.03.2014 but the share applicant companies and their Directors have given their information to the AO in writing before this date. The A.O vide para- 3/page-2 of his order admits that appellant company and his share applicants, provided confirmation, bank statement. ITR and balance sheet of all 8 share applicants. On further query about sources of investment by these share applicants, the AR provided the following table of share applicants below:-

“In continuation of our submission and in response to the further query raised regarding creditworthiness of the subscriber companies by Your Honor in previous hearing. I have to state as under:-

That all the subscriber companies have very good financials and were having very impressive monetary status as on 31/3/2008 prior to the subscription made in, the appellant company in April 2008. I hereby present the financial picture of the companies in a very illustrated chart as on 31/3/2008 S.n. Subscriber's name paid up capital Reserve& surplus Total worth 1. HumTum Marketing P.Ltd. 1,94,60,000/- 17,42,40,000/- 19,37,00,000/- 2. Lotus REalcon P. Ltd. 1,72,40,000/- 15,42,60,000/- 17,15,00,000/- Page 7 of 11

I.T.A .No.-4450/Del/2015

3. Victory soft ware. P. ltd. 1,92,30,000/- 17,21,88,619/- 19,14,18,619/- 4. Eagle Infratech p.ltd. 1,65,00,000/- 14,76,09,587/- 16,41,09,587/- 5. Adfin Capital ServiceP.ltd. 9,48,95,000/- 84,80,70.000/- 94,29,65,000/- 6. Euro Asia Mercantile p.ltd, 4,82,00,000/- 43,29,20,675/- 48,11,20,675/- 7. Manimala Delhi Prop,P.ltd 1,89,00,000/- 16,92,00,000/- 18,81,00,000/- 8. Virgin capital service P.ltd. 1,97,88,120/- 16,05,60,000/- 18,03,48,120/- All these subscriber companies were having good balances in their respective banks as on 31/3/2008. This should be sufficient to establish the creditworthiness of the companies very well." These share applicants have received money from many more companies in their balance sheet and transferred money to applicant into his balance sheet as share application money. Thus sources of investment stands explained. Hence the addition made by A.O u/s 68 as bogus share application money does not hold good. Hence the addition of Rs. 40.00,000 in its hand as bogus cash credit stands deleted. This ground of appeal is allowed. The A.O is directed to send the information or this order to assessing Officer of these share applicant companies for further investigation of those cases. Every receipt of money cannot be income. Money is transferred from balance sheets to balance sheets without paying any taxes, in the form of loan or equity. The AOs may enquire into all these possibilities. The information collected by CIT(A) at his level are not additional evidences, if not enquired by A.O. Since my findings are based on informations collected by me, the sources stand ' satisfactorily explained.”

9. On a reading of the above, it is seen that the Ld.CIT(A) has not cared to address the repeated opportunities given to the assessee to produce the director’s of the 8 companies for their deposition. This patent and obvious shortcoming in the face of the departmental case that these were mere paper companies and the paper trail available to the AO by itself was not sufficient and in order to verify genuineness a further enquiry was required. Opportunity was provided to the assessee. No effort was made as per record by the CIT(A) himself to examine the fact whether these companies were engaged in genuine business or were these created solely to launder black money.

There is no reference in its order on the business conducted by these companies.

Discussion on facts merely referring to paper trail created does not address the issue of genuineness.The facts/reasons leading these private limited allegedly dummy companies to invest in the assessee would be the crucial aspects for determining the Page 8 of 11

I.T.A .No.-4450/Del/2015 genuineness of the transactions. There is no discussion on the said aspect by the CIT(A) to satisfactorily conclude that these were genuine transactions by the private limited companies and not a mere paper trail. The CIT(A) himself notes that money is transferred from balance sheets to balance sheets without paying any taxes in the form of loan or equity and directs that “the AO may enquire into these possibilities” however himself ignores the benefit of the advise given to the unspecified AOs while deciding the issue before him. Notwithstanding the fact that the direction given by the Commissioner(Appeals) to the AO’s was beyond his jurisdiction and not relevant even otherwise for deciding the same even then the wisdom of the advise given is found to be not followed by him. Be that as it may as far as the issue for consideration in the present departmental appeal is concerned. I am of the view that the impugned order cannot be upheld as the finding of the CIT(A) suffers from fundamental flaws of ignoring the facts and evidences and the conclusion is arrived at without addressing the facts. The genuineness of the transaction without addressing the business allegedly engaged in by the 8 shareholders companies and the facts and reasons which lead then to invest in the assessee’s business can not be said to have been addressed for which purposes the directors were required to be produced. These crucial areas have been left unaddressed. Reference may be made to the decisions of the Hon’ble jurisdictional High Court in the case of NR Portfolio Private Limited and the decision of the Apex Court wherein SLP by the assessee against the decision of the Hon’ble Delhi High Court in CIT vs Navodaya Castles [2014] 367 ITR 306 was dismissed in Navodaya Castle P.Ltd. vs CIT [2015] 56 taxmann.com 18 (SC) upholding the ruling of the Hon’ble Delhi High Court that Certificate of Incorporation PAN etc. are not sufficient for the purpose Page 9 of 11

I.T.A .No.-4450/Del/2015 of identification of subscriber company when there was material to show that the subscriber was a paper company and not a genuine investor. In the facts of the present case, I am of the view that the impugned order cannot be upheld. The decisions relied upon by the parties at this stage would be of no relevance as first the facts need to be addressed. No doubt the initial onus placed upon the assessee can be said to have been discharged by providing confirmations, ITR’s, balance sheets etc of the said companies. However it shifts back to the assessee when the assessee has been required to produce the directors of these 8 closely held companies keeping in mind the fact that the assessee is a private limited company whose nature of activity necessarily would be known to only its close knit circle of friends, relatives and associates thus what were the facts which persuaded these 8 shareholders to make an investment in shares of the said company to the extent of Rs.5 lakh each are necessary facts which are required to be taken into consideration and the burden which shifts back to the assessee in the facts of the present case is not be discharged. While so holding, it may not be out of place to note yet again that the assessee company is a private limited company, the shareholders are also claimed to be private limited companies and the Ld.AR has stated that the assessee may not be in a position to produce the directors of the 8 private limited companies. The wisdom of the said submission is left open to the assessee who is required to prove genuineness of the transactions.

9.1. Accordingly, for the reason given hereinabove the impugned order is set aside and the issue is set aside back to the file of the CIT(A) with a direction to decide the same by way of a speaking order in accordance with law addressing the facts on Page 10 of 11

I.T.A .No.-4450/Del/2015 record. Needless to say that a reasonable opportunity of being heard shall be granted to the assessee.