ITO WARD 17 (4) vs. VITAL COMMUNICATION LTD,

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI

BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER

ITA No. 2448/Del/2007 Assessment Year: 2003-04

Income Tax Officer, vs. M/s Vital Communication Ltd., Ward 17(4), New Delhi 606- Kailash Building, Kasturba Gandhi Marg, New Delhi (PAN:AAACV-2016-L) (APPELLANT) (RESPONDENT)

Department by : Ms. Paramita M. Biswas, CIT(DR) Assessee by : Dr. Rakesh Gupta, & Somil Aggarwal, Advs.

Date of Hearing : 17-05-2016 Date of Order : 15-06-2016

ORDER PER H.S. SIDHU, J.M.

This Appeal has been filed by the Department against the order of

the Ld. CIT(A)-XX, New Delhi dated 1.3.2007 pertaining to assessment

year 2003-04.

“1. On the facts and in the circumstances of the case, the

Ld. CIT(A) has erred in deleting the addition of Rs. 27 crores

made u/s 68 of the Income Tax Act, 1961 in respect of share

capital.”

provide consultancy service, and advice in India and abroad regarding the

ITA NO. 2448/Del/2007

manufacturing commercial marketing, technical and managerial aspect of

the business of electronics and communication hardware. The assessee

filed its return of income on 02.12.2003 declaring loss of Rs. 6,43,754/-,

however, income of Rs. 1,09,561/- has been declared u/s 115JB of the

Income Tax Act, 1961 (hereinafter referred as Act). The return was

processed u/s 143(1) of the Act on 5.2.2004. Thereafter, the case was

selected for scrutiny as per norms. Accordingly, notices u/s 143(2) of the

Act dated 13.10.2004 was issued. Further notices u/s. 142(2) and 142(1)

of the Act alongwith questionnaire were issued. In response thereto, Ld.

Authorised Representative of the Assessee attended the assessment

proceedings and filed partial details. The AO observed that no books of

accounts were produced in spite of the repeated requisition /

opportunities. The AO has raised several contentions in the assessment

order but all those contentions point out to this aspect that the assessee

has not established the creditworthiness of the shareholders. AO relied

on various case laws for the proposition that since assessee could not

prove the genuineness of transaction and creditworthiness of the said

creditors, the sum of Rs. 27 crores was treated as unexplained cash credit

u/s. 68 of the Act on the following accounts:-

i) Increase in share capital by allotment of Rs. 2,00,00,000/- 20 lacs equity shares of Rs. 10/- each on preferential basis to promoters against cheque. ii) Increase in share capital by allotment of Rs. 10,00,00,000/- one crore equity shares of Rs. 10/- each on preferential basis to 3 other companies under swap arrangement of shares. iii) Increase in share capital by allotment of Rs. 15,00,00,000/-

ITA NO. 2448/Del/2007

1.5 crores equity shares of Rs. 10/- each to eleven parties against their outstanding trade credit balances Total Rs. 27,00,00,000/-

3.1 Thereafter, the AO completed the assessment determining total

income of Rs. 27,15,56,246/- and made the additions vide his order

dated 31.3.2006 u/s. 143(3) of the Act.

before the Ld. CIT(A), who vide impugned order dated 01.3.2007 has

allowed the appeal of the assessee and deleted the addition in dispute.

the Tribunal.

contentions raised in the grounds of appeal.

relied upon the order of the Ld. CIT(A) and stated that the order of the

Ld. CIT(A) is a well reasoned order and therefore, the same may be

upheld and Revenue’s appeal may be dismissed accordingly.

especially the orders of the authorities below. We find that Ld. First

Appellate Authority has elaborately discussed the issue in dispute by

considering the submissions of the Ld. Counsel of the assessee and

adjudicated the same vide para no. 5 to 5.16 at pages 3 to 19 of his

impugned order. For the sake of convenience, we are reproducing the

relevant portion of the impugned order i.e. para no. 5 to 5.16 as under:-

ITA NO. 2448/Del/2007

“5. The first substantive issue in this regard is of the

addition of Rs.27,OO,OO,OOO/- made on account of

unexplained cash credits uls 68 of IT Act. AO has made

this addition on the following accounts -

i) Increase in share Rs. 2,00,00,000/- capital by allotment of 20 lacs equity shares of Rs. 10/- each on preferential basis to promoters against cheque. ii) Increase in share Rs. 10,00,00,000/- capital by allotment of one crore equity shares of Rs. 10/- each on preferential basis to 3 other companies under swap arrangement of shares. iii) Increase in share Rs. 15,00,00,000/- capital by allotment of 1.5 crores equity shares of Rs. 10/- each to eleven parties against their outstanding trade credit balances Total Rs. 27,00,00,000/-

5.1 In respect of first category, shares were issued to

four promoters as under:

No. of shares

i) M/s Avisha Credit Capital Limited 500000

ii) M/s Master Finlease Limited 500000

iii) Smt. Shubha 500000

iv) Smt. Angoori Devi 500000

ITA NO. 2448/Del/2007

2000000

During the course of assessment proceedings,

appellant filed the confirmation letters, bank accounts

and income tax returns of the aforesaid four creditors

showing that entire payments from where the amounts

were paid by cheques to the appellant company on

behalf of Smt. Shubha and Smt. Angoori Devi. However

the Assessing Officer did not accept the creditworthiness

of these two lady creditors for the reason that the

income shown in their return of income did not justify

their creditworthiness. AO also did not accept the

creditworthiness of the other two creditor companies –

M/s. Avisha Credit Capital Limited and M/s. Master

Finlease limited - for the reason that assessee did not

produce their bank accounts and their complete

accounts with appellant.

5.2 In respect of second category, shares were issued

to three companies under swap arrangement of shares

as under :-

No. of shares

i) M/s Anupama Communication 5000000

Pvt. Ltd.

ii) M/s Wisdom Publishing Pvt. Ltd. 2500000

iii) M/s Chanakya Overseas Pvt. Ltd. 2500000

ITA NO. 2448/Del/2007

1000000

Assessee issued the aforesaid one crore shares

against the receipts of one crore shares from the

aforesaid companies under the swap arrangement of

shares. No consideration in cash or cheque was receipt

by the appellant in lieu of issue of aforesaid one crore

shares. The appellant filed the copies of swap

agreements with the said three companies. AO did not

consider these swap arrangements of shares as genuine

due to the reason that the copy of agreement with MIs.

Wisdom Publishing Pvt. Ltd. was dt.5-8-0-2002.

However the agreement copy filed with the AO of M/s.

Wisdom Publishing Pvt Ltd. was 3-8-2002. Moreover

the agreements' were signed through their authorized

representatives, were not signed by the witnesses and

were not registered. The appellant company increased

the authorized capital without obtaining permission from

ROC. Hence the swap arrangement of shares were held

as make believe arrangements and not genuine

transactions.

5.3 In respect of third and last category, shares were

issued to eleven trade creditors as under-

No. of shares

ITA NO. 2448/Del/2007

i) M/s Anupama Communication Pvt. Ltd. 3,10,000

ii) M/s Wisdom publishing Pvt. Ltd. 8,35,000

iii) M/s Chanakya Overseas Pvt. Ltd 9,55,000

iv) M/s Avisha Credit Capital Ltd 9,00,000

v) M/s Master Finlease Ltd 18,75,000

vi) Smt. Shubha 18,80,000

vii) Smt. Angoori Devi 18,70,000

viii) Heritage Corporate Services Ltd 18,50,000

ix) Cosmo Corporate Services 18,60,000

x) Brut Finance India Pvt. Ltd 7,80,000

xi) Troop Trac Marketing Pvt.ltd 18,85,000

1,50,00,000

5.4 Before the Assessing Officer, appellant filed

confirmation letters of the aforesaid parties stating that

the shares were allotted against-outstanding trade

liabilities and no cash / cheque amount was paid by

those creditors. The assessing officer was not satisfied

with the explanation and evidences filled by the

appellant. According to him, the appellant has raised the

share capital in respect of which though the assessee

filed evidences but those evidences fail to establish the

creditworthiness of the shareholders.

Though assessing officer has raised several contentions

in the assessment order but all those contentions point

ITA NO. 2448/Del/2007

out to this aspect that the assessee has not established

the creditworthiness of the shareholders. Assessing

Officer relied on various case laws for the proposition

that since appellant could not prove the genuineness of

transaction and creditworthiness of the said creditors,

the sum of Rs.27,OO,OO,OO0/- is to be treated as

unexplained cash credits u/s 68 of the IT Act.

5.5 During the appeal proceedings, the appellant has

filed very comprehensive written submissions

contending that the appellant has submitted all what

was required and what was essential to discharge the

burden cast u/s 68. Appellant filed a paper book too

containing the evidences filed in assessment proceeding

to drive home its view point that not only identity of the

shareholder was proved but also genuineness of

transactions and creditworthiness of the shareholders,

and that all the shareholders are existing income tax

assesses and thus identity in any case stood established

and in such a case, addition cannot be made in the

hands of the company in view of several decisions cited

in the written submissions including ones rendered by

Delhi High Court. It was pleaded that adverse

observations made in the assessment order were made

without giving any opportunity of being heard and that

ITA NO. 2448/Del/2007

is why the appellant, according to Ld. Counsel, is

constrained to file petition for additional evidence and if

such evidences are taken into account, there is no

warrant whatsoever for making impugned addition.

5.6 Petition for additional evidence was also forwarded

to the AO in accordance with the provisions of Rule 46A

of IT. Rules for his verification and comments. The

Assessing Officer submitted his reports. The counter

comment received were made available to the

appellant, which has also filed its replies thereto.

5.7 Before I take the appeal, it is expedient to dispose

the petition for additional evidence. I have considered

the petition, reply of AO thereto. It is seen from the two

questionnaires dated 27.5.2005 and 25.10.2005 issued

and order sheet entries as rightly contended by the

appellant that AO never asked even confirmations in

respect of share capital of Rs. 2 Crore and 10 crores

issued against cheques received and against SWAP

arrangement respectively. AO in fact asked about the

names and addresses and income tax particulars of the

shareholders, only in his first questionnaire dated 30-

05-2002. Confirmations of the shareholders were asked

for the first time vide questionnaire dated 25-10-2005

but sent with notice dated 8.2-2006 It is incorrect on

ITA NO. 2448/Del/2007

the part of AO to say that vide order sheet entry dated

17-03-2006, asked about the creditworthiness of all

shareholders of Rs. 15 crores to whom shares were

allotted against the credit balances only. Therefore,

there was no justification for him to make any adverse

observation in regard. Adverse observations made in

the assessment order in respect of this much of share

capital were thus made without giving any opportunity

of hearing.

5.8 I have seen that additional evidences are in

connection with share capital of Rs. 2 Crore only and

are. evidences to prove the source of funds in hands of

M/s Virasat Developers and Builders Pvt. Ltd. which

could not be filed before AO as nothing was asked by

him during the course of assessment proceedings

regarding the source of Rs. 50 lacs in the hands of M/s

Virasat Developers Pvt. Ltd. It is further seen that the

additional evidences are showing the source of Rs. 30

Lacs in the hands of Mr. Vijay Jhindal which were given

to M/s Vital Communications Ltd. by him on behalf of

Smt. Shubha. Further evidences are showing the bank

statements of M/s Avisha Credit Capital Ltd. and source

of funds in their hands. Petition contains the evidences

showing the bank statements of M/s Master Finlease

ITA NO. 2448/Del/2007

Ltd. and source of funds in their hands and further

evidence to show the source of Rs. 20 lacs in the hands

of M/s Master Finlease, Ltd. which was given to by M/s

Master Finlease Ltd. Thus, when adequate opportunity

of hearing was not given, it is incumbent for the

appellate authority to admit the evidences.

After considering all the facts and circumstances

of the case and after considering the replies filed on

behalf of the parties, additional evidences filed by the

assessee are admitted for the above stated reason and

also the same were found necessary to decide this

appeal.

5.9 The main issue to be decided in this appeal is

whether the onus u/s 68 of the Act in respect of fresh

share capital was discharged by the appellant. It is seen

that the A.O. has expressed his doubt only about the

creditworthiness of the shareholders and the identity of

the persons/ entities subscribing to the share capital

was not doubted by the assessing officer and this fact is

clear from the plain reading of the assessment order.

Full Bench of Hon'ble Delhi High Court in case of CIT vs

Sophiya Finance Limited 205 ITR 98 held that once

identity of the shareholder is established, no addition on

account of share capital can be made in the hands of

ITA NO. 2448/Del/2007

the company-assessee. Appellant has also laced reliance

on the following decisions.

Anima Investment (P) Ltd. VS. ACIT 73 ITD 125 (Delhi)

(TM)

- Share application money - Where the share

application money is received by the assessee company

through banking channel, the assessee has only to

prove the existence of the person in whose name share

application is received - Additions could not be

sustained where the existence of the investors is not

doubted and the investment is not shown to have been

made by somebody else - BARKHA SYNTHETICS LTD.

VS. ASSTT. CIT 197 CTR 432 (RAJ)

- Share application money - Assessee having

proved genuineness of subscribers of share capital,

addition under section 68 could not be made on the

ground that it did not establish genuineness of source of

subscribers - SUMAK POWERCAP LIMITED VS.

ASSTT.CIT 90 TTJ 420 (LUCKNOW).

- Share application money - Registered

shareholders having not denied subscription to shares

standing in their names, amount could not be regarded

as undisclosed income of assessee company even if the

ITA NO. 2448/Del/2007

subscribers were not genuine - BALDEO COLD STORAGE

& ICE FACTORY PVT.L TD. VS. ACIT 89 TJ 908 (AGRA).

- Pursuant to search conducted for a block period -

Assessing Officer required assessee company to produce

shareholders before him for identification - On failure of

assessee to produce shareholders, Assessing Officer

made addition to income of assessee for said block

period - Said addition was deleted by Tribunal -

Whether when necessary material had been produced

before Assessing Officer to establish identity of persons

with their PAN/GIR numbers and other details, then it

was not necessary for assessee to produce shareholders

before Assessing Officer - Held, yes - Whether

therefore, Tribunal was justified in deleting addition

made by Assessing Officer - Held, yes - CIT VS. MAKHNI

& TYAGI (P) LTD. 136 TAXMAN 641 (DELHI).

- Cash credits - Share application moneys received

by assessee company - Finding that identify of creditors

had been established - Tribunal justified in deleting

addition to income - Income Tax Act, 1961 s. 68 - CIT

V. DOWN TOWN HOSPITAL PVT.LTD. 267 ITR 460 (ALL).

CASH CREDIT - Share application money-assessee -

company having proved the existence of two companies

which had paid share application money to it through

ITA NO. 2448/Del/2007

cheques, it had discharged its onus of proving the

identity and creditworthiness of both the creditors as

well as the genuineness of the transaction and

therefore, no addition could be made under section 68 -

Asstt, CIT vs Antarctica Investment (p) Ltd. (Del) 78

TTJ 257 Affirmed in CIT vs Antarctica Investment Pvt.

Ltd. 262 ITR 493(Del) Achal Investment Ltd vs CIT 268

ITR 211 (Del).

Moreover, following decisions lay down that addition of

share capital cannot be made in the hands of the

company- assessee as was held by Hon'ble Delhi High

Court in the case of CIT vs. Steller Investment Limited

192 ITR 287 which was later on affirmed in CIT vs.

Steller Investment Limited 251 ITR 263(SC).

That being so, there is no question of any addition

on this score in the hands of the appellant company and

addition so made in defiance of the rulings cited above,

the addition of Rs. 27 crores is liable to be deleted on

this ground alone and is hereby deleted.

5.10 The aforesaid addition cannot be sustained for

another legal premise also. Section 68 of the IT Act

1961 under which these additions have been made by

the Assessing Officer reads as under: -

ITA NO. 2448/Del/2007

"Where any sum is found credited in the books of

an assessee maintained for any previous year,

and the assessee offers no explanation about the

nature and sources thereof or the explanation

offered by him is not, in the opinion of the

(Assessing) Officer, satisfactory, the sum so

credited may be charged to income-tax as the

income of the assessee of that previous year."

It is evident from the perusal of this provision that

section 68 can be invoked only if any "sum" is credited

in the account books of the assessee for which no

satisfactory explanations could be furnished by the

assessee. "Sum" denotes the money brought into the

account books by way of cash / cheque / draft. Mere

transfer of entries from one head to another cannot be

treated as sum credited in the account books for the

purpose of see 68 of the IT Act. Similarly, exchange of

shares also cannot be brought into the ambit of Section

68 of the IT Act. In the present case, out of the addition

of Rs.27,OO,OO,OOO made u/s. 68 of the IT Act, the

amount of Rs.25,00,OO,000 was not brought into the

account books by way of cash / cheque / draft during

the relevant previous year. Shares worth

Rs.15.00.00,000 were issued against the outstanding

ITA NO. 2448/Del/2007

liabilities i.e there were only the transfer of entries from

trade liability head to the share capital head. No fresh

capital was brought into the account books by way of

cash / cheque / draft. Similarly, the shares worth

RS.1O,OO,OO,OOO were issued against the shares

received under the swapping arrangements. Here also,

no fresh amount of money was brought into the books

by way of cash! cheque / draft. Hence, the addition

made in respect of these share holders to the extent of

Rs.25,OO,00,000 does not come into the purview of

section 68 of the IT Act. On this ground also, the said

addition cannot be sustained.

Though the said additions made u/s 68 cannot be

sustained on the legal grounds itself as discussed

above, I proceed to deal the addition on merit also. I

have seen the evidences filed in the paper book and

also the evidences filed with application under rule 46A

and I find that the impugned addition could not be

made under any circumstances as all the necessary

ingredients of section 68 have been satisfactorily

complied by the appellant. It is evident that the

necessary ingredients of this section i.e. identity and

capacity of the shareholders and genuineness of the

transactions in respect of the impugned credits stood

ITA NO. 2448/Del/2007

met by the appellant with the help of overwhelming

evidences which are discussed hereunder.-

PB 50-51 is letter to A.O. in which details of new

shareholders were furnished.

PB 52 is the details of shareholders with their PAN

No. furnished to Ld. A.O. showing allotment of

shares against money and against consideration.

It is seen that all these shareholders are income

tax assessee whose PAN Numbers were furnished

to Ld .A.O.

PB 53-54 is another letter to Ld. A.O. through

which confirmations were filed.

PB 56-63 are the confirmation from various

shareholders in which shareholders confirmed to

have made investments into the share capital of

the appellant and have also disclosed their PAN

Numbers.

It is seen that confirmations placed at PB 56-63

cover the first seven names of shareholders given

at PB - 52.

PB 64 is another letter to Ld. A.O. through which

assessment details of the shareholders including

the place of assessment were furnished, thus

further proving the identity of the shareholders.

ITA NO. 2448/Del/2007

PB 65 is the assessment details of the

shareholders furnished to Ld.A.O.

PB 66 is a letter to Ld. A.O. through which

confirmations and other evidences establishing

the share capital were filed to Ld. A.O.

PB 67-69 are the statement of accounts of swap

of shares with M/s. Anupama Communication Pvt.

Ltd., Wisdom Publishing Pvt. Ltd. M/s. Chankaya

Overseas Pvt. Ltd.

PB 70 is the confirmation from another

shareholder namely Smt. Shubha confirming the

investment made by her and disclosing her PAN

no. PB 71 is acknowledgement of return of Smt.

Shubha filed to Ld. A.O. to establish that she was

incometax assessee.

PB 72-73 is the copy of bank statement of Smt.

Shubha.

PB 74 is the bank statement of Mr. Vijay Jhindal.

PB 75 is the confirmation from Smt. Angoori Devi

another shareholder confirming the fact of

investment made by her into the share capital of

appellant and disclosing her PAN No. PB 76 is the

copy of acknowledgement of return of Smt.

ITA NO. 2448/Del/2007

Angoori Devi to show that she was borne on the

departmental assessment record.

PB 77 is a letter to Ld. A.O. through which further

evidences of the share capital were filed.

PB 78 is the fresh confirmation from Smt. Angoori

Devi confirming the fact of investment and

disclosing her PAN and place of assessment.

PB 79 is the statement of account of Smt. Angoori

Devi in the books of M/s. Virasat Development &

Builders Pvt. Ltd. showing the cheques issued on

her behalf to the appellant.

PB 80 is the bank statement of M/s. Virasat from

where the cheques were issued to appellant.

PB 81 is letter from the appellant to Smt. Angoori

Devi acknowledging the receipt of share capital.

PB 82 is an affidavit from Smt. Angoori Devi

deposing all these facts.

PB 83 is fresh confirmation from Smt. Subha.

PB 84 is her bank statement where from the

payment was made to the appellant.

PB is a letter from Master Finlease Limited to Smt.

Shubha confirming the loan giving to her.

ITA NO. 2448/Del/2007

PB 85, 86 are the evidences of Rs.30,OO,OOO/-

investment made by Smt. Shubha by raising loan

from Mr. Vijay Jhindal.

PB 89 is an affidavit from Smt. Shubha deposing

all these facts.

PB 88 is acknowledgement of share capital from

appellant to Smt. Shubha.

PB 91-92 are the confirmations from M/s. Cosmo

and M/s. Troop Track showing their PAN No. and

place of assessment.

PB 93-107 are the confirmations and evidences of

further share capital from the parties mentioned

at PB 52 showing PAN Number and place of

assessment.

5.11 During the appellate proceedings, AR has

filed the copies of ledger accounts of eleven trade

creditors to whom the shares were, issued to

settle their outstanding liabilities. The software

supplied by such creditors share holders to the

appellant company were also demonstrated during

the appellate proceedings on 26-2-2007 by the

director of the appellant company Mr. J.P.Madaan.

There is no evidence brought on record the show

that such transactions of purchase of softwares

ITA NO. 2448/Del/2007

were sham transactions to evade the taxes nor

there can be any, since there is no advantage to

the appellant company to enter into such sham

transactions. Appellant had neither debited such

expenses on purchase of software into the P & L

account nor claimed any depreciation thereon.

These were only reflected in the work in progress

in the balance sheet under head fixed assets.

There is no tax implication of such transactions.

5.12 Appellant has also furnished the copies of

agreements in respect of shares with the other

three companies. Swapping of shares is a

recognized standard Appellant has also furnished

the copies of agreements in respect of swapping

the commercial practice and cannot be treated as

any tax evasion technique. The technical

objections raised by the AO regarding the

difference in the date of agreements is

satisfactorily explained by the Ld. AR. It is

worthwhile to note from the assessment record,

that one of the shareholder namely M/s

Wisdom Publishing Pvt. Ltd has even confirmed

the allotment of shares to them directly to AO in

SWAP arrangement to the extent of Rs.

ITA NO. 2448/Del/2007

2,50,00,000/-. This being the case, there is no

question for making addition of this amount.

5.13 Thus the appellant has satisfactorily discharged

the onus lying on him by proving the identity of each

and every new shareholder. Further, presuming that the

appellant is o required to prove the other two

requirements of section 68, i.e., creditworthiness of the

share holders and genuineness of transactions.

Appellant has proved beyond any iota of doubt that all

the share holders were creditworthy and all the

transactions were genuine. It is so evident from the

documents filed during the assessment proceedings. To

explain the credit entries in the said bank accounts, the

bank accounts of the third parties in the chain were also

filed by the appellant. Thus the appellant has not only

proved the creditworthiness of the said share holders

but also proved the source of the source, for which

though no onus lie on him

5.14 Appellant has also furnished the. copies of

agreements in respect of swapping the shares with the

other three companies. Swapping of shares is a

recognized standard commercial practice and cannot be

treated as any tax evasion technique. The technical

objections raised by the AO regarding the difference in

ITA NO. 2448/Del/2007

the date of agreement is satisfactorily explained by the

Id. AR. It is pertinent to mention here that the said

swapping transactions have been accepted as genuine

by the Assessing Officers having jurisdiction over the

other companies with whom the shares were swapped.

Therefore, having filed above evidences

establishing the identity of the shareholders,

genuineness of the transactions and capacity of the

shareholder, there remains nothing more for the

appellant to prove and onus is discharged and thus

action of A.O. in treating the entire increase in share

capital as undisclosed income of the appellant is

unjustified and I therefore delete the addition of Rs. 27

crores.

5.15 It was rightly argued by the Ld. Counsel that onus

to prove the source of the credits stood discharged in

this case in terms of the following decisions with which I

concur and there was thus no case for making any

addition:-

Sarogi Credit Corp. vs. CIT 103 ITR 344/345

(Pat.)

I. Add!. CIT vs.Bahri Bros (P) Ltd. 154 ITR

244(Pat.)

ITA NO. 2448/Del/2007

349/350 (SC)

(Delhi)

(Gauhati)

5.16 Assessing Officer has made certain adverse

observations in the assessment order which have been

met by the appellant in its written submissions. I have

considered the adverse observations made by AO and

reply of the appellant and I am satisfied that the

observations of the AO do not carry any weight in the

face of overwhelming evidences filed by the appellant

which have been discussed above. These objections do

not dilute the weight of the evidences filed by the

appellant. However, I proceed to discuss each one of

them:-

A. Assessing Officer has mentioned at Page 4

of the assessment order that on 8th March, 2006 and on

I7th March, 2006 authorized representative of the

assessee was asked to produce Smt. Angoori Devi and

Smt. Shubha. But these were not produced.

ITA NO. 2448/Del/2007

It is seen that vide letter dated 21.03.2006 placed

at PB 77, It was submitted by the appellant to Assessing

Officer that Smt. Angoori Devi is an Old Lady of 76

years and Smt. Shubha was unwell. Therefore, they

were unable to attend and it was also requested to Ld.

Assessing Officer to exempt their appearance before

him for these reasons. The request of the assessee in

my consideration was not unreasonable. When both the

ladies were Income tax asses sees and overwhelming

evidences of their identity were filed before Assessing

Officer and source of money in their hands was more

'than established with the help of documentary

evidences, there is no reason as to why non appearance

of the two ladies be viewed against the appellant,

B. Assessing Officer has observed at Page No. 5 of

assessment order that Bank account of M/s Virasat

Developers and Builders Pvt Ltd. had opening Balance of

Rs. 2142 and then two sums of Rs. 30 Lacs and 20 lacs

were credited in its account on 4.7.2003 and 5.7.2003.

It is seen that M/s Virasat Developers and Builders Ltd.

has not made any investment in the share capital of the

appellant company in respect of these two amounts of

Rs. 30 Lacs and Rs. 20 Lacs. Therefore, source of these

two sums in their hands in my considered opinion, is

ITA NO. 2448/Del/2007

immaterial to the case of the appellant. Investment was

made by Smt. Angoori Devi by raising loan from M/s

Virasat Developers and Builders Ltd. In that context,

context, copy of the bank account of M/s Virasat

Developers and Builders was filed before Assessing

Officer. It is seen that nothing was asked by the AO

regarding the source of funds in the hands of M/s

Virasat Developers and Builders Ltd. and thus there was

no occasion to explain the source in the hands of M/s

Virasat Developers and Builders Ltd. In fact, in petition

for additional evidence even the source in the hands of

M/s Virasat stands explained by way of funds received

by them from M/s Flare Finance India Ltd. and M/s

Perfect Car Scanner Pvt. Ltd. Therefore the adverse

observations of Assessing Officer about the Bank

account of M/s Virasat, was not warranted.

C. Assessing Officer has mentioned at page No. 5 of

Assessment order that though Loan confirmation for M/s

Master Finlease Ltd. to Smt. Shubha states that loan of

Rs. 20 Lacs has been given to her but this amount is not

reflected in her bank statement. It is seen that this

allegation of Assessing Officer is factually incorrect. PB

84 may be in this regard referred and it is seen that this

ITA NO. 2448/Del/2007

amount of Rs. 20 Lacs is very much appearing in her

bank statement filed before Assessing Officer.

Therefore, such incorrect fact needs no

adjudication.

D. Assessing Officer has mentioned at Page 5 of the

assessment order that capital account or personal

Balance Sheet of Smt. Angoori Devi and Smt Shubha

have not been filed with their returns of income.

According to me, Source of funds in the hands of these

2 ladies with the help of overwhelming evidence were

very much established by the appellant and therefore

absence of Balance sheet with their returns is of no

Significance and at any rate, no adverse inference can

be drawn against the appellant If these two ladles have

not filed their balance sheets with the Department .

E. Assessing Officer has mentioned at page 6 of

Assessment order that in respect of Investment made

by M/s Master Finlease Ltd. And M/s Avisha Credit

Capital Ltd., the appellant has furnished confirmations

but their bank statements or any other document have

not been furnished. It is seen that PB 57 & 58 are the

confirmations of these two shareholders which are

comprehensive enough giving PAN no. and other

necessary particulars and are sufficient evidence in, so

ITA NO. 2448/Del/2007

far as the initial onus upon the appellant is concerned in

view of the decision of Supreme Court in case of Orissa

Corporation 159 ITR 78. In any case, it was seen by me

that nothing thereafter was asked from the appellant by

AO as is clear from Pg 6 of assessment order where in

nothing has been mentioned by the Assessing Officer as

to whether he did at all ask about these things in the

assessment order. Therefore, there was no occasion for

the appellant to furnish bank statement or any other

document relating to these 2 companies who have filed

very comprehensive confirmations of the investment

made by them. However petition for additional evidence

even the evidence of the source of funds in the hands of

these 2 concerns including the copies of bank

statements of these two concerns were filed. It is seen

from these evidences that Master Finlease Ltd had

obtained these funds from MIs Troop Track Electrodes

Pvt. Ltd, Brut Finance India Ltd., A visha Credit Capital

Ltd., MIs Chanakya Overseas Pvt. Ltd., M/s. Troop Track

Marketing co. Ltd. and M/s Avisha Credit Capital Ltd.

had obtained funds from MIs Brut Finance India Pvt.

Ltd. and M/s Rajat Stock Invest Pvt. Ltd. Therefore,

there is no reason for Assessing Officer's any objection

in this regard.

ITA NO. 2448/Del/2007

F. Assessing Officer has mentioned at Page 7 of

Assessment order that originally the appellant stated

the sources of Investment made by 11 Shareholders

was against the loans already given to the assessee and

later on appellant changed the stand and explained the

source out of the money payable against bills raised by

these parties. Thus, according to Assessing Officer,

there was shifting of stand. I have considered this

objection but find no merit in that because the ultimate

fact of the matter is that Investors have confirmed the

fact of investment made by them in the capital of the

appellant company, Shares were issued against the

credit balances appearing in the accounts of these

parties/ persons and it is a matter of inference as to

whether the credit balances lying in the books were in

the nature of loan or not. Therefore, nothing turns on

such observation of AO, as rightly contended by the

appellant.

G. Assessing Officer has mentioned at page 10 or

Assessment order that equity shares were allotted to

M/s Master Finlease Ltd. on 7/08/03 which according to

Assessing Officer was not possible. I have seen the

document and admittedly PB 94 which is the

confirmation of Master Finlease Ltd. shows the date as

ITA NO. 2448/Del/2007

"7/08/03" but this, according to the appellant, was

typographical error and was so explained orally to Ld

Assessing Officer during the course of assessment

proceeding too. It is worth noticing that when this

confirmation talks of "FY 2002-03" meaning thereby

that it covers the period from 1.4.2002 to 31.3.03, how

could there be any date beyond 31.3.2003.

H Assessing Officer has mentioned that confirmation

/letters filed before him have not been signed by any

directors but have been signed by the "authorized

persons" with no designation. But it is seen that case of

Ld. AO is not that such confirmations were required

under the law to be signed by the directors alone and or

that such confirmations are bogus or sham. It is not

necessary for the directors to sign all the papers and

authorized persons usually sign. It is interesting to note

that on the one hand Assessing Officer is saying that

these have been signed by "authorized persons", there

is then no room left for any grievance on that score.

I. Assessing Officer has mentioned at page 10 of

Assessment order that most of the share applications

have not made any payment to the assessee in the form

of share application money and shares have been

allotted against bills raised by the share applicants. This

ITA NO. 2448/Del/2007

observation of AO is vague. I am inclined to agree with

the contention of the appellant that if Assessing Officer

is convinced that shares have been issued without any

money having been received by the appellant then there

is no case all the more for making any addition u/s 68

as the first pre requisite of application u/s 68 is that

there has to be "Any Sum" which means any sum of

money. Fact of the matter in the present case is that

there was enforceable liability against which instead of

payments, the shares have been issued and allotted by

the appellant in favour of these shareholders and there

is nothing wrong in it.

J. Assessing Officer has mentioned at page 12 of

assessment order the copy of agreement between

assessee company and M/s Wisdom Publishing Pvt. Ltd.

shows that agreement is dated 5/8/02 whereas the copy

of agreement obtained from the AO of M/s Wisdom

shows the same having been signed on 3/8/02. It is

seen that Assessing Officer never confronted about this

aspect during the assessment proceedings as rightly

contended by the appellant, otherwise it would have

been explained to him. Copy of agreement filed before

Assessing Officer would show that this agreement was

entered on 5.8.02 and was also signed on 5/8/02. In

ITA NO. 2448/Del/2007

fact such agreement could not be signed prior to

5/8/02. A copy of this very agreement filed by M/s

Wisdom Publishing Pvt. Ltd. in its assessment

proceedings before its Assessing Officer appears to,

bear the date on 3rd page of Agreement could be a

typographical error which does not have a significant

bearing on the present issue. Signing by witness or

registration is not legally required and therefore

observations of Assessing Officer on these aspects also

do not carry any meaning.

K. AO has mentioned at page 3 of the assessment

order that vide order sheet entries dated 17-03-

2006, creditworthiness of the parties were asked

but it is seen as noted by me above also that that

he did not ask for this evidence in respect of all

the shareholders but asked about the

shareholders to whom share capital was allotted

against the credit balance. Fact of the matter is

that evidences were filed which would show that

onus to establish the share capital was

discharged.

L. AO has mentioned at page 3 of the assessment

order that bank statement was not produced. It is

seen that the bank reconciliation statement was

ITA NO. 2448/Del/2007

already filed with copy of bank statement with

letter 20-9-2005 as is seen from the departmental

assessment record. Thus, this contention of AO is

incorrect.

M AO has mentioned at page 3 of the assessment

order that books of accounts were not produced.

It is seen that appellant is a limited company

whose accounts are audited both under Income

Tax Act and under Companies Act for which

maintenance of books of accounts are inevitable.

According to the appellant. these were given to

the AR Mr. D.P. Bansal for the production of the

same but he did not produce the same. It was

explained by the appellant that Mr. Bansal was

suffering from depression due to his "marital

discord problem" as could be known to the

appellant after the assessment order was received

containing such adverse observations and when it

was put to Mr, Bansal. Medical certificate in

support of this fact was made available to the

appellant by Mr. Bansal. In fact, it was pleaded

that it was a case of no malafide on the part of

the appellant but a case of negligence on the part

of AR due to medical reason. Otherwise, as

ITA NO. 2448/Del/2007

explained by the appellant there was no purpose

for not producing the books of accounts as none

of the two additions has got any bearing on the

books of accounts. I have considered the

explanation supported with the medical reason.

and I am convinced that it was a case of counsel's

negligence due to the medical reason and in any

case, this aspect has very little to do with the

additions made here.

Considering the entire facts and material

filed before me, I hold that addition of

Rs.27,OO,OO,OOO/- on account of share capital

made uls 68 of the IT Act, cannot be sustained

both on facts and law and hence deleted.”

8.1 We have heard both the parties and perused the records available

with us, especially the impugned order passed by the Ld. First Appellate

Authority as reproduced above. After going through the same, we are of

the considered view that the addition in dispute is of Rs. 27,OO,OO,OOO/-

was made on account of unexplained cash credits uls 68 of IT Act. We

note that before the Assessing Officer, assessee filed confirmation letters

of the aforesaid parties stating that the shares were allotted against

outstanding trade liabilities and no cash / cheque amount was paid by

those creditors. The Assessing Officer was not satisfied with the

explanation and evidences filled by the assessee. According to AO, the

ITA NO. 2448/Del/2007

assessee has raised the share capital in respect of which the assessee

filed evidences, but as per the AO those evidences fail to establish the

creditworthiness of the shareholders. Assessing Officer relied on various

case laws for the proposition that since assessee could not prove the

genuineness of transaction and creditworthiness of the said creditors, the

sum of Rs.27,OO,OO,OO0/- is to be treated as unexplained cash credits

u/s 68 of the IT Act. However, during the appellate proceedings, the

assessee has filed written submissions contending therein assessee

submitted all what was required and what was essential to discharge the

burden cast u/s 68. Assessee filed a Paper Book containing the evidences

filed in assessment proceeding to drive home its view point that not only

identity of the shareholder was proved but also genuineness of

transactions and creditworthiness of the shareholders, and that all the

shareholders are existing income tax assesses and thus identity in any

case stood established and in such a case, addition cannot be made in the

hands of the company in view of several decisions cited in the written

submissions including ones rendered by Delhi High Court. It was

contended that adverse observations made in the assessment order were

made without giving any opportunity of being heard and that is why the

assessee filed petition for additional evidence and if such evidences are

taken into account, there is no warrant whatsoever for making impugned

addition. The Petition for additional evidence was also forwarded to the

AO in accordance with the provisions of Rule 46A of IT Rules for his

verification and comments. The Assessing Officer submitted his reports.

ITA NO. 2448/Del/2007

The counter comment received were made available to the assessee, who

has also filed its replies thereto. We find that the Ld. CIT(A) has

considered the petition, reply of AO thereto and observed that from the

two questionnaires dated 27.5.2005 and 25.10.2005 issued and order

sheet entries as rightly contended by the asessee that AO never asked

even confirmations in respect of share capital of Rs. 2 Crore and 10 crores

issued against cheques received and against SWAP arrangement

respectively. AO in fact asked about the names and addresses and income

tax particulars of the shareholders, only in his first questionnaire dated

30-05-2002. Confirmations of the shareholders were asked for the first

time vide questionnaire dated 25-10-2005 but sent with notice dated 8.2-

2006 It is incorrect on the part of AO to say that vide order sheet entry

dated 17-03-2006, asked about the creditworthiness of all shareholders of

Rs. 15 crores to whom shares were allotted against the credit balances

only. Therefore, there was no justification for him to make any adverse

observation in regard. The additional evidences are related with share

capital of Rs. 2 Crore only and are the evidences to prove the source of

funds in hands of M/s Virasat Developers and Builders Pvt. Ltd. which

could not be filed before AO as nothing was asked by him during the

course of assessment proceedings regarding the source of Rs. 50 lacs in

the hands of M/s Virasat Developers Pvt. Ltd. It was further seen that the

additional evidences are showing the source of Rs. 30 Lacs in the hands of

Mr. Vijay Jhindal which were given to M/s Vital Communications Ltd. by

him on behalf of Smt. Shubha. Further evidences are showing the bank

ITA NO. 2448/Del/2007

statements of M/s Avisha Credit Capital Ltd. and source of funds in their

hands. Petition contains the evidences showing the bank statements of

M/s Master Finlease Ltd. and source of funds in their hands and further

evidence to show the source of Rs. 20 lacs in the hands of M/s Master

Finlease, Ltd. which was given to by M/s Master Finlease Ltd. Ld. CIT(A)

has rightly held that thus, when adequate opportunity of hearing was not

given by the AO, it is incumbent for the appellate authority to admit the

evidences. Hence, in view of the above, additional evidences filed by the

assessee were rightly admitted by the Ld. CIT(A).

8.2 As regards the addition u/s. 68 it is observed that the A.O. has

expressed his doubt only about the creditworthiness of the shareholders

and the identity of the persons/ entities subscribing to the share capital

was not doubted by the Assessing Officer and this fact is clear from the

plain reading of the assessment order. In this behalf, we draw support

from the decision of the Full Bench of Hon'ble Delhi High Court in case of

CIT vs Sophiya Finance Limited 205 ITR 98 wherein it has been held that

once identity of the shareholder is established, no addition on account of

share capital can be made in the hands of the company-assessee. We find

that moreover, following decisions lay down that addition of share capital

cannot be made in the hands of the company assessee as was held by

Hon'ble Delhi High Court in the case of CIT vs. Steller Investment Limited

192 ITR 287 which was later on affirmed in CIT vs. Steller Investment

Limited 251 ITR 263(SC). Therefore, there is no question of any addition

on this score in the hands of the assessee company and addition so made

ITA NO. 2448/Del/2007

in defiance of the rulings cited above, the addition of Rs. 27 crores is

liable to be deleted on this ground alone and was therefore, rightly

deleted.

8.3 We find force in the Ld. CIT(A)’s finding that the aforesaid addition

cannot be sustained for another legal premise also. Section 68 of the I.T.

Act 1961 under which these additions have been made by the Assessing

Officer reads as under: -

"Where any sum is found credited in the books of

an assessee maintained for any previous year,

and the assessee offers no explanation about the

nature and sources thereof or the explanation

offered by him is not, in the opinion of the

(Assessing) Officer, satisfactory, the sum so

credited may be charged to income-tax as the

income of the assessee of that previous year."

8.3.1 It is evident from the perusal of this provision that section 68

can be invoked only if any "sum" is credited in the account books of the

assessee for which no satisfactory explanations could be furnished by the

assessee. "Sum" denotes the money brought into the account books by

way of cash / cheque / draft. Mere transfer of entries from one head to

another cannot be treated as sum credited in the account books for the

purpose of see 68 of the IT Act. Similarly, exchange of shares also cannot

ITA NO. 2448/Del/2007

be brought into the ambit of Section 68 of the IT Act. In the present case,

out of the addition of Rs.27,OO,OO,OOO made u/s. 68 of the IT Act, the

amount of Rs.25,00,OO,000 was not brought into the account books by

way of cash / cheque / draft during the relevant previous year. Shares

worth Rs.15,00,00,000 were issued against the outstanding liabilities i.e

there were only the transfer of entries from trade liability head to the

share capital head. No fresh capital was brought into the account books

by way of cash / cheque / draft. Similarly, the shares worth

RS.1O,OO,OO,OOO were issued against the shares received under the

swapping arrangements. Here also, no fresh amount of money was

brought into the books by way of cash/ cheque / draft. Hence, the

addition made in respect of these share holders to the extent of

Rs.25,OO,00,000 does not come into the purview of section 68 of the IT

Act. On this ground also, the said addition cannot be sustained. Though

the said addition made u/s 68 cannot be sustained on the legal grounds

itself as discussed above

8.4 We further note that during the appellate proceedings, the Assessee’s

AR has filed the copies of ledger accounts of eleven trade creditors to

whom the shares were, issued to settle their outstanding liabilities. The

software supplied by such creditors share holders to the assessee

company were also demonstrated during the appellate proceedings on

26-2-2007 by the Director of the aaseessee company Mr. J.P.Madaan.

There is no evidence brought on record the show that such transactions of

ITA NO. 2448/Del/2007

purchase of softwares were sham transactions to evade the taxes nor

there can be any, since there is no advantage to the appellant company

to enter into such sham transactions. Assessee had neither debited such

expenses on purchase of software into the P & L account nor claimed any

depreciation thereon. These were only reflected in the work in progress in

the balance sheet under head fixed assets. There is no tax implication of

such transactions. The Appellant has also furnished the copies of

agreements in respect of shares with the other three companies.

Swapping of shares is a recognized standard Assessee has also furnished

the copies of agreements in respect of swapping the commercial practice

and cannot be treated as any tax evasion technique. The technical

objections raised by the AO regarding the difference in the date of

agreements is satisfactorily explained by the Ld. AR. It is worthwhile to

note from the assessment record, that one of the shareholder namely M/s

Wisdom Publishing Pvt. Ltd has even confirmed the allotment of shares to

them directly to AO in SWAP arrangement to the extent of Rs.

2,50,00,000/-. In view of the above, there is no question for making

addition of this amount. Thus the Assessee has satisfactorily discharged

the onus lying on him by proving the identity of each and every new

shareholder. Further, presuming that the assessee is required to prove

the other two requirements of section 68, i.e., creditworthiness of the

share holders and genuineness of transactions. Assessee has proved

beyond any iota of doubt that all the share holders were creditworthy and

all the transactions were genuine. It is so evident from the documents

ITA NO. 2448/Del/2007

filed during the assessment proceedings. To explain the credit entries in

the said bank accounts, the bank accounts of the third parties in the chain

were also filed by the assessee. Thus the assessee has not only proved

the creditworthiness of the said share holders but also proved the source

of the source, for which though no onus lie on him.

8.5 The Assessee has also furnished the copies of agreements in respect

of swapping the shares with the other three companies. Swapping of

shares is a recognized standard commercial practice and cannot be

treated as any tax evasion technique. The technical objections raised by

the AO regarding the difference in the date of agreement is satisfactorily

explained by the Ld. AR before the Ld. CIT(A). It is pertinent to mention

here that the said swapping transactions have been accepted as genuine

by the Assessing Officers having jurisdiction over the other companies

with whom the shares were swapped. Therefore, having filed above

evidences establishing the identity of the shareholders, genuineness of

the transactions and capacity of the shareholder, there remains nothing

more for the assessee to prove and onus is discharged and thus action of

A.O. in treating the entire increase in share capital as undisclosed income

of the assessee is unjustified and therefore Ld. CIT(A) has rightly deleted

the addition of Rs. 27 crores.

8.6 In the background of the aforesaid discussions and precedents

relied upon, we do not find any infirmity in the detailed and well reasoned

ITA NO. 2448/Del/2007

order passed by the Ld. CIT(A), hence, we uphold the same by deleting

the addition of Rs. 27 Crores. As a result, the ground raised by the

Revenue stands dismissed.

Order pronounced in the Open Court on 15/06/2016.

Sd/- Sd/-

[O.P. KANT] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 15/06/2016

“SRBHATNAGAR” Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches