INCOME TAX OFFICER, NEW DELHI vs. SBS PROPERTIES PVT. LTD, NEW DELHI

PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER Both these appeals are filed by the revenue. dated 23.11.2007, wherein he has deleted the additions made by the AO u/s 68 of the Income Tax Act, 1961 (the Act) and allowed the appeal of the assessee. & ITA No. 2164/Del/2008 13.3.2007 wherein the penalty u/s 271(1)(c) of the Act was quashed on the ground that on merits the addition was deleted and the penalty has no legs to stand.

Aggrieved the revenue is in appeal.

“5. The facts of the case are that in the assessment order, the AO has added the share capital and share premium received from the following companies u/s 68 of the Act by holding that the assessee has failed to prove the creditworthiness and genuineness of the said share capital received from the followings :-

Name Share capital Share premium (Amt. in Rs.) (Amt. in Rs.) Timely Fincap Pvt. Ltd. 3,00,000/- Nil 2,00,000/- Nil Graph Financial Services Pvt. Ltd. VPC Financial 3,11,000/- 27,90,000/- Services Pvt. Ltd. Kila Financial Services 2,73,000/- 24,57,000/- Pvt. Ltd. 3,00,000/- 27,00,000/- Highyield Securities Pvt. Ltd. Mehul Finvest Pvt. Ltd. 2,42,000/- 21,78,000/- Synergy Finlease Pvt. 4,73,000/- 42,57,000/- Ltd.

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20,98,000/- 1,43,82,335/- Total Grand total 1,64,80,335/-

The AO concluded the assessment u/s 143(3) r.w.s 148 determining the total 9. income at Rs. 1,64,95,075/-. Aggrieved the assesee carried the matter in appeal.

The first appellate authority deleted the addition by giving the following reasons :- a) The Ld. CIT(A) held as follows :- “The reasons tendered by the AO for making the aforesaid additions to income are summarized as under :- (i) That the facts of the case are similar to that of one M/s. Synergy Finlease Pvt. Ltd. where the AO passed an order adding the share capital received during the year. The AO has alleged that the cash credits are entries arranged by one Mr. S.K. Jain in whose case, a search was conducted on 14.12.1999 and the entire modus-operandi of converting un-accounted money into accounted one was unearthed. The AO further stated that the material seized during search on Mr. S.K. Jain indicates involvement of certain parties some of whom are those who have contributed to the share capital of the company. (ii) The bank transactions and books of accounts were verified by the AO and observed that the appellant company has no financial base and it is not doing any real business except receiving money and remitting the same immediately. He further observed that no explanation on reasons for receipt of high premium on shares could be furnished and the assessee failed to produce the parties from whom share capital and share premium was received. (iii) The AO further stated that the Bank Manager of Standard Chartered Bank, Parliament Street, New Delhi was summoned uls 131 of the Act but there was no response from him. According to the AO, Standard Chartered Bank has the accounts of the share holders who have contributed to the share capital of the company.

(iv) The AO has finally stated that filing of mere confirmation letters did not discharge the onus that lay on the assessee and he has relied upon the decision of the Hon’ble Delhi High Court in the case of CIT v.

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Sofia Finance Ltd. (1994) 205 ITR 98 (Del) to hold that the share capital is to be treated as income u/s 68 of the Act if the assessee company fails to prove the source of investment. The Ld. AO has further stated that the case of Stellar Investment 251 ITR 263 (SC) cannot be relied upon because it was a mere dismissal of SLP by the Hon’ble Supreme Court without assigning any reasons and, therefore, the said summary dismissal did not have any binding precedent. The AO relied upon the judgement in the case of CIT v. Ruby Traders 263 ITR 300 and CIT v. Hindustan Tea Co. 263 ITR 289 to hold that it is for the assessee to establish the genuineness and creditworthiness of the investing company. The AO also referred the judgement of the Delhi High Court in the case of Antarctica Investments (P) Ltd. 262 ITR 493 wherein it was held that addition can only be deleted if the assessee furnish the source of investment in share capital.” b) The AO relied upon the statement of Shri S.K. Jain which was recorded by the investigation wing during the course of search. The AO also referred the material seized during the course of search in the case of Shri S.K. Jain. The asessee was neither confronted with the statement of Shri S.K. Jain nor with the material referred to by the AO as seized from Shri S.K. Jain and thus the statement and the material cannot be used against the assessee. The AO also failed to provide opportunity to the assessee to cross examine Shri S.K. Jain and hence this statement cannot be used as evidence against the assessee. c) If statement of Shri S.K. Jain and the material which is not confronted to the assessee is eliminated, then there is no material available with the AO to support his finding that the receipt of share capital and share premium of Rs. 1,64,80,335/- was not a genuine transaction.

5 20x5 & ITA No. 2164/Del/2008 d) The allegations of the AO that money had been received by the assessee company as share capital and that it had inturn advanced the same as share application money to other companies is no good reason for making an addition as the assessee company is engaged in the business of investment and finance and to arrange and manage its business affairs in the manner it likes. e) The assessee company has filed confirmation letters from the share holders giving their permanent account number and ward/circle in which it exist, balance sheet of the respective companies evidencing contribution towards share capital , registration numbers of the companies with date of incorporation as per the records of the Registrar of companies and wherever the shareholder companies were registered with the RBI, as envisaged, the certificate number of NBFC. He observed that the investments were made by account payee cheques. He recorded that final assessment orders passed u/s 143(3) of the Act passed in the case of five shareholders companies were also filed. He relied on certain case laws and held that assessee had discharged the burden of proof that lay on it. f) On the issue of non production of the directors of the share holder companies for examination before the AO, the Ld. CIT(A) held that no addition can be made for non-production of persons and that the assessee has discharged its primary onus and the AO has not pointed out any discrepancy in the evidences filed by the assessee. He held that the assessee cannot be faulted for non-appearance of a Bank Manager, in response to summons u/s 143(3) of the Act.

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1. “On the facts and in the circumstances of the case the Ld. CIT(A) erred in law and on facts in deleting the disallowance of Rs. 1,64,95,070/- made by the AO u/s 68 of the Income Tax Act, 1961.” 11. Ld. DR Shri O.P. Meena submitted that share capital was taken by the assessee company at huge premium without any justification. He pointed out that on 6th December, 1999, the assessee received share capital from M/s. Timely Fincap and M/s. Graph Financial of Rs. 3,00,000/- and Rs. 2,00,000/- respectively, as share application money, at par and without any share premium and immediately thereafter from January, 2000 to March, 2000, the assessee received share applications at huge premiums. He pointed out there is no co-relation nor a proper explanation was given for the quantum of premium charged by the assessee company. He submitted that the genuineness of transactions have not been proved by the assessee and this is apparent on the face of the transactions. On the finding of the Ld. CIT(A) that the AO has not provided proper opportunity to the assessee and has not provided the statement of Shri S.K. Jain and the material found in search, to the extent relied upon by the AO, to the assessee, he relied on the decision of Delhi High Court in the case of CIT vs. Jansampark Advertising & Marketing (P) Ltd. (2015) 56 taxmann.com 286 (Delhi) wherein, it was held that, the Commissioner (Appeals) and Tribunal are also forums for fact finding and that, in the event of the Assessing Officer failing to discharge his functions properly, obligation to conduct proper inquiry on facts would naturally shift to the door of said appellate authorities and when they have noticed want of proper inquiry, it cannot close the chapter simply by allowing the appeal and deleting the addition made and that much deficiency should be cured by the appellate authorities. He also relied on 7 20x5 & ITA No. 2164/Del/2008 the judgment of M/s. Deepak Agro Foods vs. State of Rajasthan & Ors. 2008 TIOL 134 (SC).

12. He further relied on the following case laws for the proposition that the assessee has failed to prove the genuineness of the transactions and hence the addition u/s 68 of the Act has been rightly made by the AO.

8 20x5 & ITA No. 2164/Del/2008 195 (SC), CIT vs. Gangeshwari Metal Pvt. Ltd. judgment dated 21.2.2013 and submitted that the assessee has filed before the AO all possible evidences in support of the genuineness, identity as well as creditworthiness of the shareholders of the transactions and hence the addition is bad in law. He relied on the order of the Ld. CIT(A).

Date Name of the share holder Share Share capital premium 06/12/99 Timely Fincap Pvt. Ltd. 3,00,000/- --------- 06/12/99 Graph Financial Services Pvt. 2,00,000/- --------- 04/01/2000 VPC Financial Services Pvt. 45,000/- 4,05,000/- Ltd. 31/03/2000 -do- 2,65,000/- 23,85,000/- 04/01/2000 Killa Financial Services Pvt. 1,35,000/- 12,15,000/- Ltd.

9 20x5 & ITA No. 2164/Del/2008 31/03/2000 -do- 1,38,000/- 12,42,000/- 30/03/2000 Highyield Securities Pvt. Ltd. 3,00,000/- 27,00,000/- 30/03/2000 Mehul Finvest Pvt. Ltd. 2,42,000/- 21,78,000/- 31/03/2000 Synergy Finlease Pvt. Ltd. 4,73,000/- 42,57,000/- 20,98,000/- 1,43,82,335/-

Within less than a month of allotment of shares to M/s. Timely Fincap Pvt. Ltd. and M/s. Graph Financial Services Pvt. Ltd. at par, on 4.1.2000 an amount of 4,05,000/- was received from M/s. VPC Financial Services Pvt. Ltd. and shares were allotted to this company at a premium of Rs. 90/- per share. Similarly in the case of Kila Financial Services Pvt. Ltd. 1,35,000 shares were allotted at a premium of Rs. 90 per share on 4th January, 2000. No explanation as to why the shares were allotted at a premium and the logic or basis on which such premium was charged was given.

Further allotment of 26500 shares were made to VPC Financial Services Pvt. Ltd. and share of 1380 to M/s. Killa Financial Services Pvt. Ltd. on 31st March 2000.

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19. The assessee has filed balance sheets, income tax assessment details and wherever the shareholder is a NBFC, copy of Certificate issued by RBI of the share holder companies have been filed. The list of documents filed by the assessee are listed out by the Ld. CIT(A) from pages 6 to 10 of his order. We do not repeat the same for the sake of brevity.

Jain is relevant and the activities of Shri S.K. Jain as recorded by the AO cannot be ignored.

11 20x5 & ITA No. 2164/Del/2008 reliance for making the addition, should have also been confronted to the assessee.

Thus to the extent to which the AO places reliance on the statement of Shri S.K.

Jain, as well as the material seized by the investigation wing which has been used in the assessment proceedings in the case cannot be treated as evidence for the purpose of this addition. It can be used only when the same is confronted to the assessee. The AO has also not provided the assessee with a chance to cross examine Shri S.K. Jain.

“35. Assessment proceedings under the Income Tax Act are not a game of hide and seek. The inquiry in the wake of a notice under Section 148 is not an empty formality. It must be effective and with a sense of purpose. There is an elaborate procedure set out which requires scrupulous adherence and followed up on. In the hierarchy of 12 20x5 & ITA No. 2164/Del/2008 the authorities, the AO is placed at the bottom rung. The two layers of appeals, before the matter engages the appellate jurisdiction of this court, are authorities vested with the jurisdiction, power and obligation to reach appropriate findings on facts. Noticeably, it is only the appeal to the High Court, under Section 260-A, which is restricted to consideration of "substantial question of law", if any arising. As would be seen from the discussion that follows, the obligation to make proper inquiry and reach finding on facts does not end with the AO. This obligation moves upwards to CIT (Appeals), and also ITAT, should it come to their notice that there has been default in such respect on the part of the AO. In such event, it is they who are duty bound to either themselves properly inquire or cause such inquiry to be completed. If this were not to be done, the power under Section 148 would be rendered prone to abuse.

13 20x5 & ITA No. 2164/Del/2008 of hearing to be afforded not only to the assessee but also the AO, the first appellate authority is given the liberty to make, or cause to be made, "further inquiry", in terms of sub-section (4) which reads as under:- "The Commissioner (Appeals) may, before disposing of any appeal, make such further inquiry as he thinks fit, or may direct the Assessing Officer to make further inquiry and report the result of the same to the Commissioner (Appeals). ”

14 20x5 & ITA No. 2164/Del/2008 party (who, in the case of share applicants vis-a-vis a company, would be individuals at large and may not be even in direct or personal contact), the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summonses under Section 131. Conversely, with doubts as to the genuineness of some of the parties persisting on account of non- delivery of the processes, the initial burden on the assessee to adduce proof of identity cannot be treated as discharged.”

“42. The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a "further inquiry" in exercise of the power under Section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld.” (emphasis own) 26. A perusal of the above decisions demonstrates that the Ld. CIT(A) should have ensured that, necessary evidences and copy of statements and opportunity of cross examinations are provided to the assessee and not to simply delete the addition on the ground that, the AO has not confronted the assessee with the statement and evidences or on the ground that opportunity of cross examination has not been provided by the AO to the assessee. Hence the Ld. CIT(A) has erred in his approval.

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Jain. On a perusal of the documents submitted by the assessee, we are of the considered opinion that the genuineness of the transaction and the creditworthiness of the creditors has not been demonstrated by the assessee. The AO in his order at page 7 has clearly recorded that the assessee company has no financial base or business and the money received by it was withdrawn the very same day or the next day. More important he has recorded that the assessee has not given any let alone satisfactory explanation for the high premium charged on the shares. When shares are allotted within a span of less than one month, the reason for charging high premium in the case of VPC Financial Services P Ltd. , Killa Financial Services Pvt. Ltd., Highyield Securities Pvt. Ltd. , Mehul Finvest Pvt. Ltd. and Synergy Finlease P. Ltd. and reason for not charging premium in the case of M/s. Timely Fincap Pvt. Ltd. and Graph Financial Services Pvt. Ltd. is not at all explained. The explanation given that the Ld. Counsel for the assessee that charging of premium is the sole discretion of the company and that price is a contract entered between two parties and cannot be questioned by the revenue is devoid of merit. The AO cannot be expected to wear blinkers and accept bald explanations of the assessee. There should be some explanation which is logical and rationale. Ld. Counsel could not demonstrate that the assessee company was in fact, carrying on the business of finance and investment. It is common sense that shares of loss making companies do not command a premium. The financial status or the projected cash flow of the assessee company or any such record has been produced by the assessee to justify the charging of such premiums for allotment. Discounted cash flow matter is one of 16 20x5 & ITA No. 2164/Del/2008 the accepted methods to determine premium chargeable on share capital. Certain other methods have also been prescribed. Premium cannot be charged as per the whims and fancies of the company. In cases where explanation or justification of the valuation of shares is given, to explain the basis on which share premium has been fixed, then no addition can be made, as the genuineness of the transaction can be held as explained. In this case no explanation whatsoever has been given. Under these circumstances we are of the considered opinion that the assessee has not discharged the burden that lay on it in proving the genuineness of the cash credits.

We also find that the AO was right in holding that the assessee has not proved the creditworthiness of the share holder companies. The balance sheets, income tax assets etc. show that the resources of these companies are limited. We now discuss the case law on the subject.

“18. In the course of the assessment proceedings, the assessee had adduced documentary evidence in an attempt to prove all the three ingredients of Section 68 viz. (i) identity of the creditor, (ii) creditworthiness of the creditor and (iii) the genuineness of the transaction. But the question before us cannot be resolved merely on the basis of the documentary evidence. The evidence adduced by the assessee has to be examined not superficially but in depth and having regard to the test of human probabilities and normal course of human conduct. Before we proceed to note the findings of the Tribunal and decide whether they have been properly arrived at, it is relevant to note a few judgments of the Supreme Court. In CIT v . Durga Prasad More [1971] 82 ITR 540 Hegde J. speaking for the Supreme Court observed as under: -

"Now we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that the apparent must be 17 20x5 & ITA No. 2164/Del/2008 considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will b e very easy to make self- serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents." In CIT vs. Daulat Ram Rawatmull [1973] 87 ITR 349, the Supreme Court dealt with the question as to when the findings of facts recorded by the Tribunal can be interfered with in a reference made under section 66 of the Indian Income Tax Act, 1922. The Supreme Court referred to the leading case of Edwards ( Inspector of Taxes) v. Bairstow [1955] 28 ITR 579 (H.L.) decided by the House of Lords in which Viscount Simonds observed as under: "For it is universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarized by saying that the court should take that course if it appears that the Commissioners have acted without any evidence or upon a view of the facts which could not reasonably be " In the same case Lord Radcliffe expressed himself in the following words: "If the case contains anything exfacie which is bad law and which bears upon the determination, it is, obviously, erroneous in point of law. But, without any such misconception appearing ex facie, it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal. In those circumstances, too, the court must intervene." Reference was also made to the observations of Bhagwati, J. (speaking for the majority) in the case of Mehta Parikh & Co. v. CIT [1956] 30 ITR 181(SC), which are as under:- "It follows, therefore, that facts proved or admitted may provide evidence to support further conclusions to be deduced from them, which conclusions may themselves be conclusions of fact and such inferences from facts proved or admitted could be matters of law. The court would be entitled to intervene if it appears that the fact-finding authority has acted without any evidence or upon a view of the facts, which could not reasonably be entertained or the facts found are such 18 20x5 & ITA No. 2164/Del/2008 that no person acting judicially and properly instructed as to the relevant law would have come to the determination in question."

In DIT v. Bharat Diamond Bourse [2003] 259 ITR 280 / 126 Taxman 365 , the Supreme Court again reiterated the aforesaid position and held as under: - "As a principle, this court does not disturb findings of fact unless the findings of fact are perverse. It appears to us this is one of those exceptional cases where the correct conclusion recorded by the Assessing Officer, and affirmed by the appellate authority, has been reversed by the Tribunal on account of perverse reasoning, as we shall presently see."

“41. In the case before us, not only did the material before the Assessing Officer show the link between the entry providers and the assessee-company, but the Assessing Officer had also provided the statements of Mukesh Gupta

19 20x5 & ITA No. 2164/Del/2008 and Rajan Jassal to the assessee in compliance with the rules of natural justice. Out of the 22 companies whose names figured in the information given by them to the investigation wing, 15 companies had provided the so- called “”share subscription monies” to the assessee. There was thus specific involvement of the assesee-company in the modus operandi followed by Mukesh Gupta and Rajan Jassal. Thus, on crucial factual aspects the present case stands on a completely different footing from the case of Oasis Hospitalities (P) Ltd. (supra).”

Independent of this link we hold that the assessee has not proved the genuineness of the transaction in this case. The Hon’ble High Court has laid down that the evidence adduced in the assessee has to be examined, not superficially, but in depth and having regard to the test of human probabilities and normal course of human conduct. When we do so in this case we have to uphold the action of the AO.

“11. The respondent assessee is a private limited company. It is not the case of the respondent that their Directors or persons behind the companies, who had purportedly made investment in the shares were related or known to them. In the present case substantial investment has been made in a private limited company which includes share premium @ Rs.40/- per share amounting to Rs.41 ,88,000/-. It is not a case of the respondent assessee that they had a proven good past track record justifying a hefty premium, four times the face value. What was placed on record were certain papers which showed that the respondent assessee had taken care to ensure legal compliances. The said evidence is primarily documentary evidence. But, what the tribunal has noticed but not given due credence to are the surrounding circumstances which include a huge premium i.e. four times of the face value of the shares, credit entries in the bank accounts before transfer of money to 20 20x5 & ITA No. 2164/Del/2008 the assessee, failure of the companies to file details of the inventories and the fact that the assessee company had not charged any premium earlier. Identity, creditworthiness of the shareholders and genuineness of the transaction in all cases is not established by only showing that the transaction was through banking channels or account payee instrument. It would be incorrect to state that the onus to prove genuineness of the transaction and creditworthiness of the creditor stands discharged in all cases if payment is made through banking channels. Surrounding and corroborative factual detail are equally important and may justify further proof or details before it is held that onus is discharged. As held in N.R. Portfolio (P.) Ltd. (supra) the question of discharge of onus depends upon whether the two parties are related or known to each other, the manner in which the parties approached each other, whether the transaction was entered into through written documents to protect the investment, whether the investor professes and was an angel investor, the quantum of money , creditworthiness of the recipient. the object and purpose for which payment was made etc. These fact are primarily in knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Thus, mere reliance on neutral documentary evidence cannot always be regarded a satisfactory discharge of onus.

"6. The list of facts mentioned in Section 57 of which the Court can take judicial notice is not exhaustive and indeed the purpose of the section is to provide that the Court shall take judicial notice of certain facts rather than exhaust the category of facts of which the Court may in appropriate cases take judicial notice. Recognition of facts without formal proof is a matter of expediency and no one has ever questioned the need and wisdom of accepting the existence of matters which are unquestionably within public knowledge . ..........

........ No Court therefore insists on formal proof, by evidence, of notorious facts of history, past or present. The date of poll' passing away of a man of eminence and events that have rocked the nation

21 20x5 & ITA No. 2164/Del/2008 need no proof and are judicially noticed. Judicial notice, in such matters, takes the place of proof and is of equal force. In fact, as a means of establishing notorious and widely known facts it is superior to formal means of proof..... "

22 20x5 & ITA No. 2164/Del/2008 the addition made by the AO u/s 68 of the Act is upheld and the order of the Ld. CIT(A) is vacated.

Order pronounced in the open court on 30th May ,2016.