M/S ARROWSPACE TRADECOM PVT. LTD.,KOLKATA vs. ITO, WARD-10(2), KOLKATA

In this case, there is a delay of several months in filing of this appeal for which the appellant has filed a letter along with the grounds of appeal requesting for consideration of delay. The reason mentioned for the delay is that the accountant left the company and did not inform the management about the order passed by the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as ld. 'CIT(A)']. It has also been stated that the delay was not deliberate and the appellant would not gain in any way by the said delay.

That the Ld. AO passed high pitched assessment order on 14-10-2016 as unexplained cash credit merely on mismatch of details without providing another opportunity to Substantiate these transactions.

For that the Ld. AO erred in assessing Rs. 4,57,06,000/- as unexplained investment without issuing show cause notice. For that under the facts and circumstances, the addition made is liable to be deleted.

The Order passed by Ld. AO is unjust, unfair, illegal and invalid in law.

That the appellant craves to add or alter or delete any grounds of appeal

The ld. DR assisted us in going through the assessment order and first appellate order. He also argued that the share applicants in question were shell companies having no worthwhile business. It is seen that the facts of this case are similar to another case in Grafton Merchant Pvt. Ltd. vs. DCIT in order dated 21.08.2024 dealt with by a Coordinate Bench of Kolkata Tribunal. Some portions from the case deserve to be extracted: “3.1. The factual matrix of this case reveals that not only is the appellant having a poor track record of income but even majority of share applicants are also corporate entities having meagre profits. In such a situation, the ld. AO’s action have to be held as justified in as much as the creditworthiness of the share applicants and the genuineness of the transaction needed to be proved through better evidence than merely filing the documents as have been mentioned time and time again by the appellant. In principle the action of ld. AO is justified and upheld. 3.2. For arriving at this conclusion against the Appellant, we draw considerable strength from the findings of the Coordinate Bench of the ITAT, Kolkata in M/s. Nexcare Agency Pvt. Ltd. vs. ITO in order dated 26.07.2024 where, like in this case a corporate entity of poor profitability attracted substantial premiums on the face value of individual shares. Some portions deserve to be extracted for reference:

On a careful consideration of the totality of facts and circumstances, as also the averments of the assessee and ld. D/R it is clear that once proceedings u/s 263 of the Act were initiated then the assessee was put on notice regarding his duty to prove the transaction which involved very substantial amounts as share premium. It is not understood how a closely held company which has minimal commercial activity as is evidenced by the profit and loss account filed with the paper book as under:

Thus the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges are founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion. On facts we are convinced to hold that the assessee has not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies is questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source. The assessee has miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. As noted above merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or the credit worthiness has not been established.

In the light of the above discussion, we hold that the assessee has failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which has shown to be so by a "round tripping" of funds. For all the above reasons, the revenue succeeds.

In the result the appeal is allowed, the order passed by the learned Tribunal is set aside and the order passed by the CIT(A) dated 28.11.2019 is restored and the substantial questions of law are answered in favour of the revenue.” 5.2. We also draw considerable strength from the case of PCIT vs. NRA Iron & Steel (P.) Ltd. reported in [2019] 412 ITR 161 (SC) in which share application money was approved for action u/s 68 of the Act even where the share applicants had filed confirmations and attempted to show that the transactions have taken place through normal banking channels, etc. in this case, the Hon'ble Apex Court has dealt with the issue from legal perspective and sum of the passages deserve to be extracted for reference: “This Court in the land mark case of Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) and, Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and creditworthiness, then the Assessing Officer must conduct an inquiry, and call for more details before invoking section 68. If the assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the revenue to hold that it is Page 5 of 8 I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. [Para 8.2] With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence, that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee's knowledge. Merely, proving the identity of the investors does not discharge the onus of the assessee, if the capacity or credit-worthiness has not been established. [Para 8.3] The Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries. In the instant case, the Assessing Officer made an independent and detailed enquiry, including survey of the so- called investor companies from Mumbai, Kolkata and Guwahati to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the shareholders were either non-existent, or lacked creditworthiness. [Para 9] The principles which emerge where sums of money are credited as Share Capital/Premium are: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the creditworthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name- lenders. iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68. [Para 11] In the instant case, the Assessing Officer had conducted detailed enquiry which revealed that: i. There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee. The genuineness of the transaction was found to be completely doubtful. ii. The enquiries revealed that the investor companies had filed returns for a negligible taxable income, which would show that the investors did not Page 6 of 8 I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. have the financial capacity to invest funds ranging between Rs. 90 lakhs to Rs. 95 lakhs in the assessment year 2009-10, for purchase of shares at such a high premium. iii. There was no explanation whatsoever offered as to why the investor companies had applied for shares of the assessee company at a high premium of Rs. 190 per share, even though the face value of the share was Rs. 10 per share. iv. Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested. v. The mere mention of the income tax file number of an investor was not sufficient to discharge the onus under section 68. [Para 12] The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the assessee since the information is within the personal knowledge of the assessee. The assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the Assessing Officer, failure of which, would justify addition of the said amount to the income of the assessee. [Para 14] On the facts of the present case, clearly the assessee company - respondent failed to discharge the onus required under section 68, the Assessing Officer was justified in adding back the amounts to the assessee's income. [Para 15]” 5.3. It is seen that in another case on somewhat similar facts, the Hon'ble Calcutta High Court in the case of BalGopal Merchants (P.) Ltd. vs. PCIT reported in [2024] 162taxmann.com465 (Calcutta) has held that action u/s 68 of the Act was justified.

A close reading of the case laws cited (supra) reveals that mere filing of confirmations and the income tax details etc. are not enough to justify payment of in terms of monies as share premium when the financial aspects of the recipient company would not merit such investments under any kind of prudent consideration. In the present case while 4 out of 11 share applicants were not traceable on e-mail addresses and one more did not respond to the summons, it is evident that even those share applicants who did file certain documents, were not sufficient in the eyes of law to discharge the burden cast on the assessee regarding proving the genuineness of the transaction. The profit and loss account statement extracted (supra) would normally paint a grim picture to any prudent investor, however, in this case it seems to have encouraged 11 entities to transfer huge sums of money by way of share premium. 6.1. Considering the case laws cited (supra) the financial health of the Page 7 of 8 I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. assessee and the inadequate discharge of onus, we hold this case to be a fit case for application of Section 68 of the Act and thereby confirm the impugned addition.” 3.1. Considering the similarity of facts and the discussion in the case of Grafton Merchant Pvt. Ltd. (supra), and the relative similarity of facts, it is held that the impugned amount has been rightly added by the ld. AO.