SILVERLAKE TRADERS PVT. LTD.,KOLKATA vs. ITO, WARD-5(1), KOLKATA

आयकर अपीलीय अधिकरण कोलकाता 'ए' पीठ, कोलकाता में IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘A’ BENCH, KOLKATA श्री राजपाल यादव, उपाध्यक्ष (कोलकाता क्षेत्र) एवं श्री संजय अवस्थी, लेखा सदस्य के समक्ष Before SRI RAJPAL YADAV, VICE-PRESIDENT & SRI SANJAY AWASTHI, ACCOUNTANT MEMBER I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd……….............................................Appellant [PAN: AAMCS 3292 F] Vs. ITO, Ward-5(1), Kolkata…………………………………………………Respondent Appearances: Assessee represented by: None. Department represented by: Subhendu Datta, CIT DR. Date of concluding the hearing : September 4th, 2024 Date of pronouncing the order : September 23rd, 2024 ORDER Per Sanjay Awasthi, Accountant Member: In this case, the ld. D/R pointed out that there is a considerable history of non-compliance to notices sent by the Assessing Officer (hereinafter referred to as ld. 'AO'), the ld. CIT(A) and even by the Registry of ITAT, Kolkata. Indeed, it is a matter of record that several notices sent by the ld. AO, as recorded in para 3 of ld. AO’s order, were totally unresponded. Even before the ld. CIT(A) it is seen that as many as ten notices have gone unresponded, as a result of which the action of ld. AO was upheld. Accordingly, this case is being disposed off on the basis of facts already on record.

I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. 2. Briefly, in this case the Commissioner of Income Tax (Appeals)-2, Kolkata [hereinafter referred to as ld. 'CIT(A)'] passed an order u/s 263 of the Income Tax Act, 1961 (in short the 'Act') on the ground that adequate enquiries were not carried out regarding the establishing of identity and creditworthiness of share subscribers in the assessee company. The ld. AO’s order was accordingly set aside for fresh adjudication on the lines contained in the said order u/s 263 of the Act. As has been mentioned earlier, there was no compliance before the ld. AO and he proceeded to add Rs. 8,64,54,000/- u/s 68 of the Act, representing share application money (including share premium of Rs. 8,41,95,150/-) and Rs. 88,140/- u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. These two amounts represent the principle grievance which are sought to be redressed in the ITAT through as many as 7 grounds of appeal. 2.1. Before us the ld. D/R not only pointed out the long history of non- compliance right up to the level of ITAT and vehemently argued that the two impugned additions deserve to be sustained. 3. We have gone through the material available and it deserves to be held at the outset that the first impugned amount of Rs. 8,64,54,000/- representing share application money deserves to be confirmed for addition u/s 68 of the Act, since the facts here are somewhat similar to a Coordinate Bench case of Elegant Dealmark Pvt. Ltd. vs. ITO in ITA No. 51/KOL/2024 order dated 21.08.2024, the findings there deserve to be extracted as under: “2.2. Regarding the addition of Rs. 1,57,50,000/- u/s 68 of the Act a combined reading of the ld. AO’s findings extracted (supra), the findings of ld. CIT(A) (which mainly relied on certain authorities) and a reading of the written submissions of the appellant extracted (supra) would reveal that the question whether the onus cast on the appellant to escape the rigours of Section 68 of the Act is primary one which needs to be deliberated upon. It is not in doubt that the appellant filed considerable documents to establish the creditworthiness and identity of the share capital subscribers and also to attempted to prove the genuineness of the transaction through supplying of bank documents etc. In a case of the Coordinate Bench of ITAT, Kolkata in M/s. Nexcare Agency Pvt. Ltd. vs. ITO in ITA No. 35/KOL/2023 order dated 26.07.2024 on somewhat similar facts it was found that the financial condition of the appellant in that case was not good enough to attract

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. substantial premiums on the shares issued to certain subscribers. Relevant portions from the said case deserve to be extracted which are as follows: “5.1. The profit and loss account filed by the assessee paints a grim picture about the qualitative aspect of commercial activity which does not seem to justify a premium of Rs. 490/- on a share with face value of Rs. 10/-. Thus total revenues of Rs 1,26,350 for the year ending on 31.3.2012 and Rs. 96,020 for the year ending on 31.3.2011 are visible, which cannot be said to indicate a healthy bottom-line or even a robust business model. Considering this fact, it would be all the more prudent to examine the genuineness etc. of the 11 concerns which chose to repose considerable faith in the commercial future of the assessee to trust them with huge sums of money. It was on a somewhat similar situation when the Hon'ble Jurisdictional High Court upheld the doubtful nature of share premium monies being given to companies having doubtful commercial credentials in the case of PCIT vs. BST Infratech Ltd. reported in [2024] 161 taxmann.com 668 (Calcutta). Hon'ble Calcutta High Court had occasion to observe that in the said case investors had no reason to invest huge amounts in business of that assessee and the entire transaction was done to circumvent the provisions of the Act. It has been held that the action of the assessing officer in treating such share application money u/s 68 of the Act as undisclosed cash credit was justified. The relevant portion from this order deserves to be extracted as under: “36. In Swati Bajaj, the court held that based on the foundational facts the department has adopted the concept of "working backward" leading to the assessee. The department would be well justified in considering the surrounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over and then arrive at a decision. 37. 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.

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. 38. 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. 39. 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 a legal perspective and some 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 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:

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. 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 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

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. 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. 6. 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 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 given 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 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.” 2.3. In this case the financial condition of the appellant is evident from the profit and loss account filed in the paperbook as under:

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. 2.4. It is seen that the appellant has a very nominal income of Rs. 5,000/- during the year under consideration and expenses of Rs. 9,647.75 only. It is clear that such sub-par financials cannot justify premiums of Rs. 990/- per share to any prudent investor. Accordingly, the insistence by the ld. AO for ensuring the presence of the directors of the appellant company for verification was justified. Merely by filing financial statements, income tax details and bank statements will not be enough to prove the genuineness of the transaction in a closely held company, which is certainly distinct from widely held company in which the general public is invited to invest and, needless to say, the public invest on a fair appraisal of the financials and future prospects of the company. In this case, the ld. AO was right in insisting on more verification than whatever the appellant was willing to submit before him. In this regard a recent case of the Hon'ble Calcutta High Court in PCIT vs. One Point Commercial (P.) Ltd. reported in [2024] 161 taxmann.com 737 (Calcutta) on similar facts has given an order which will help in deciding this case conclusively. Certain portions deserve to be extracted from the said order as under: “4. The Assessing Officer while completing the assessment under Section 143(3) of the Act by order dated 24th March, 2015 held that the assessee has failed to prove anyone of the three ingredients which are required to be proved under Section 68 of the Act. Several decisions were referred to and the Assessing Officer concludes that there was no documents produced by the assessee to substantiate their claim. This order was affirmed by the Commissioner of Income Tax (Appeals)-9 [CIT(A)] by order dated 21st January, 2019 holding that merely furnishing documents in a routine way does not explain the source of creditworthiness of the party. Further, it has been held that the basis on which premium has been charged for the shares has not been explained; no efforts have been made with the help of financial statements to justify the quantum of share premium charged. The CIT(A) placed reliance on the decision of Kolkata Bench of the Tribunal in the case of ITO v. Blessings Commercial (P.) Ltd. [2018] 91 taxmann.com 176 in ITA 271/Kol/2014, dated 28th June, 2017 and other judgments and ultimately the appeal was dismissed. On an appeal preferred by the assessee before the Tribunal, the concurrent findings recorded by the Assessing Officer and the CIT(A) have been set aside and the appeal has been allowed. The impugned order passed by the Tribunal runs to 14 pages and in paragraph 11 of the impugned order, the learned Tribunal has recorded that from the bare perusal of the paper book and the documents placed, it is revealed that all the share applicants are income tax assessees, they are filing their income tax returns, share application form and allotment letter is available on record which were filed in response to the notice under section 133(6), share application money was made by account payee cheques, details of the bank accounts belonging to the share applicants and their bank statements have been furnished and all the share applicants are having substantial creditworthiness represented by their capital and reserves. Though such is the findings recorded by the Tribunal, it is not supported by Page 7 of 11

I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. facts. The Assessing Officer has held that the assessee was a Private Limited company which cannot issue shares in the same manner in which Public Limited company does and in so far as creditworthiness of the share subscribers is concerned, there must be positive evidence to show the nature and source of resources of the share subscribers and if the assessee was serious enough to establish his case, it ought to have complied with the notices/letters issued by the Assessing Officer and ought to have produced the directors of the subscribing companies before the Assessing Officer so that they could explain the sources from which the share subscription was made. It is stated that there is no complaints either from the end of the assessee company or from the end of the alleged subscriber company. This finding recorded by the Assessing Officer as affirmed by the CIT(A), if required to be set aside by the learned Tribunal, reasons have to be assigned. Therefore, we find that the conclusion arrived at by the learned Tribunal in paragraph 11 is insufficient to support its ultimate conclusion in allowing the assessee's appeal. Therefore, we are of the view that the matter has to be remanded back to the Tribunal for fresh consideration.” 2.5. Interestingly, para 11 of the ITAT’s case which has not been approved in this order also deserves to be extracted. “11. From the perusal of the paper book and the documents placed therein, it is vivid that all the share applicants are (i) income tax assessees, (ii) they are filing their income tax returns, (iii) share application form and allotment letter is available on record which were filed in response to notice u/s 133(6), (iv) share application money was made by account payee cheques, (v) details of the bank accounts belonging to share applicants and their bank statements, (vi) all the share applicants are having substantial creditworthiness represented by their capital and reserves.” 2.6. It is clear that merely filing income tax details, share application form & allotment letter, bank details and details about the creditworthiness of the share applicants is not enough to prove a transaction from the point of view of Section 68 of the Act. In this case also, the appellant is seen to have filed documents, by and large, as mentioned in para 11 of the ITAT’s order (supra), but following the extracted portions from the case of M/s. Nexcare Agency Pvt. Ltd. (supra) and the Hon'ble Calcutta High Court’s order, as extracted (supra), it is held the onus case on the appellant for escaping the provisions of Section 68 of the Act have not been discharged and thus, the action of the authorities below is confirmed and the appeal on this point being dismissed.” 3.1. In light of the findings in Elegant Dealmark Pvt. Ltd. (supra), since there is some similarity of facts, the addition u/s 68 of the Act is sustained.

I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. has been earned on the investments made by the assessee during this year. While the ld. AO has relied on the CBDT Circular No. 5/2014 dated 11.02.2014 to apply the provisions of Section 14A of the Act read with Rule 8D of the Rules, it is clear that the appellant cannot be subjected to the rigours of Section 14A of the Act read with Rule 8D of the Rules considering the finding given in the Coordinate Bench case of Elegant Dealmark Pvt. Ltd. (supra) as under: “3. Regarding the addition of Rs. 9,647/- made u/s 14A of the Act read with Rule 8D of the Rules, it is evident that the appellant has not earned any exempt income this year and thus, relying on the findings in the case of (i) Eveready Industries India Ltd. vs. PCIT reported in [2020] 114 taxmann.com 610 (Kolkata - Trib.) and (ii) PCIT vs. Vardhman Chemtech (P.) Ltd. reported in [2020] 423 ITR 241 (Punjab & Haryana) the appellant deserves relief. The relevant extracts from the two authorities are as under: (i) Eveready Industries India Ltd.: “33. From the assessment order as also from the facts on record it appeared that during the relevant year the appellant did not earn any dividend from its investments made in shares of other bodies corporate. We also note that barring investment of about Rs.5 lacs, the investments held by the appellant were in foreign subsidiaries from which no exempt dividend could have been earned. We also note that in the course of assessment the AO had specifically required the assessee to explain why disallowance u/s 14A of the Act should not be made. The assessee vide its letter dated 14.12.2016 had explained before the AO that no disallowance u/s 14A was warranted since during the relevant year it did not earn any tax free dividend. The relevant letter is available at Page 23 of the paper book. After considering the submissions of the assessee, the assessment order was passed u/s 143(3) of the Act in which no disallowance u/s 14A was made. We thus find that it was not a case where the aspect of disallowance u/s 14A was not enquired into by the AO prior to completion of assessment. We also find that the view entertained by the AO for not making disallowance u/s 14Aof the Act, in absence of earning of tax free dividend, was in consonance with the judicial view expressed by the High Courts at Calcutta, Delhi, Gujarat, Madras& Allahabad. The relevant citations are as follows: - CIT v. Ashika Global Securities Ltd. [GA No. 2122 of 2014, dated 11-6- 2018] - Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi)

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. - Pr. CIT v. IL & FS Energy Development Co. (P.) Ltd. [2017] 84 taxmann.com 186/250 Taxman 174/399 ITR 483 (Delhi) - CIT v. Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116/223 Taxman 130/[2015] 372 ITR 97 (Guj.) - CIT v. Shivam Motors (P.) Ltd. [2015] 55 taxmann.com 262/230 Taxman 63 (All.) - Redington India Ltd. v. Addl. CIT [2017] 77 taxmann.com 257/392 ITR 633 (Mad.) 34. For the reasons set out above we therefore hold that the assessment order passed by the AO in which no disallowance u/s 14Aof the Act was made, could not said to be unsustainable in law because the course adopted by the AO while passing the order u/s 143(3) of the Act was not only permissible in law but the said course was in conformity with the view expressed by the jurisdictional high court. Accordingly the impugned order of the Ld. Pr. CIT with reference to the reasons set out in clause (c) of the SCN is held to be unsustainable and accordingly set aside. Ground Nos. 8 & 9 are therefore allowed.” (ii) Vardhman Chemtech (P.) Ltd.: “■ Section 14A provides for disallowance of expenditure in relation to income not 'includible' in total income. [Para 7] ■ The Tribunal while relying upon the judgment of this Court in CIT v. Lakhani Marketing Inc. [2014] 49 taxmann.com 257/226 Taxman 48 (Punj. & Har.) (Mag.) had held that section 14A cannot be restored to in the year in which no exempt income had been earned. However, the revenue relied upon the CBDT Circular dated 11-2-2014 to contend that section 14A can be invoked even in the year in which no exempt income had been earned. Accordingly, the Tribunal had dismissed the appeal of the revenue holding that unless and until there is receipt of exempted income for the concerned assessment year, section 14A is not attracted. [Para 11] ■ The Tribunal had, regarding the ground of deletion of disallowance amounting to Rs. 40.29 lakhs under section 14A, recorded that there was no infirmity in the order of the Commissioner (Appeals), who deleted the disallowance made following the decision of the jurisdictional High Court in the case of Lakhani Marketing Inc. (supra). The argument of the revenue that the CBDT Circular No. 5/2014, dated 11-2-2014 stating that even in the absence of any exempt income disallowance under section 14A had to be made, is binding on the revenue authority, had no merit. [Para 12] ■ No illegality or perversity could be demonstrated by the Revenue in the aforesaid findings recorded by the Tribunal. [Para 13]

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I.T.A. No.: 379/KOL/2024 Assessment Year: 2009-10 Silverlake Traders Pvt. Ltd. ■ Thus, the substantial question of law as claimed is to be answered accordingly and the appeal is to be dismissed. [Para 15]” 4.1. In light of the authorities relied upon and also following the Hon'ble Jurisdictional High Court’s order in the case of of Pr. CIT vs. Avantha Realty Ltd. reported in [2024] 164 taxmann.com 376 (Calcutta), the impugned amount of Rs. 88,140/- is directed to be deleted. 5. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open Court on 23rd September, 2024. Sd/- Sd/- [Rajpal Yadav] [Sanjay Awasthi] Vice President Accountant Member Dated: 23.09.2024 Bidhan (P.S.) Copy of the order forwarded to: 1. Silverlake Traders Pvt. Ltd., 3rd Floor, Block B, Room No. 10, Mercantile Building, 9/12, Lal Bazar Street, Kolkata, West Bengal, 700006. 2. ITO, Ward-5(1), Kolkata. 3. CIT(A)-NFAC, Delhi. 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. //True copy // By order

Assistant Registrar ITAT, Kolkata Benches Kolkata

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