M/S NEELAKANTHA COMMOSALES PVT. LTD.,KOLKATA vs. CIT, KOLKATA-1, KOLKATA

The Assessee is a company. It carries on business of trading in shares and deriving income from rendering consultancy services. During the previous year relevant to A.Y.2009-10 the assessee issued share capital in the form of 129000 equity shares of the face value of Rs.10/- at a premium. The assessee received a sum of Rs.12,90,000/- towards share capital and a sum of Rs.5,83,10,000/- on account of share premium.

The Assessee filed return of income on 07.09.2009 disclosing total income of Rs.790/- for A.Y.2009-10. Thereafter the assessee offered voluntarily certain income to tax and based on such disclosure proceedings u/s 147 of the Act were initiated. In such proceedings the AO brought to tax consultancy fees not disclosed of Rs.24,000/- and also disallowed share issue expenses of Rs.5,000/- which according to the AO were not in ITA No.644/Kol/2015-M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 the nature of revenue expenditure. Consequently the AO passed an order u/s.147 of the Act determining the total income of the Assessee at a sum of Rs.29,790/-. While completing the assessment the AO also made a passing reference to the fact that the assessee has raised share capital during the previous year by issue of shares at a premium and also made a reference to the fact that notice u/s 133(6) of the Act were issued to the fresh share applicants and replies were verified. There is no other discussion in the order of assessment about any other aspect of the receipt of share capital by the assessed during the previous year. The AO passed an order u;/s 143(3) r.w.s. 147 of the Act on 07.08.2012.

The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue in as much as the AO did not make a thorough and proper enquiry which were required in the case to check the genuineness of the transaction of the receipt of share capital, the capacity and identity of the persons who were investors in the share capital of the assessee. The CIT was also of the view that the AO failed to inform the AO of the persons who had subscribed to the share capital of the assessee regarding the amount paid by them as contribution to the share capital of the assessee.

The CIT also noticed from the copy of the bank statement of the assessee that there were several debit and credit entries of similar figures – involving huge transactions during different periods. The Assessee being a newly formed company scrutiny in respect of the peculiar nature of such bank transactions were required to be made. Hence the CIT was of the view that thorough and proper inquiry into the existence, credit-worthiness and genuineness of subscribers in the case as claimed by the assessee company was not made by the A.O., nor the genuineness of the company and its directors were examined.

The CIT issued show cause notice u/s 263 of the Act. In reply to the show cause notice the assessee filed explanation for huge share premium, details of payments, source ITA No.644/Kol/2015-M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 of funds, copy of income tax returns , Balance sheet and bank statements of the share holders etc. 7. The CIT after considering the submissions of the assessee was of the view that the modus operandi of the introduction of such bogus share capital and huge premium was similar as was done in a large number of cases which was considered and decided by the Hon’ble ITAT Kolkata Bench in the case of M/s. Bisakha Sales Pvt. Ltd as bogus transactions. The CIT also came to the conclusion that the AO failed to carry out proper verification of the transactions of the share capital by the assessee and finally passed an order directing the AO to make proper inquiry with regard to the receipt of share capital and share premium by the assessee. The following were the conclusions of the CIT in this regard :- “16. In view of the above, the order passed by the A,O, is erroneous and prejudicial to the interest of revenue and hence, the order passed by the A.O. is set-aside with the direction that he/she should pass the assessment order after conducting independent detailed and complete enquiries into the subscription to the share capital and premium to the extent of Rs. 5,96,00,000/-.introduced in this case. The A.O. should examine the source of share capital by proper enquiry through which the money has been introduced in this company as share capital and also examine the directors of subscriber companies by issuing summons u/s 131 of the I.T. Act. The A.O. should conduct thorough independent enquiries to verify the documents filed before him in respect or proof of subscription to share-capital/share-premium. The A.O. should pass speaking order after providing reasonable opportunity to the assessee and verifying the source of share capital including the share premium of all the subscribers so as to ascertain the true nature of transactions which will bring to the fore the reality of transactions, and tax accordingly. “

Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal. At the time of hearing it was submitted by the ld. DR that the case of the assessee is similar to the case of Subhlakshmi Vanijya Pvt. Ltd. vs. CIT (ITA No.1104/Kol/2014) dated 30.7.2015 for the A.Y. 2009-10 and the various aspects considered and decided by the Tribunal are squarely applicable to the facts of the present case. The following are the findings of the Hon’ble Tribunal in the case of Subhlakshmi Vanijya Pvt. Ltd. vs. CIT (supra) on receipt of share capital by several assesses whose ITA No.644/Kol/2015-M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 modus operandi and the facts and circumstances under which order u/s 147 was passed and was revised by order u/s 263 of the Act are identical: A. Contention of the assessee that since the AO of the assessee-company was not empowered to examine or make any addition on account of receipt of share capital with or without premium before amendment to section 68 by the Finance Act, 2012 w.e.f. A.Y. 2013-14 and hence the CIT by means of impugned order u/s 263 could not have directed the AO to do so, is unsustainable. B. Failure of the AO to give a logical conclusion to the enquiry conducted by him gives power to the CIT to revise such assessment order, by holding that :- i) the enquiry conducted by the AO in such cases can’t be construed as a proper enquiry; ii) CIT u/s 263 can set aside the assessment order and direct the AO to conduct a thorough enquiry, notwithstanding the jurisdiction of the AO in making enquiries on the issues or matters as he considers fit in terms of section 142(1) and 143(2) of the Act, which is relevant only up to the completion of assessment ; iii) Inadequate inquiry conducted by the AO in the given circumstances is as good as no enquiry and as such, the CIT was empowered to revise the assessment order ; iv) The order of the CIT is not based on irrelevant considerations and further in the present circumstances, he was not obliged to positively indicate the deficiencies in the assessment order on merits on the question of issue of share capital at a huge premium ; and v) the AO in the given circumstances can’t be said to have taken a possible view as the revision is sought to be done on the premise that the AO did not make enquiry thereby rendering the assessment order erroneous and prejudicial to the interest of the revenue on that score itself. C. In the given facts and circumstances of all such cases, the notices u/s 263 were properly served through affixture or otherwise. Further the law does not require the service of notice u/s 263 strictly as per the terms of section 282 of the Act. The only requirement enshrined in the provision is to give an opportunity of hearing to the assessee, which has been complied with in all such cases. D. Limitation period for passing order is to be counted from the date of passing the order u/s 147 read with sec. 143(3) and not the date of Intimation issued u/s 143(1) of the Act, which is not an order for the purposes of section 263. In all the cases, the orders have been passed within the time limit. -M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 E. The CIT having jurisdiction over the AO who passed order u/s 147 read with section 143(3), has the territorial jurisdiction to pass the order u/s 263 andnot other CIT. F. Addition in the hands of a company can be made u/s 68 in its first year of incorporation. G. After amalgamation, no order can be passed u/s 263 in the name of the amalgamating company. But, where the intention of the assessee is to defraud the Revenue by either filing returns, after amalgamation, in the old name or otherwise, then the order passed in the old name is valid. H. Order passed u/s 263 on a non-working day does not become invalid, when the proceedings involving the participation of the assessee were completed on an earlier working day. I. Order u/s 263 cannot be declared as a nullity for the notice having not been signed by the CIT, when opportunity of hearing was otherwise given by the CIT. J. Refusal by the Revenue to accept the written submissions of the assessee sent after the conclusion of hearing cannot render the order void ab initio. At any rate, it is an irregularity. K. Search proceedings do not debar the CIT from revising order u/s passed u/s 147 of the Act.”

The ld. Counsel for the assessee however submitted that the facts of the assessee’s case stood on a different footing from the facts of the case decided by the Tribunal in the case of Subhlakshmi Vanijya Pvt. Ltd. vs. CIT (supra). In this regard he brought to our notice that share capital and share premium was received by the assessee was from six different persons as follows :- Name of Address PAN No.of No.of Total face Total Total amount Applicant Shares shares value premium received applie allotted received d for Goodhope 16, Mangoe AADCG3758 20000 20000 200,000.00 9800000 10,000,000.00 Vanijya Pvt., Lane, P Ltd. Kolkata- 700001 Lipi Finstock P-41, Princep AAACL2220 20000 20000 200,000.00 9800000 10,000,000.00 6th Limited Street, N Floor,Kolkata -700072 Sharma Jalan AANCS9614 20000 20000 200,000.00 9800000 10,000,000.00 Gandhi Hire Complex, A purchase Gate No.3, -M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 Limited Near Bhagwati Kanta, P.O.Begri, Jangalpur, Howra- 711411 Shivshakti Room AAFCS0279P 12000 12000 120,000.00 5880000 6,000,000.00 6th communicatio No.602, n & Floor, 4 Investment Farilie Place, Pvt.Ltd. Kolkata- 700001 Shobha Martin Burn AANCS6578 20000 20000 200,000.00 9800000 10,000,000.00 Investment House, 1, F Pvt. Ltd. R.N.Mukherje e Road, 4th Floor, Room No-43, Kolkata- 700001. Shreyans House AABCS3447 27000 27000 270,000.00 13230000 13,500,000.00 Finlease Pvt. No.220,Streee F Ltd. t No.9, Chandan Vihar, West Sant Nagar, Burari Delhi North Delhi 110084 TOTAL 11900 119,00 1,190,000.0 58,310,00 59,500,000.00 0 0 0 0.00

He drew our attention to the order of CIT u/s 263 of the Act and pointed out that the CIT has presumed that there were nine share holders and the AO issued notices u/s 133(6) of the Act only to six out of the nine share holders. He pointed out that the AO had issued notices to all the six share holders. These share holders had filed reply to the notices issued u/s 133(6) of the Act issued by the AO in the course of the proceedings u/s 147 of the Act. These replies are placed at pages 29 to 34 of the assessee’s paper book. He also pointed out that the CIT in the impugned order has also observed that the AO has failed to send any intimation to the persons of the AO who has subscribed to the share capital of the assessee. In this regard he pointed out that in the case of all the six share applicants who contributed to the capital of the assessee company, proceedings u/s 263 of the Act had been initiated by the CIT on the ground that the AO in their cases had not ITA No.644/Kol/2015-M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10 properly investigated receipt of share capital and share premium by them. He also brought to our notice the fact that these proceedings were dropped by CIT. Copies of the relevant show cause notice u/s 263 of the Act and the order dropping the proceedings u/s 263 of the Act in the case of the six share applicants are placed at pages 186 to 195 of the assessee’s paper book. It was submitted by him that the identity and creditworthiness of share applicants stood established by reason of the CIT dropping proceedings u/s.263 of the Act against the share applicants who subscribed to the share capital of the Assessee. It was further submitted by him that the allegation that the directors of the assessee should have been examined was not a requirement contemplated in law and such observations of the CIT in the impugned order passed u/s 263 of the Act are unsustainable. It was also submitted by him that the receipt of share premium is a capital item and not in the nature of income and in this regard he placed reliance on the CBDT Instruction No.2 of 2015 dated 29.01.2015. It was also submitted that the impugned order of the CIT merely states that order of the AO is prejudicial to the interest of the revenue and nowhere it has been mentioned that order of the AO is erroneous. According to him therefore the condition precedent for exercising of powers u/s 263 of the Act does not exist.

We have given a very careful consideration to the rival submissions. From a reading of the entire of the CIT it is clear that the main plank of the case of CIT is that mere sending notices u/s 133(6) of the Act to the various share applicants and getting their replies was not sufficient, in the given facts and circumstances of the case, namely the receipt of huge premium by a company which was a newly formed company. It is for this reason of lack of proper inquiry that proceedings u/s 263 of the Act had been invoked by the CIT. The absence of the word “erroneous order” is not very fatal as reading of the entire order of the CIT would go to show that he was of the view that order of the AO was erroneous because the AO failed to make proper enquiries which were warranted in the facts and circumstances of the case. Apart from the above, we also find from para-16 of the impugned order that the CIT has clearly observed that order of the AO was erroneous and prejudicial to the interest of the revenue. -M/s. Neelakantha Commosales Pvt.Ltd. A.Y.2009-10

The reference in the impugned order regarding existence of nine share holders when in fact there are only six share holders, in our view is not very material. What is material is the quality of enquiry that was made by the AO. This enquiry was not proper and had not been carried to its logical conclusion. The fact that proceedings initiated in the case of the share applicants u/s 263 of the Act were dropped is not very material and that fact ipso facto cannot be the basis to conclude that proceedings u/s 263 ought not to have been invoked by the CIT in the case of the case of the assessee. Reference made by the ld. Counsel for the assessee to Instruction No.2 of 2015 of CBDT dated 29.01.2015 is thoroughly misplaced as those instructions of CBDT was given in the context of transfer pricing provisions u/s 92 of the Act and has no relevance to the present case. We are of the view that conclusions drawn by ITAT, Kolkata in the case of Subhlakshmi Vanijya Pvt. Ltd. vs. CIT(supra) which have been referred to in the earlier part of this order clearly supports case of the revenue. We therefore hold that jurisdiction u/s 263 of the Act was properly exercised by the CIT and his action does not call for any interference. Consequently this appeal by the assessee is dismissed. 12. In the result, this appeal by the assessee is dismissed. The order pronounced in the open court on 01.03.2017.