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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri M. Balaganesh & Shri S.S. Viswanethra Ravi
Per Shri S.S. Viswanethra Ravi :- This appeal filed by the assessee is directed against the order of ld. Commissioner of Income Tax (Appeals)-XX, Kolkata dated 12.09.2013 for the assessment year 2006-07 on the following grounds:-
“(i) That the order of Ld. CIT(A)-XX, Kolkata dated 12.09.2013 which we received on 09.10.2013 seems to vindictive and bad in law and is liable to be modified in light of the following facts and circumstances:
2. That the Ld. CIT(A)-XX, Kolkata allow part of the Form 2 which is bad in law. Either he accepts the Form 2 or he may reject the Form 2. He may not accept part of the Form 2.
./2013 Assessment year: 2006-2007 Page 2 of 11
3. Ld. CIT(A)-XX, Kolkata passed his order based on the remand report drawn and submitted by the ITO 3(4), Kolkata. From the remand report it is clear that the ITO, Ward 3(4) Kolkata sent his Inspector to the ROC, Kolkata for verification of the Form 2 but unfortunately till drawing of the remand report dated 27.06.13, the ROC has not given any response. When any Govt. of India Office (Ministry of Corporate Affairs) fails / delay to give their response to another Govt. of India Office (Income tax Office), in that situation it was the duty of the Income Tax Office to send the reminder to the ROC for reply before adding the huge amount as undisclosed income / cash credit U/S 68 of the IT Act, 1961. In this case our humble submission before you that please make a added party to The Registrar, Registered of Companies, Nizam Palace, AJC Bose Road, Kolkata for proper verification of such Form 2 which was field on 15.07.2005.
4. That Ld. CIT(A)XX, Kolkata disallow some genuine business expenses of Rs.1,05,550.00 treating the expenditure as a capital expenditure. We explained that we incurred some expenses in this year and benefit of the entire expenses enjoyed in same year (benefit not carry forwarded for next and subsequent years). So, this is a revenue expenditure.
5. That the applicant reserve the right of raising any further ground and or grounds and or adducting any further submission either on or before the final date of hearing likely to be fixed by your office.
Brief facts of the case are that the assessee is a Private Limited Company, which is engaged in the business of trading of iron and steel. The return of income for the year under consideration was filed by it on 30.11.2006 disclosing total income of Rs.98,270/-.
Ground no-3 relates to an addition on account of share capital of Rs.38,10,000/-. The AO found that the assessee company had issued share capital of Rs. 38,10,000/- from the audited balance sheet as on 31.3.2006. The assessee was requested to produce form No. 2 filed with ROC along with names and addresses of the share applicants. The AR of the assessee has submitted only names, addresses and amount involved but not submitted form no- 2. The AO issued notices U/s. 133(6) of the Act to ./2013 Assessment year: 2006-2007 Page 3 of 11 verify the genuineness of share capital raised by the assessee to the following parties:
1. 1. Palpit Viniyog (P) Ltd.
2. Kayal Vayaapar (P) Ltd 3. Laxmi Vayaapar (P) Ltd 4. Touchstone Comtrade (P) Ltd.
5. Sulake Steels Ltd.
The AO observed that the said notices were returned as not found and departmental Notice Server could not serve the said notices and on some parties notices U/s. 133(6) were served but no one responded to such notices. The Inspector was deputed to verify the existence and genuineness of such parties and addresses respectively and he could not trace such companies at the given address provided by the assessee. As the assessee failed to file any documentary evidence in support of its claim and in absence of which, the AO was of the view that the asessee had introduced its own undisclosed money for enhancement of share capital. The AO added the alleged share capital amount of Rs.38,10,000/- to the total income of the assessee as undisclosed income u/s.68 of the Act.
The assessee having agreived by the order of AO, challenged the same, contending that it increased capital and necessary form no-5 have been filed before the Registrar of Companies and annexed the same for his reference for the first time. The assessee also submitted that the RBI declared it as non performing asset (in short NPA) and a case was pending before the Debt Recovery Tribunal, Kolkata in respect of bank loan default. The CIT-A sought remand report from the Assessing Officer, who submitted his report on 27.06.2013 which reads as under:- "As desired, the report is regarding the genuineness of acquiring the share capital of Rs.38,10,000/- claimed to have had been introduced by the assessee company during the year under consideration i.e. financial year 2005-06. ./2013 Assessment year: 2006-2007 Page 4 of 11
As reported earlier that for a cross verification from the ROC, Kolkata, his office issued letter and also sent Inspector physically to the ROC, Kolkata for a primary verification of the submission of the required Forms(No.-2 etc.). The ROC, Kolkata yet to give any written confirmation regarding the matter. Who rather insisted to check from online system.
However, though as on today, the ROC has not given any written clarification but the Authorized Representative (Authorized Representative) of the assessee company has produced the original acknowledgement slip issued by ROC in support of assessee's submission of Form No.2. Obtained a copy of such acknowledgement which is dt. 15-07-2005 bearing REG No.1198839 and REG. No.21092383 along with the annexure reflecting the names and addresses of five share allottees. Therefore, apparently it can be said that ROC formalities were accomplished for raising the share capital considering the surroundings.
Further, for necessary verification of all the five such applicants about their physical existence, genuineness of the transactions, creditworthiness to a possible extent, etc., this office communicated the assessee requesting to clarify about the addresses of the share applicants given as in the Form No. 2 and the statement of the bank accounts concerned of the assessee wherein the share application money had been credited.
In response, the Authorized Representative Mr. Partha Chowdhury appeared, who was requested to furnish the statement of the corresponding bank a/c of the assessee and clarify all the transaction in respect of the share application money claimed to have had been received by the assessee. The cheque Nos., date of receipt, amount involved, Bank details of each of the share applicants were also requested to be clarified. The Authorized Representative was even given with a liberty to arrange to produce the person concerned of the share applicants with their documents concerned in support of their transactions with the assessee to buy the shares.
As requested by the Authorized Representative, repeated opportunities were extended but none of the representative of any of the share applicant companies could be brought before this office. Whereas from a copy of a document i.e. a letter issued from 'Debts Recovery Tribunal No.1, Kolkata,' to the assessee, it appears that one of the share applicants, namely M/s Laxmi Vyapaar P Ltd., is an associated concern of the assessee. (copy enclosed)
Significantly, without any letter being sent to the share applicants from this office, all the five such share applicant companies have made certain written representation to this office by themselves, in course of the current remand proceedings, that they acquired the ./2013 Assessment year: 2006-2007 Page 5 of 11 shares from the assessee and paid the amount concerned, which probably, as insisted and/or arranged by the assessee, as obvious. However, from such intimations received, it is observed that only two of the applicants have mentioned the bank Cheque Nos. and date that they issued to the assessee. Other three have not given any such information. The Authorized Representative subsequently admitted a fact that three out of five of the share applicant companies are closely associated companies of the assessee and might have transferred the money from A/c to A/c in the same branch. This office, in the meantime obtained the statement of the bank Alc concerned of the assessee (Current No.55049017602 with SBI, Camac St. Br.) shown to the Authorized Representative and requested for his clarification. Who, on going through, could not conclusively clarify any other transactions other than those who mentioned the cheque Nos. and the amount of cheque, value of shares.
The Inspector attached to this office have been sent to all the given addresses of the share applicant companies, who, in his Report clearly states that all the companies are found to be not operative at present, the premises are closed, no name board of the companies are found, etc. A copy of the Report is enclosed for your kind perusal.
The above stated details with the value of the shares and a brief remarks are given in a tabular form for your reference at a glance as follows:- Names of the Nos. of Value in Cheque Date of Remarks share shares (Rs.) Nos. credit to applicant Cos. allotted involved Mention assessee’s ed by a/c applican t Palpit Viniyog 1500000 150000/- Not Not Couldn’t be P. Ltd. mention clarified clarified by ed the Authorized Representa tive (associated concern) Kayal Vyapar 50000 500000/- 965722 25.06.05 Clarified P. Ltd. &965723 & 28.06.05 Laxmi Vyapar 60000 600000/- Not Not The P. Ltd. mention clarified Authorized ed Representa tive only hinted at a credit ./2013 Assessment year: 2006-2007 Page 6 of 11 entry dt. 8.6.05 of Rs. 6 lacs matching with the figure but no conclusive evidence produced Touchstone 100000 1000000/ 922416 20.05.05 Clarified Comtrade P. - & Ltd. 922417 Sulake Steels 21000 210000/- Not Couldn’t be P. Ltd. mention clarified by ed the Authorized Representa tive (associated concern) Total 38,10,000 /- Therefore, this Office reports that genuineness of banking transaction only is observed in respect of two parties involving a total amount of Rs.15,00,000/-“.
Basing on remand report, CIT(Appeals) observed as under: 5-1. I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the AO noted that the appellate company claimed to have received an amount of Rs.38,10,000/- as share application money from 5 different persons. The A.O. during the assessment proceedings as well as remand proceedings tried to verify the genuineness of the share application money/share applicants through the appellant but he found from the details received that in the cases of M/s. Palpit Viniyog P. Ltd., M/s. Laxmi Vyapaar P. Ltd. and M/s. Sulake Steel P. Ltd., no cheque nos. with regard to application money was mentioned by which it could not be proved that the transaction was made through banks. However, in the cases of M/s. Kayal Vyapar P. Ltd. and M/s. Touchstone Comtrade P. Ltd., the A.O could conclude that in these cases the transaction was made through banking channel. Before me, the appellant filed a copy of Form No. 2 filed before the ROC and also copies of bank statements in the cases of M/s. Kayal Vyapaar P. Ltd., M/s. Touchstone ./2013 Assessment year: 2006-2007 Page 7 of 11
Corn trade P. Ltd. and M/B. Laxmi Vyapaar P. Ltd. by which it is proved that the share application money was paid through banks, however, in the cases of M/s. Palpit Viniyog P. Ltd. and M/s. Sulake Steel P. Ltd. copies of confirmations from the parties concerned was filed but no copies of relevant bank statements were filed by which it could not be proved that the share application money was paid through banks. Thereby, the creditworthiness and genuineness of the transactions could not be proved in absence of proving the source of money. In view of the facts and circumstances of the case, the A.O. is directed to delete addition of Rs.21,00,000/- and the balance addition in connection with the cases of M/s. Palpit Viniyog P. Ltd. and M/s. Sulake Steel P. Ltd. of Rs.15,00,000/- and Rs.2,10,000/- respectively are confirmed. Thereby, the appeal is partly allowed.
Thus, the CIT(Appeals) confirmed the addition aggregating to Rs.17,10,000/- in respect of M/s. Palpit Viniyog Pvt. Ltd. and M/s. Sulake Steel Pvt. Limited amounting to Rs.15,00,000/- and Rs.2,10,000/- respectively, out of the total addition of Rs.38,10,000/- and he deleted the balance addition of Rs.21,00,000/- in respect of M/s. Kayal Vyapar Pvt. Limited, M/s. Laxmi Vyapar Pvt. Limited and M/s. Touchstone Comtrade Pvt. Ltd. amounting to Rs.5,00,000/-, 6,00,000/- & Rs.10,00,000/- respectively.
We have heard the arguments of both the sides and also perused the relevant material available on record. With regard to the addition of Rs.38,10,000/- under section 68 of the Act in Ground No. 3 on account of share application money, we find that the AO noted that the appellate company claimed to have received an amount of Rs.38,10,000/- as share application money from 5 different persons. The A.O. during the assessment proceedings as well as remand proceedings tried to verify the genuineness of the share application money/share applicants through the appellant but he found from the details received that in the cases of M/s. Palpit Viniyog P. Ltd., M/s. Laxmi Vyapaar P. Ltd. and M/s. Sulake Steel P. Ltd., no cheque nos. with regard to application money was mentioned by ./2013 Assessment year: 2006-2007 Page 8 of 11 which it could not be proved that the transaction was made through banks. However, in the cases of M/s. Kayal Vyapar P. Ltd. and M/s. Touchstone Comtrade P. Ltd., the A.O could conclude that in these cases, the transaction was made through banking channel. We also find that the assessee-company filed a copy of Form No. 2 filed before the ROC and also copies of bank statements in the cases of M/s. Kayal Vyapaar P. Ltd., M/s. Touchstone Corn trade P. Ltd. and M/B. Laxmi Vyapaar P. Ltd. by which it was proved that the share application money was paid through banks, however, in the cases of M/s. Palpit Viniyog P. Ltd. and M/s. Sulake Steel P. Ltd. copies of confirmations from the parties concerned was filed but no copies of relevant bank statements were filed by which it could not be proved that the share application money was paid through banks. Thereby, the creditworthiness and genuineness of the transactions could not be proved in absence of proving the source of money. Therefore, the ld. CIT(Appeals) directed the Assessing Officer to delete addition of Rs.21,00,000/- and the balance additions in connection with the cases of M/s. Palpit Viniyog P. Ltd. and M/s. Sulake Steel P. Ltd. of Rs.15,00,000/- and Rs.2,10,000/- respectively were confirmed. We, therefore, do not find no infirmity in the order of the ld. CIT(Appeals) and uphold the same. Ground No. 3 of the assessee’s appeal is dismissed.
Ground No. 4 is relating to an addition of Rs. 1,06,050/- claimed towards Filling Fees. The Assessing Officer found from the Balance sheet that the assessee claimed expenses of Rs. 1,06,050/- as filing fees from the Profit & Loss account. The Assessing Officer requested the assessee to produce the details of filing fees, but, however, neither the assessee nor the AR of the assessee appeared or submitted any written explanation in respect of above claim. The Assessing Officer observes that, in spite of adequate opportunities, the assessee failed to substantiate its claim and the assessee failed to file any documentary evidence in support of its claim. The Assessing Officer treated the said amount as capital ./2013 Assessment year: 2006-2007 Page 9 of 11 expenditure and disallowed and added to the total income of the assessee finding as under: 5.3. Section 35D of the Income Tax Act clearly states that the expenditure incurred on account of increase in authorized capital is allowable for the first time only. It also states that if the assessee is paid any amount towards the raising / enhancement of Authorised capital for the second time as well as subsequent times the same will be treated as capital expenditure and will not be allowed. Hence the amount of Rs 1,05,550/- (Rs.1,06,050 - Rs.500/-) which was incurred towards the payment of fees for increase in authorized capital for second time is treated as capital expenditure and disallowed and added back to the total income of the assessee company.
The assessee questioned the order of Assessing Officer in respect of disallowance of expenses incurred on account of enhancement of authorized share capital amounting to Rs.1,06,050/- before the CIT(Appeals). The CIT (Appeals) confirmed the addition made by the Assessing Officer by treating the same as capital expenditure. The ld. CIT(Appeals) in his impugned order observed as under:- “7. Ground no. (iii) relates to addition of Rs. 1,05,550/- on account of filing fees. The fact of the case is that the appellant incurred certain expenses with regard to increase in authorized capital. Since, the nature of expenditure is of capital, the A.O. was justified to treat the same as capital expenditure. Hence, appeal on this ground is dismissed”.
Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.
At the time of hearing before us, the ld AR for the assessee urged that the order of the CIT(Appeals) be reversed by contending that the expenses were incurred as filing fees for submissions of necessary entries before the ROC i.e. Form No. 5, Form No. 2, Form No. 23 and Form No. 20B and such benefit remains for that year itself and does not carry benefit to subsequent years and it is revenue in nature. On the other hand, the ld. D.R. vehemently supported the order of ld. CIT(Appeals). ./2013 Assessment year: 2006-2007 Page 10 of 11
Heard rival submissions and perused the material on record. we find that the assessee incurred certain expenses by way of filing fees to ROC to increase authorized capital and in our opinion the issue on hand is hit by Judgement Hon’ble Supreme Court in the case of Brook Bond India Ltd vs CIT reported in 225 ITR 798. The relevant of portion of which is reproduced herein below:
“5. Dr. Pal has, however, submitted that this decision does not cover a case, like the present case, where the object of enhancement of the capital was to have more working funds for the assessee to carry on its business and to earn more profit and that in such a case the expenditure that is incurred in connection with issuing of shares to increase the capital has to be treated as revenue expenditure. In this connection, Dr. Pal has invited our attention to the submissions that were urged by the learned counsel for the assessee before the AAC as well as before the Tribunal. It is no doubt true that before the AAC as well as before the Tribunal it was submitted on behalf of the assessee that increase in the capital was to meet the need for working funds for the assessee-company. But the statement of case sent by the Tribunal does not indicate that a finding was recorded to the effect that the expansion of the capital was undertaken by the assessee in order to meet the need for more working funds for the assessee. We, therefore, cannot proceed on the basis that the expansion of the capital was undertaken by the assessee for the purpose of meeting the need for working funds for the assessee to carry on its business. In any event, the above quoted observations of this Court in Punajb State Industrial Dev. Corpn. Ltd. vs. CIT (supra) clearly indicate that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit-making, the expenses incurred in that connection still retain the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company”.
In the light of afore laid law by the Hon’ble Supreme Court, Since the nature of expenditure incurred in the present case also paid towards filing fees ROC and therefore, is of capital in nature, thus, we are of the view that the facts of the case on hand and that of case involved therein are similar and the law laid down therein is applicable to the present case and the order of CIT(Appeals) is justified in treating the same as capital expenditure. Accordingly, Rs.70,000/- claimed by the assessee is ./2013 Assessment year: 2006-2007 Page 11 of 11 disallowed. We find that the remaining sum of Rs.36,050/- is incurred towards regular filing fees paid to ROC, which are squarely allowable as deduction. Assessing Officer is directed accordingly.
Grounds No. 1, 2 & 5 of the assessee’s appeal are general in nature and do not require any adjudication.
In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open Court on June 29th, 2016.