SHALU DYEING PTG MILLS PVT. LTD.,SURAT vs. DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), SURAT

The grounds of appeal

raised by the assessee are as follows: “1. On the facts and circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of Assessing Officer in making addition of Rs.1,80,00,000/- for alleged bogus share application & share premium u/s. 68 of the Act.

First, we shall take ground nos. 1 and 2 raised by the assessee, which are interconnected and mixed and which relates to addition of Rs.1,80,00,000/- on account of share application money and Rs.90,000/- for unexplained expenditure u/s. 69C of the Act.

The facts of the case which can be stated quite shortly are as follows: The assessee before us is a Private Limited Company and filed its return of income for assessment year (AY) 2012-13, showing total income to the tune of Rs.24,02,900/- on 01/10/2012. The assessee`s case was selected for scrutiny and accordingly notice u/s 143(2) of the Act was issued on 12/08/2013, which was served upon the assessee. The assessee company is engaged in the business of Dyeing and Printing of art silk clothes. During the year under consideration, the assessee has shown total turnover of Rs.28,55,23,740/- and gross profit of Rs.3,44,81,920/-, which worked out to 12.08%. During the assessment proceedings, the assessing officer observed that assessee- company received funds to the tune of Rs.1,80,00,000/- from the following companies, namely, M/s Silverpoint Dealers Pvt. Ltd, M/s. Amrapali Metal Pvt Ltd, M/s. Gandheshwari Developers, and M/s. Sunshine Tie-Up Pvt Ltd. The assessing officer observed that total income of these companies are insignificant, however, these companies made investment in share capital/premium in the assessee-company, out of their accumulated reserve and surplus. The assessing officer noted that these companies are Kolkata based companies and engaged in providing accommodation entries. The assessing officer did

In response, the assessee submitted its reply, which is reproduced by the assessing officer, in the assessment order page Nos. 32 to 43 of the assessment order. The assessee stated in its reply that bank statement has been submitted by the assessee which clearly states that amount was received through banking channel, the assessee submitted Balance Sheet and profit and loss account and as per audited balance sheet, as on 31.03.2012, the share applicant companies has share capital, reserve and surplus as on 31.03.2012 out of that they made investment. The assessee submitted PAN number of these companies. The assessee submitted that these companies are active companies as per ROC records. The Board Resolution of these companies were filed before the assessing officer. The relevant records of Registrar of Companies were also submitted before the assessing officer. It was also submitted that assessee-company has not deposited the cash in the bank account of these share applicant companies

However, the assessing officer rejected the above contention of the assessee and observed that in the Statement u/s 131 of the Act, Shri Jivendra Mishra, in reply to question No. 5, has specifically admitted that his main business is providing accommodation entries through Jama- Khaarchi/shell companies to various beneficiaries in lieu of commission. The Bank statements of these share applicant companies show repetitive pattern of two or three credit entries followed almost on the same day by debit of an amount equivalent to the sum total of the credit entries. In other words, it reflected that just before the transfer of money to assesses, parties were getting money transferred to their accounts. An analysis of bank account shows that all the transactions are arranged in such a way to give it colour of genuineness. All the share applicant companies and their bank accounts have the identical patterns wherein the money is deposited and transferred immediately and the credit balance is always negligible. Therefore, assessing officer held that assessee-company has not fulfilled the three conditions of section 68 of the Act viz, identity, creditworthiness and genuineness of the transaction, in respect of the share capital and share premium received by the it, hence assessing officer made addition to the tune of Rs.1,80,00,000/- under section 68 of the Act.

Aggrieved by the order of Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the Assessing Officer, therefore, assessee is in further appeal before us.

Shri Rasesh Shah, Learned Counsel for the assessee, argued that notices u/s 133(6) of the Act were served on the share applicant and in response to these notices share applicants have provided all details to the assessing officer. These share applicant companies have made investment in assessee-company only after receiving money through banking channel and thus the source is explained. The ld Counsel further stated that no any cash has been deposited in bank account of share applicants in lieu of share capital receipt. The ld Counsel further stated that assessing officer has not provided statement of Jivendra Mishra, who floated investor companies namely, Bhavsagar Vinimay Pvt. Ltd. and Shivam Lohh Product Pvt. Ltd and neither cross examination was provided to the assessee-company, hence it is complete violation of principles of natural justice. The ld Counsel also stated that allegation of the assessing officer that no establishments were there in case of share applicant companies, is not tenable, as these share applicant companies are investor companies ( and these are not manufacturing organization) hance they do not require more space for their offices. Besides, the allegation of the assessing officer that other expenses of these share applicant companies are lower side, cannot be the base for making addition u/s 68 of the Act. The ld Counsel contended that by submitting bank statement, PAN number, name and address, Balance sheet, profit and loss account and ROC records, the assessee-company has proved the three conditions of section 68 of the Act viz, identity, creditworthiness and genuineness of the transaction, in respect of the share capital and share premium received by the it. The ld Counsel also relied on several judgments of jurisdictional High Court of Gujarat and other High Courts to support his contention. Therefore, ld Counsel prays the Bench that addition made by the assessing officer, and sustained by ld CIT(A) may be deleted.

On the other hand, Ld DR for the Revenue submitted before us that it is well settled principal of law as declared by the Hon'ble Supreme Court in the case of Sumati Dayal Vs CIT, (214 ITR 801) that the true nature of transactions have to be ascertained in the light of the Surroundings circumstances. The findings emanating from the investigation carried out reveal that the circumstances surroundings the transaction of alleged share capital proves the transactions as not genuine. Undisputedly, the onus of proving of credits in its books of accounts lies with the assessee and the settled position of law is that the assessee is required to prove all the three criteria, that is identity, genuineness and creditworthiness. But in the instant case, the assessee company failed to discharge this onus. The Assessing Officer was justified in adding share subscription money to assessee's taxable income as unexplained cash credit. The Ld DR also pointed out that the credit worthiness of share subscribers is not at all proved because there was no credit balance in the bank account of the subscriber. The income of the subscriber as per profit and loss account is almost Nil or a very small amount. Therefore, the credit worthiness is not at all proved. Therefore, ld DR vehemently argued that the order of the Ld. CIT(A) should be upheld.

We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. CIT(A) and other material brought on record. We note that assessee-company submitted the following documents and evidences, in respect of its own affairs, before lower authorities, Viz: (1) Valuation of Fair Market Value of shares for FY.2010-11 (vide Pb.28), (2) Minutes of meeting of Board of Directors (vide Pb.29 to 31), (3) Minutes of meeting of Board of Directors (vide Pb.32 to 33),(4) Form 5 to increase the authorized share capital filed with ROC (vide Pb.34 to 38), (5)

The assessee-company has submitted the following documents and evidences in respect of share applicant company, M/s Amrapali Metal Pvt. Ltd, Viz: (1) Acknowledgment of return of income along with computation of income (vide Pb.78 to 79), (2) Audit Report along with Audited Financial Statements (vide Pb.80 to 89), (3) Relevant Bank statement (vide Pb.90), (4) Ledger account from the books of Shalu dyeing and PTG Pvt. Ltd. (vide Pb.91), (5) Share application from (vide Pb.92 to 93), (6) MCA Master details along with signatories details, showing that company is active company (vide Pb.136).

The assessee-company has submitted the following documents and evidences in respect of share applicant company, Gandeshwari Developers Pvt. Ltd, Viz: (1) Acknowledgment of return of income along with computation of income (vide Pb.95 to 96), (2) Audit Report along with Audited Financial Statements (vide Pb.97 to107), (3) Relevant Bank statement (vide Pb.108), (4) Ledger account from the books of Shalu dyeing and Pvt. Ltd. (vide Pb.109), (5) Share application from (vide Pb.110), (6) MCA Master details along with signatories details, showing that company is active company (vide Pb.136).

The assessee-company has submitted the following documents and evidences in respect of share applicant company, Silverpoint Dealers Pvt. Ltd, Viz: (1) Acknowledgment of return of income alongwith computation

The assessee-company has submitted the following documents and evidences in respect of share applicant company, Sunshine Tie Up Pvt. Ltd, Viz:(1) Acknowledgment of return of income alongwith computation of income (vide Pb.137 to 138),(2) Audit Report along with Audited Financial Statements (vide Pb.139 to 151),(3)Relevant Bank statement (vide Pb.152),(4)Ledger account from the books of Shalu dyeing and Pvt. Ltd. (vide Pb.153),(5)Share application from (vide Pb.154 to 155),(6).MCA Master details along with signatories details, showing that company is active company.

The assessee-company has also submitted the following general documents and evidences Viz: (1) Acknowledgment of return of income alongwith computation of income (vide Pb.157 to 159), (2) Audit Report along with Audited Financial Statements (vide Pb.160 to 196), (3) Relevant Bank statement of assessee-company (vide Pb.197 to 228), (4) Letter requesting the investors to appear before the learned Assessing Officer along with postal receipts and address proof (vide Pb.229 to 238).

We note that to prove the creditworthiness, genuineness and identity of the share applicants, the assessee company had produced before the assessing officer, all four share applicants, that is, requested them to appear before the assessing officer, and submitted the followings documents: (1) Return of ROC, that is, form No. 2 submitted before R.O.C.

With help of these plethora documents, evidences and personal appearance before the AO in response to notice U/s 131, during the assessment proceedings, the ld Counsel claimed that the assessee company has proved the identity, genuineness and creditworthiness of all these three share applicant companies in the following manner: (i) Identity of all the share applicants have been proved by the assessee with help of PAN Number, ROC details and bank statements. We note that before issuing PAN, the Income Tax Department requires address proof.

Before we adjudicate as to whether the Ld. CIT(A)’s action is right or erroneous, let us look at section 68 of the Act and the judicial precedents on the issue at hand. Section 68 under which, the addition has been made by the AO reads as under: “68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year.”

The phraseology of section 68 is clear. The legislature has laid down that in the absence of a satisfactory explanation, the unexplained cash credit may be charged to income-tax as the income of the assessee of that previous year. In this case the legislative mandate is not in terms of the ITA. 118/SRT/2023/AY.2012-13 Shalu Dyeing PTG Mills Pvt. Ltd. words ‘shall’ be charged to income-tax as the income of the assessee of that previous year". The Supreme Court while interpreting similar phraseology used in section 69 has held that in creating the legal fiction the phraseology employs the word “may” and not “shall”. Thus, the un- satisfactoriness of the explanation does not and need not automatically result in deeming the amount credited in the books as the income of the assessee as also held by the Supreme Court in the case of CIT v. Smt. P. K. Noorjahan [1999] 237 ITR 570.

The main plank on which the AO made the addition was because all the directors of the share subscribers did not turn up before him. In our view, this approach of the AO is not correct. Any one director appearing before the AO will suffice for the purpose of compliance of notice under section 131 of the Income Tax Act,1961. Hence, notice under section 131 of the Act has been duly complied with. It is noted that all the documents were furnished before the AO which substantiated the transaction between the assessee company and the share applicants. It is therefore not a case where the documents sought from the applicants to examine the transaction were not available before the AO. As regards the issue of non-appearance of the share applicants, we note that in such a case the Hon'ble Apex Court in the case of Orissa Corpn. (P.) Ltd. (supra) 159 ITR 78 and the Hon'ble Gujarat High Court, in the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360/[2003] 127 Taxman 523, has held that onus of the assessee (in whose books of account credit appears) stands fully discharged if the identity of the creditor is established and actual receipt of money from such creditor is proved. In case, the Assessing Officer is dissatisfied about the source of cash deposited in the bank accounts of the creditors, the proper course would be to assess such credit in the hands of the creditor (after making due enquiries from such creditor). In arriving at this conclusion, the Hon'ble Court has further stressed the presence of word “may” in ITA. 118/SRT/2023/AY.2012-13 Shalu Dyeing PTG Mills Pvt. Ltd. section 68. Relevant observations at pages 369 and 370 of this report are reproduced hereunder:- “Merely because summons issued to some of the creditors could not be served or they failed to attend before the Assessing Officer, cannot be a ground to treat the loans taken by the assessee from those creditors as non-genuine in view of the principles laid down by the Supreme Court in the case of Orissa Corporation [1986] 159 ITR 78. In the said decision the Supreme Court has observed that when the assessee furnishes names and addresses of the alleged creditors and the GIR numbers, the burden shifts to the Department to establish the Revenue's case and in order to sustain the addition the Revenue has to pursue the enquiry and to establish the lack of creditworthiness and mere non- compliance of summons issued by the Assessing Officer under section 131, by the alleged creditors will not be sufficient to draw and adverse inference against the assessee. in the case of six creditors who appeared before the Assessing Officer and whose statements were recorded by the Assessing Officer, they have admitted having advanced loans to the assessee by account payee cheques and in case the Assessing Officer was not satisfied with the cash amount deposited by those creditors in their bank accounts, the proper course would have been to make assessments in the cases of those creditors by' treating the cash deposits in their bank accounts as unexplained investments of those creditors under section 69.”

In the case of CIT Vs. Jalan Hard Coke Ltd (95 taxmann.com 330), the Hon’ble Rajasthan High Court noted that the assessee had furnished the details of the share applicants but expressed its inability to produce the share applicants before the AO for examination. The Hon’ble High Court held that mere non-appearance of share applicants could not be reason enough to assess the share application monies received by way of unexplained cash credit. The SLP filed by the Revenue against this judgment has been dismissed by the Hon’ble Supreme Court. The relevant extracts of the judgment are as follows: “6.2 Taking into consideration the aforesaid decision we are of the considered opinion that company cannot be assessed for the income tax to find out the person who has applied as shareholder. The view of taken by the Tribunal is just and proper, therefore, the issue is answered in favour of the assessee and against the department.”

Further, in the case of CIT v. Orchid Industries (P.) Ltd. [2017] 88 taxmann.com 502/397 ITR 136, the Hon’ble Bombay High Court on the issue of non-appearance of share applicants had held as under:

Further, in the case of CIT v. S. Kamaljeet Singh [2005] 147 Taxman 18(All.) their lordships, on the issue of discharge of assessee's onus in relation to a cash credit appearing in his books of account, has observed and held as under: “4. The Tribunal has recorded a finding that the assessee has discharged the onus which was on him to explain the nature and source of cash credit in question. The assessee discharged the onus by placing (i) confirmation letters of the cash creditors; (ii) their affidavits; (iii) their full addresses and GIR numbers and permanent account numbers. It has found that the assessee's burden stood discharged and so, no addition to his total income on account of cash credit was called for. In view of this finding, we find that the Tribunal was right in reversing the order of the AA C, setting aside the assessment order.”

When a question as to the creditworthiness of a creditor is to be adjudicated and if the creditor is an Income Tax assessee, it is now well settled by the decision of the Calcutta High Court that the creditworthiness of the creditor cannot be disputed by the AO of the assessee but the AO of the creditor. In this regards our attention was drawn to the decision of the Hon'ble High Court, Calcutta in the CIT Vs Data ware Pvt Ltd (ITAT No. 263 of 2011) dated 21.09.2011 wherein the Court held as follows:

Our attention was also drawn to the decision of the Hon'ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgment delivered by the CTR at 216 CTR 295: “Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple reason that if the share application money is received by the assessee- company from alleged bogus shareholders, whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment.”

We note that according to section 68 of the Income Tax Act, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the assessing officer, the sum so credited may be charged to income tax as the income of the assessee of that assessment year. The assessing officer may consider such sum as cash credit due to lack of sufficient explanation. It is well known that provisions of section 68 have been introduced into the taxing enactments step by step in order to plug ITA. 118/SRT/2023/AY.2012-13 Shalu Dyeing PTG Mills Pvt. Ltd. loopholes. Even long prior to the introduction of section 68 of the Act, in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the assessing officer, is not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of the relevant assessment year. We note that with effect from assessment year 2013-14, section 68 of the Income Tax Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the assessing officer, the same shall be deemed to be the income of the company under section 68 of the Act. However, in the assessee`s case, the assessment year involved is the assessment year 2012-13, where the assessee need not to prove source of the source, hence amended provisions are not applicable to the assessee under consideration, as the said amendment has been held to be prospective and not retrospective by Hon`ble Bombay High Court in Gagandeep Infrastructure Private Limited TS-132-HC-2017 (Bom).

We note that in the case of ACIT v/s Tarujyot Investment Ltd, vide TA No. 457/1999 dated 09.08. 2010, held as follows: “9. Thus, from the facts emerging on record, it is apparent that during the period immediately after its incorporation the assessee- company had practically done no business so as to generate income of Rs 50 lakhs. The assessing officer on inquiry has found many of the alleged shareholders to be benamidars or having not invested the money, but at the same time, he has traced out the source of money to some specific persons, who were the real investors. The Supreme Court has in the case of CIT v/s Lovely Exports (P) Ltd (supra) held that, if the share application money is received by the assessee- company from alleged bogus share holders, whose names are given to the assessing officer then the Department is free to proceed to reopen the individual assessments in accordance with law. Such amounts cannot be regarded as undisclosed income u/s 68 of the assessee- company. Applying the said principles to the facts of the present case, the assessing officer having trace out the source of funds to specific persons who had invested the same in share of the assessee- company, it was open for the assessing officer to proceed ITA. 118/SRT/2023/AY.2012-13 Shalu Dyeing PTG Mills Pvt. Ltd. against the said persons. The funds not having emanated from the assessee - company, there was no warrant for making addition of the said amount as undisclosed income u/s 68 of the Act, in its hands. In the circumstances the Tribunal was justified in deleting the addition of Rs 50,00,000 made u/s 68 of the Act. The question stands answered accordingly, that is, in favour of the against the Revenue… ….”

The same legal ratio is also followed in following binding decisions of Hon'ble’ jurisdictional High Court of Gujarat: “(i) CIT v/s Pankaj Enka P Ltd Tax Appeal no.976/2016 dt 05.01.2016 (ii) CIT v/s Ujaia Dyeing and Printing Mills (P) (Tax Appeal No. 375 of 2008 (order dated 30.07.2008) reported in (2010) 328 ITR 0437 (iii) Hindustan Inks & Resigns Ltd v/s DCIT ( High Court of Gujarat) reported in Tax appeal no. 523 of 2004 dated .17. 06. 2011 (2011) 60 DTR 0018”

Thus, we note that all documents that is, the PAN details, bank account statements, audited financial statements, balance sheet, profit and loss account, Income Tax acknowledgments, and ROC statements etc. were placed on AO's record. One of the directors of share applicant companies appeared before the AO in response to summon u/s131 of the Act and explained the genuineness of share applicants. Therefore, considering this factual position and precedents relied on the subject, as noted above, we delete the addition made by the assessing officer U/s 68 of the Act to the tune of Rs.1,80,00,000/-.

In the result, ground No.1 raised by the assessee is allowed.

Since, we have deleted the main addition of Rs. 1,80,00,000/-, therefore addition made by the assessing officer of Rs.90,000/- on account of commission at the rate of 0.50 paise per hundred rupees, is consequential in nature hence it is hereby deleted.

In the result, ground No.2 raised by the assessee is allowed.

Ground No.3 relates to confirming the action of Assessing Officer, by ld CIT(A) in making addition of Rs.6,92,871/- u/s 36(1)(va) r.w.s.

In the result, ground No.3 raised by the assessee is dismissed.

In the combined result, appeal filed by the assessee is partly allowed in above terms.