M/S. LGF VITRIFIED PVT. LTD.,MORBI vs. THE CIT-3, RAJKOT

The captioned appeal has been filed at the instance of the assessee against the order of the Learned Principle Commissioner of Income Tax(Appeals)- 3, Rajkot, (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s.263 of the Income Tax Act 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2016-17.

The only issue raised by the assessee is that the learned PCIT erred in holding the assessment order passed under section 143(3) of the Act as erroneous insofar prejudicial to the interests of the revenue.

The facts in brief are that the assessee, a private limited company, is engaged in the business of manufacturing of vitrified tiles. The assessee for the year under consideration declared loss of Rs. 3,85,08,902/- only. The case of the assessee was selected for complete scrutiny under section 143(2) of the Act and assessment order was passed under section 143(3) of the Act dated 4-12-2018 accepting the loss declared by the assessee.

The learned PCIT on examination of the case records found that the books of the assessee were credited on account of fresh share capital for Rs 10.40 crores and unsecured loan of Rs. 3,93,05,000/- from several parties. There were some parties who made investment in shares of the assessee as well as also extended unsecured loan to the assessee. The AO during the assessment proceeding raised questions regarding credit of share capital and unsecured loan to which the assessee submitted details such as ITRs, copy of bank statements, ledger copies etc only in respect to 20 shareholders and loan parties but no detail whatsoever was furnished with respect to the remaining shareholder and loan provider. Thus, the AO failed to make enquiry of identity, creditworthiness, and genuineness with respect to remaining shareholder and loan provider but accepted the same which is erroneous insofar prejudicial to the interest of the revenue.

Further, from the details provided by the assessee of other shareholders and loan parties, it was seen that in most of the cases the loan and investment have been made by those parties exceedingly more than 30 times of their income reported in ITRs. The AO without making further inquiry regarding the creditworthiness of those parties proceeded to the accept the same merely based on the details provided by the assessee. Merely the AO asked assessee to produce certain detail to which assessee submitted but the same will not be tantamount to the verification or enquiry. Likewise, from the financial statement provided in case of certain shareholder, it can be seen that those party received fund as unsecured loan and same was diverted to the assessee company as investment in share capital which is unusual that a person will take loan from third parties more than his income and investment the same in the other entities. But the AO did not bother to make any inquiry in this regard. As such, as per the amended provision of the section 68 of the Act the amount credited in closely held company in the form of share capital shall deemed to be unexplained unless the sources of fund in the hands of investor are not explained by the assessee. The AO despite having specific legal requirement has not made inquiry about the sources of fund in the hands of investor.

The learned PCIT further found that the assessee has trade payable on account of goods and capital goods. The AO required the assessee to furnish confirmation and supporting documents in the case of parties where the amount payable exceeds Rs. 5 lakh to which assessee made submission but details or confirmation were furnished in case of 10 capital goods parties to whom amount payable was exceeding Rs. 5 Lakh. But the AO did not make further inquiry or asked the assessee to furnish necessary details of those 10 parties.

The learned AR before us filed paper books running from pages 1 to 51 and 1 to 417 and contended that the assessment has been framed by the AO after making a reference to the documents filed by the assessee and due application of mind. Therefore, the assessment order cannot be said as erroneous insofar prejudicial to the interest of revenue.

On the other hand, the learned DR submitted that the assessment has been framed by the AO without necessary verification as pointed out by the learned PCIT in his order. The learned DR vehemently supported the order of the learned PCIT.

We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, primarily, it appears that the assessee has shown credit of share capital and unsecured loans from 39 parties. However, the assessee did not discharge the primary onus regarding the identity, creditworthiness, and genuineness in respect of all share subscribers and loan providers. Even, in the case of shares subscribers or loan providers whose details were provided, there were several glaring facts highlighted by the learned PCIT which was prima facie evidence that the required proper inquiry by the AO before reaching to conclusion was not concluded. The amended provision of section 68 of the Act which was applicable for the year under consideration provides that in case of credit of share capital, the explanation of the assessee shall be deemed not satisfactory unless sources of fund in the hand of the investor are explained. However, there is no such enquiry regarding the sources of fund in the hand of share subscriber has been made by the AO. The learned CIT(A) also highlighted that in response to the query reading trade payable the assessee made only part compliance, but the AO did not raise any further question.

In the result, the appeal of the assessee is hereby dismissed.