ITO, NEW DELHI vs. M/S. SHANTAM FASHION FABRICS PVT. LTD., NEW DELHI

PER A.T. VARKEY, JUDICIAL MEMBER :

This appeal, at the instance of the Revenue, is filed against the order of CIT (Appeals)-XI, New Delhi dated 02.11.2011 for the assessment year 2007-

lakhs for share capital and Rs.16 lakhs as share premium) from the following

parties :-

(i) M/s. Tajinder Fabrications P. Ltd. Rs.5,00,000/- 301, Himalaya Place, 65, Vijay Block, Laxmi Nagar, Delhi.

(ii) M/s. Aurochem Estate Pvt. Ltd. Rs.5,00,000/- U-75, Main Vikash Marg, Shakarpur, Delhi.

(iii) M/s. Indian Hosiery Pvt. Ltd. Rs.5,00,000/- B-114, Shakarpur, Delhi.

(iv) M/s. Shaily Builders Pvt. Ltd. Rs.5,00,000/- U-75, Shakarpur, Delhi.

In support of the evidence for credit of these Rs.20 lakhs in its books, the assessee had filed the copies of income tax returns of these companies for AY

2007-08 along with their balance sheet etc. & bank statements. The AO made

detailed inquiries from the bank and from the assessee by issuing summons to the directors of the aforesaid companies. The AO observed that for proving a credit in books u/s 68, the three main ingredients to be proved are identity,

creditworthiness and genuineness of the transaction. And he noted that the deposit of cash in the bank accounts of these four companies either on the same date or immediately prior to the date on which the amount of cheque

was debited to its account which, according to him, clearly called for serious

examination as to the creditworthiness and genuineness of transaction. For this purpose, the AO issued summons along with a letter dated 03.11.2009 to the directors thereof for personal deposition on 13.11.2009 but none attended

and this fact was brought to the notice of the assessee company vide letter

dated 16.11.2009. The AO further took note that the chartered accountant

who is auditing the balance sheet of all these four companies was the same

and was also having his office in the same premises where those companies

were having their registered offices. So the AO came to an irresistible

conclusion that these companies were merely name tenders. He also mentions about one M/s Shaily Builders Pvt Ltd which was an assessee in his

ward (PAN AAECS1133M) and its assessment of AY 07-08 was completed

u/s 143(3) of the Act on 24.12.2009 and notes that the generation of funds in that case was also through receipt of share application money in cash which had been treated as its income. In view of the above discussion, the AO held

that the assessee had miserably failed to prove the credit worthiness of these

four companies as also the genuineness of the transaction and hence the receipt of Rs.20 lakhs was treated as credit not satisfactorily proved and accordingly, held that the amount of Rs.20 lakhs was deemed as income of the assessee u/s 68 of the Act.

authority and the ld. CIT (A) deleted the addition by observing as under:- “ I have considered the facts of the case, the submissions mode by the appellant and also perused the evidences filed by the appellant. The issue in this case is the share capital of Rs.20,00,000/- received by the appellant company during the year. Admittedly this share capital has been received from M/s Tajinder Fabrications P. Ltd, M/s Aurochem Estate Pvt Ltd, M/s Indian Hosiery Pvt Ltd and M/s Shaily Builders Pvt Ltd. The appellant in this regard has filed confirmation, bank account, other details to prove the existence of the companies. Based on these documents and evidences it is established that M/s Tajinder Fabrications P. Ltd, M/s Aurochem Estate Pvt Ltd, M/s Indian Hosiery Pvt Ltd and Ms Shaily Builders Pvt Ltd are in existence. On going through the assessment order, I notice that the AO is relying on the three parameters of Section 68 i.e identity, creditworthiness and genuineness of the transaction. The Issue of share capital has been settled in various judicial pronouncements. In my opinion the latest judgement of the Hon'ble Delhi High 31st January, 2011 has dealt with the issue at length and after examining the various judgments has settled certain parameters to decide an issue like this. After analyzing the provisions of the Companies Act, Section 68 of the IT Act and the judgements delivered in the cases of CIT vs Divine Leasing & Finance Ltd. 299 ITR 268 (Del), CIT vs. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB), CIT vs. Dolphin Canpack Ltd. 283 ITR 190, CIT vs. Lovely Exports Pvt Ltd. 216 CTR 195 it was held that the initial burden is upon the assessee to explain the nature and source of share application money received by the assessee. The Court further observed in case the investor/shareholder is an individual some documents will have to be filed or the said shareholder will have to be produced before the AO to prove his identity. If the creditor/subscriber is a company then the details in the form of resolution or PAN Identity, etc. can be furnished.

As regards the genuineness of the transaction to be demonstrated, the Court held that by showing that the assessee had in fact received money from the said shareholder and the money came from the corpus of that very shareholder the genuineness was duly established. The Division Bench also held that when the money is received by cheque and is transacted through banking or other undisputable channel, the genuineness of the transaction would be proved. Other documents showing the genuineness of the transaction could be copies of the shareholder's register, share application form, share transfer register, etc. As far as creditworthiness or the financial strength of the creditor or subscriber is concerned that con be proved by producing bank statement of the creditor/subscriber showing that it had sufficient balance in its account to enable it to subscribe to the share capital. Once these documents are produced the assessee would have satisfactorily discharged the onus placed upon him. Now applying the above judgment to the facts of this case, it is an admitted fact that M/s Tajinder Fabrications P. Ltd, M/s Aurochem Estate Pvt Ltd, M/s Indian Hosiery Pvt Ltd and M/s Shaily Builders Pvt Ltd exist. The appellant has filed sufficient documents e.g copy of PAN Card, bonk statement, etc. to establish its identity. The copy of the bank statement of the share subscriber wherein the transaction is reflected as well as its balance sheet showing investment in the appellant company on its assets' side establish the creditworthiness of the party while the genuineness of the transaction is borne out by the fact that the transaction was through banking channels. In this regard, reference is made to the decision of the Hon'ble Apex Court delivered in the case of CIT Vs Lovely Exports 216 CTR 195. In this case it was held 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, but it cannot be regarded as undisclosed income of the assessee.

Reference is also made to the decision of the Hon'ble Investment P Ltd in ITA No. 911/2010 vide order dated 02.08.2010. The relevant paras of this judgement of Hon'ble Delhi High Court i.e para No.6, 7 & 8 are reproduced herein below:-

"In our opinion, as section 68 of the Act, 1961 has been interpreted as recently as 2008 by a Division Bench of this Court in Divine Leasing and Finance Ltd. (Supra) after considering all the relevant judgements we do not have to reconsider all the judgements referred to by Mr. Sohni which are prior in date and time to the aforesaid judgement. In fact, a Special Leave Petition filed against the said Division Bench judgement was dismissed by the Supreme Court by way of speaking order in CIT vs Lovely Exports (P) Ltd 216 CTR 195 (SC). The Supreme Court in Lovely Exports (P) Ltd. (Supra) has held as under:-

“Can the amount of share money be regarded as undisclosed income u/s 68 of the IT Act 1961. We find no merit in this Special Leave Petition for the simple reason that if 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 judgement."

Consequently, the doctrine of merger would apply and the judgement of the Supreme Court in Lovely Exports (P) Ltd (Supra) would cover the field with regard to interpretation of section 68 of the Act.

In any manner, the onus of proof is not a static one. Though in Section 68 proceedings, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors/share/applicants by either furnishing their PAN number or income tax assessment number and shows the genuineness of transaction by showing money/ his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the revenue."

The appellant has by providing the details in respect of shareholders like PAN Nos., copies of audited balance sheet & P&L account, Copies of asstt orders, names and addresses of all four companies, bank statements, clearly established the identity of the shareholders, their credit worthiness and genuineness of the transactions.

The addition of Rs.20 lacs made by the AO u/s 68 is therefore deleted.”

his decision for treating the receipt of Rs.20 lakhs as deemed income of the assessee u/s 68 of the Act and underscored the fact that the creditworthiness of the creditors and genuineness of the transaction has not been proved.

Therefore, he pleaded that the order of the CIT (A) be set aside and that of the AO be restored.

proceedings, the assessee submitted the following documents before the AO :-

(i) PAN of all four investing companies;

(ii) Name and address of all four companies;

(iii) Copy of Income Tax Return for AY 2007-08 of all the four companies;

(iv) Audited Balance Sheet & Profit & Loss account with all annexures.

The ld. AR further submitted that the AO raised the question of genuineness

of the transaction and creditworthiness of the investing companies and in this regard, the assessee had submitted the following documents to prove the genuineness of the transaction and creditworthiness of the creditors :- (i) Copy of application for shares of all four companies, which included all relevant details of investing companies, including their PAN with details of the ITO concerned. This application also contained details of payment viz. cheque number, name of bank and its branch address too; (ii) Bank statement of the assessee company, which confirms that amount of share application money has been received vide account payee cheques in the bank account of the assessee company; (iii) Copy of Form 2 filed with