ITO, WARD - 11(2), KOLKATA, KOLKATA vs. M/S. R.B. HORTICULTURE & ANIMAL PROJECTS CO. LTD., NORTH 24 PARGANAS

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ITA 632/KOL/2011Status: DisposedITAT Kolkata20 January 2016AY 2007-088 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal dismissed the appeal of the revenue. The Tribunal found that the assessee had provided complete details about the share applicants, establishing their identity, creditworthiness, and genuineness of transactions beyond doubt, thereby discharging its onus. The Tribunal noted that the AO had the opportunity to make further inquiries but did not. The Tribunal found the reliance placed by the CIT(A) on the Hon'ble Apex Court's decision in CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 (SC) to be well-founded. This decision held that the company receiving share application money only needs to prove the existence of shareholders, which the assessee had done, along with the source of funds. The Tribunal also referred to decisions of the Hon'ble Calcutta High Court in CIT vs. Roseberry Mercantile (P) Ltd. and the Hon'ble Delhi High Court in CIT vs. Value Capital Services P Ltd., which supported the view that the burden shifts to the department to prove that the investment emanated from the assessee's coffers if the applicants lack means. The Tribunal concluded that no addition could be made in the hands of the recipient assessee in such circumstances and found no infirmity in the CIT(A)'s order.

What were the facts?

The Revenue (Income Tax Officer, Ward 11(2), Kolkata) appealed against the order of the CIT(A),XII, Kolkata, for Assessment Year 2007-08. The appeal challenged the deletion of an addition of Rs. 60,00,000/- made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, 1961. The assessee, M/s. R.B Horticulture & Animal Projects Co. Ltd, a newly incorporated public limited company, had received Rs. 10,00,000/- as equity share capital, Rs. 25,00,000/- as redeemable preference share capital, and Rs. 25,00,000/- as advance preference share capital. The AO treated these amounts as unexplained cash credits, citing issues with the identity, creditworthiness, and genuineness of the transactions with the subscribers, many of whom were stated to be agriculturists from rural areas.

What were the issues?

1. Whether the addition made under Section 68 of the Income Tax Act, 1961, in the hands of the assessee company with regard to the receipt of equity share capital totaling Rs. 10,00,000/- is sustainable, considering the genuineness and creditworthiness of the transactions. 2. Whether the addition made under Section 68 of the Income Tax Act, 1961, in the hands of the assessee company with regard to the receipt of redeemable preference share capital totaling Rs. 25,00,000/- and advance preference share capital totaling Rs. 25,00,000/- is sustainable, considering the identity, genuineness, and creditworthiness of the subscribers. Assessee's Contentions (as per CIT(A)'s order and Tribunal's findings): The assessee argued that all details of share applicants were provided to the AO. The subscribers were agriculturists with agricultural income, residing in rural areas, and many lacked banking facilities or taxable income. Confirmations from subscribers were filed, and some even met the AO personally. The assessee contended that the creditworthiness of these agriculturists contributing small amounts should not be doubted. Legal formalities, including filing Forms 2 and 5 with the Registrar of Companies, were complied with. The assessee relied on the decision in CIT vs. Lovely Exports Pvt. Ltd. Revenue's Contentions: The Revenue argued that the CIT(A) erred in deleting the additions as the genuineness and creditworthiness of the transactions could not be proved by the assessee. The Revenue also questioned the feasibility of a newly formed company receiving such a large amount in cash from 1581 persons within a short period. The Revenue prayed for setting aside the issue to the AO for full verification.

Which sections of the Income-tax Act were involved?

Section 68,Section 143(3),Section 133(6)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C” BENCH, KOLKATA

Before: Shri M.Balaganesh, & Shri S.S.Viswanethra Ravi

This appeal of the revenue arises out of the order of the Learned CIT (A),XII, Kolkata in Appeal No. 816/XII(2)/09-10 dated 22-02-2011 for the assessment year 2007- 08 against the order of assessment passed by the ld.AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.

The only issue to be decided in this appeal is as to whether an addition could be made u/s 68 of the Act in the hands of the assessee company with regard to receipt of equity share capital , preference share capital and preference share application money totaling to Rs. 60,00,000/- during the year in the facts and circumstances of the case.

3.

The brief facts of this issue is that the assessee is a public limited company incorporated on 2.1.2007 and accordingly the Asst Year 2007-08 is the first year of assessee and is engaged in the business of poultry farming and other allied business. During the asst year under appeal, the assessee raised the following share capital :-

1 M/s. R.B Horticulture & Animal Proj. Co.Ltd a) 100000 Equity shares of Rs 10 each from totally seven persons - Rs.10,00,000 b) 25000 Redeemable Preference Shares of Rs 100 each from 837 persons received in cash - Rs. 25,00,000 In addition to the above, the assessee was also in receipt of Rs. 25,00,000/- being advance preference share capital received in cash from 744 persons. The assessee is an agro based company and most of the share applicants were residing in rural areas, were having only agricultural income and not provided with banking facility and do not have taxable income under the Act. The assessee stated that the list of shareholders representing Return of Allotment in Form No.2 was duly filed with the Registrar of Companies. Certain share applicants were also produced before the Learned AO together with their respective identity and address proof.

Equity Share Capital – Rs 10,00,000/-

The Learned AO observed that the shares were allotted to Sri Ranjit Kr. Baidya (Managing Director) , Sri Sujit Baidya (Director), Ms. Swapna Baidya, Kaushik Baidya, Dipayan Roy, Chandana Baidya and Alakesh Sardar totaling to Rs. 10,00,000/-. The Learned AO called for information u/s 133(6) of the Act to Ranjit Kr.Baidya, Swapna Baidya and Sujit Baidya and observed that the monies were received in cash for allotment of equity shares. The other subscribers of equity shares also introduced their capital in cash. The Learned AO added the same as unexplained cash credit u/s 68 of the Act.

Preference Share Capital – Rs 25,00,000/-

The Learned AO observed that the assessee had received sum of Rs. 25,00,000/- from 837 persons in cash to whom preference shares were allotted by the assessee. On obtaining the details of the names and addresses of the share applicants,

2 M/s. R.B Horticulture & Animal Proj. Co.Ltd the Learned AO sought to obtain information u/s 133(6) of the Act from Bishnupada Sarkar, Nirmal Patra, Lipika Pati and Nagendra Nath Pramanik. He found that the reply was received from Nagendra Nath Pramanik stating that he had subscribed to preference share capital to the tune of Rs. 10,000/- with the assessee company but did not produce any evidence regarding the source of fund. In respect of Bishnupada Sarkar, Nirmal Patra and Lipika Pati, the notices were returned unserved by the postal department. The assessee furnished copies of confirmation letters from share applicants namely Lipika Pati, Niranjan Sarkar, Bishnupada Sarkar, Manoranjan Mondal, Sukdev Das, Nirmal Patra and Bupal Joddar. The Learned AO observed that all these share applicants had paid monies in cash to the assessee company and their sources of funds were not proved to prove the genuineness of transactions. The Learned AO accordingly observed that the assessee had not proved the identity and creditworthiness of share applicants and had not established the genuineness of transactions and hence the monies received by the assessee company in the guise of subscription of preference share capital is to be treated as unexplained cash credit u/s 68 of the Act.

Advance Preference Share Capital – Rs 25,00,000/-

The Learned AO observed that the assessee had received sum of Rs. 25,00,000/- from 744 persons in cash as advance for preference share capital by the assessee. On obtaining the details of the names and addresses of the share applicants, the Learned AO sought to obtain information u/s 133(6) of the Act from certain persons. He found that the reply was received from Nikhil Das and Kadam Mondal among others but they did not produce any evidence about their creditworthiness but they had confirmed the payment of monies in cash to assessee towards advance for preference share capital. The Learned AO accordingly observed that the assessee had not proved the identity and creditworthiness of share applicants and had not 3 M/s. R.B Horticulture & Animal Proj. Co.Ltd established the genuineness of transactions and brought the advance towards preference share capital as unexplained cash credit u/s 68 of the Act.

4.

On first appeal, the assessee stated that all the details of share applicants have been produced before the Learned AO. The assessee stated that it is engaged in agro based industry and almost all the share subscribers are residing in rural areas and having agricultural income and are agriculturists who do not have taxable income. The assessee further stated in response to notices u/s 133(6) of the Act, share applicants who received the notices in time, replied to the Learned AO confirming the contributions made by them, towards equity or preference share capital or advance towards preference share capital. In some cases, the letters were returned unserved only by the postal department and even in such cases, the confirmations were filed by the assessee before the Learned AO. The share applicants also confirmed that the sources of funds are from their agricultural activities. In some cases, the parties were living in remote villages in Sunderbans area and hence the postal department had returned the notices unserved. Certain parties like Sri Nirmal Patra, Sukdev Das, Bhupal Joddar, Manoranjan Monda, Bishnupada Sarkar and Niranjan Sarkar came personally to meet the Learned AO and submitted their reply. However, the Learned AO chose not to take any deposition from them. The assessee stated that the creditworthiness of the subscribers cannot be doubted because all of them are agriculturists and they have all contributed small amounts in cash towards share subscription. The assessee company had issued share certificates to all of them wherever shares are allotted in the asst year under appeal and for the advance against preference shares, they have been allotted shares in the next asst year. The assessee has complied with the legal formalities by filing Form 2 and Form 5 to Registrar of Companies which were also produced before the Learned AO. The copies of voter ID cards and share certificates were also enclosed before the Learned AO to establish the existence of share applicants. The cash flow statements of share applicants were also produced before the Learned AO. The Learned CIT(A) found that the Learned AO

4 M/s. R.B Horticulture & Animal Proj. Co.Ltd has added the entire share capital and advance preference share capital by issuing letters to only few of the share subscribers out of the large number of them. The Learned CIT(A) duly appreciated the contentions of the assessee and also relied on the decision of Hon’ble Apex Court in the case of CIT vs Lovely Exports Pvt Ltd reported in 216 CTR 195 (SC) and accordingly deleted the additions u/s 68 of the Act. Aggrieved, the revenue is in appeal before us on the following grounds:- “

1. On the facts and in the circumstances of the case ld. CIT(A) has erred in deleting the addition of Rs.10/- lakh on account of share capital though genuineness and creditworthiness of transactions could not be proved by the assessee. 2. ld. CIT(A) erred in deleting additions of Rs. 25 lakh towards redeemable preference share and Rs. 25 lakh advance against preference share without appreciating the merits of the case as well as not examining the identity, genuineness and creditworthiness.

3. Ld. CIT(A) erred in appreciating the feasibility of receiving such huge amount of share capital by a newly formed company from 1581 persons by cash within a very short period. “

5.

The Learned DR prayed for set aside of this issue to the file of the Learned AO to enable the Learned AO to verify the share subscribers in full.

6.

We have heard the Learned DR and when the case was called on for hearing , none was present on behalf of the assessee. However, we find from the file that the assessee had filed a detailed paper book and written submissions. Hence the case is disposed off based on the arguments of the Learned DR and written submissions and paper book already available on record. The facts stated in the Learned CIT(A) were not controverted by the Learned DR before us. We find that the assessee had given the complete details about the share applicants clearly establishing their identity , creditworthiness and genuineness of transaction proved beyond doubt and had duly discharged its onus in full. Nothing prevented the Learned AO to make enquiries from the assessing officers of the concerned share applicants for which every details

5 M/s. R.B Horticulture & Animal Proj. Co.Ltd were very much made available to him by the assessee. We find that the reliance placed by the Learned CITA on the decision of the Hon’ble Apex Court in the case of CIT vs Lovely Exports (P) Ltd reported in (2008) 216 CTR 195 (SC) is very well founded, wherein, it has been very clearly held that the only obligation of the company receiving the share application money is to prove the existence of the shareholders and for which the assessee had discharged the onus of proving their existence and also the source of share application money received.

6.1. We also find that the impugned issue is also covered by the decision of Hon’ble Calcutta High Court in the case of CIT vs Roseberry Mercantile (P) Ltd in GA No. 3296 of 2010 ITAT No. 241 of 2010 dated 10.1.2011, wherein the questions raised before their lordships and decision rendered thereon is as under:-

“On the facts and in the circumstances of the case, Ld. CIT(A) ought to have upheld the assessment order as the transaction entered into by the assessee was a scheme for laundering black money into white money or accounted money and the Ld. CIT(A) ought to have held that the assessee had not established the genuineness of the transaction.” Held After hearing the learned counsel for the appellant and after going through the decision of the Supreme Court in the cases of CIT vs M/s Lovely Exports Pvt Ltd, we are at one with the tribunal below that the point involved in this appeal is covered by the said Supreme Court decision in favour of the assessee and thus, no substantial question of law is involved in this appeal. The appeal is devoid of any substance and is dismissed.

6.2. We find that the issue is also covered by the decision of Hon’ble Delhi High Court in the case of CIT vs Value Capital Services P Ltd reported in (2008) 307 ITR 334 (Del) , wherein it was held that :

“In respect of amounts shown as received by the assessee towards share application money from 33 persons, the Assessing Officer required the assessee to produce all these persons. While accepting the explanation and 6 M/s. R.B Horticulture & Animal Proj. Co.Ltd the statements given by three persons the Assessing Officer found that the response from the others was either not available or was inadequate and added an amount of Rs. 46 lakhs pertaining to 30 persons to the income of the assessee. The Commissioner (Appeals) upheld the decision of the Assessing Officer. On appeal, the Tribunal set aside the order of the Commissioner (Appeals) and deleted the additions. On further appeal :

Held, dismissing the appeal, that the additional burden was on the department to show that even if the share applicants did not have the means to make the investment, the investment made by them actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. No substantial question of law arose. “

6.3. We find that the argument of the Learned DR to set aside this issue to the file of the Learned AO for verification of share subscribers would not serve any purpose as the ratio decided in the above cases is that in any case, no addition could be made in the hands of the recipient assessee. In view of the aforesaid findings and respectfully following the decision of the apex court (supra), Jurisdictional High Court (supra) and Delhi High Court (supra) , we find no infirmity in the order of the Learned CIT(A) and accordingly, the grounds raised by the revenue are dismissed.

7.

In the result, the appeal of the revenue is dismissed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 20 -01-2016

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