KUNJ ALLOYS PVT. LTD.,BHUBANESWAR vs. A.C.I.T., CIR-2, BHUBANESWAR, BHUBANESWAR

257/CTK/2007, are cross appeals, which are directed against the order of ld. Commissioner of Income Tax (Appeals)-II, Bhubaneswar dated 28.05.2007.

I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 3 of 10 the said order of the ld. CIT(Appeals), the Tribunal vide its order dated 20.01.2011 passed in has already deleted the said addition. A copy of the said order is placed on record before us and a perusal of the same shows that the impugned amount added by the Assessing Officer in the assessment completed under section 153A has already been deleted by the Tribunal for the following reasons given in paragraphs no. 8, 8.1 & 8.2 :- “8. After hearing the rival submissions and on careful perusal of the materials available on record, as regarding ground no. 1, it is observed from the copies of the audited accounts and the analytical statement of revenue composition for financial years 2001-02 to 2005-06, it was found by the ld. CIT(A) that MBIPL was regularly engaged in granting of loans and derived substantial interest thereon. From the audited accounts it appeared that MBIPL’s major sources of revenue were (i) interest on loans and (ii) share of profit received from partnership firm. During the accounting periods 2001-02 to 2005-06 the income by way of interest on loans was always more than 50% of the gross revenue credited in the profit & loss accounts. The percentage of interest income vis-a-vis total receipts credited in the profit and loss account was 66% in FY 2005- 06. These facts conclusively proved that interest received represented dominant source of revenue for MBIPL. It also appeared that loans and advances on which interest was earned was the dominant income yielding asset as per the balance sheets of the MBIPL during the FYs 2001-02 to 2005-06. In the assessment orders of MBIPL interest received on loan was assessed as business income which established that in the income tax assessment proceedings MBIPL was considered to be engaged in the business of granting loans.

8.1. Sec. 2(22)(iii) provides that dividend does not include any advance or loan made to a shareholder by a company in the ordinary course of its business where lending of money is a substantial part of the business of the company. The analysis of profit & loss account of MBIPL for the period 2001-02 to 2005-06 showed that granting of loan formed substantial part of its business as more than 50% of the revenue credited in the profit & loss account was derived by way of interest charged on the loan granted. The analysis of the balance sheets for the corresponding period also showed that more than 50% of the gross assets appearing in I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 4 of 10 balance sheet were interest bearing loans. These lead the ld. CIT(A) to conclude that granting of loans formed substantial part of MBIPL’s business. As per sec. 2(22)(iii) the loan granted by MBIPL did not fall within the definition of dividend as substantial part of its business was granting of loans.

8.2. Keeping in view of the above facts and the decision of the Tribunal in the case of R.D. Fan Ltd., wherein this Tribunal has come to the conclusion that when once the business of the lender company covered by exception (ii) to section 2(22)(e) of the Income Tax Act, then the provisions of section 2(22)(e) will not be applicable. Since in this case, it is clearly established that MBIPL was considered to be engaged in the business of granting of loan, the analysis of the P&L A/c of the MBIPL for the period 2000-01 to 2005-06 showed that granting of loan formed substantial part of its business which is more than 50% of the revenue. We are of the considered view that as per section 2(22)(iii), the loans granted by MBIPL did not fall within the definition of dividend and therefore, we find no infirmity in the orders of the ld. CIT(A) to be interfered with. Hence, we confirm the same”.

I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 5 of 10

not a case where the share application money has been paid In cash. The AO had issued notice u/s.133(6) of the Act to all the 12 share applicants and was satisfied with the compliance in 4 such cases. In the 8 cases where there was no compliance, it came to light that the addresses had changed' and the Appellant company had furnished the changed address as appearing In their members register after having taken note of the fact the changed address was Intimated to them by the share applicants. Having perused the confirmations and having taken note of the changed addresses, the AO preferred not to make any further enquiries or any direct verification from the said share applicants. However, he took note of the peculiarities in regard to the transactions relating to these 8 parties and his objections were basically regarding the changed addresses, the availability of the acknowledgement slips on the copies of the share application forms, the difference in the signatures of the authorized signatories and the fact that in the case of 3 companies, the share applications were of September 2004, which had been accounted for by the appellant company in March .2004. In regard to these objections, I find that the changed addresses were already notified to the AO are clearly verifiable from the members register of the Appellant company. The availability of the copies of the acknowledgement slips along with the copy of the share application form was duly explained to the AO and the Appellant's case is that these were the photo copies of the original application forms on receipt and in fact the acknowledgements have been sent along with the money receipt on encashment of the cheques. As regards the difference in the signatures of authorized signatory in some of the case, I am convinced that this Is a regular feature and the authorized signatory may change over a period of time and may be different from the one who signed the share application. There may be different authorized signatories for different purposes. As regards the AO's objection that the applications as well as share application money from M/s. Singdha Trexim Pvt. Ltd, M/s. Umang Credit Capital Ltd. and M/s. Taral Vincom Pvt. Ltd was received in September 2004 where as the Appellant has accounted for It on 31.03.2004, I am of the view that not much can be made out of this objection in view of the fact that there was no flow of funds and It was merely a book entry as per the Accounting practice considered convenient by the Appellant. There is nothing wrong when the money along with share application has come In September 2004. Because there was no flow of funds, the said amount aggregating in all to Rs.30 lakhs in any case does not represent a credit of a sum in the, real sense of the term in the Books of the Appellant. In reality, there was no credit in accounts of any sum of motley. The entire receipts were shown 'as "towards share application money" and the cheques in this regard were shown as cheques in hand on the asset side, which were realized and collected only in September 2004. Thus, on all the 4 counts it is noticed that the observation of the AO were on a weak wicket. Thus, even where the share

I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 7 of 10 applications were received on 31.03.2004, the amount represented by the share application money was credited in the Bank of the Appellant company in September 2004, a fact which is verifiable from records. This clearly means that the Appellant was privy to those funds only in A.Y. 2005-06 and not in A.Y.2004-05. Under, the circumstances, In my view the addition made u/s.68 of the Act Is not at all justified.

5.3.1. In the case of CIT Vs. Stellar Investment Ltd 192 ITR 387 (Del), it has been held that:

"It is evident that even if it be assumed that the subscribers to the increased share capital were not genuine, nevertheless, under no circumstances, can the amount of share capital be regarded as undisclosed income of the assessee. It may be that there are some bogus. shareholders in whose names shares had been issued and the money may have been provided by some other persons. If the assessment of the persons who are alleged to have really advanced the money is sought to be reopened, that would have made some sense but we fail to understand as to how this amount of increased share Capital can be assessed in the hands of the company itself.

The above decision has been affirmed by the Hon'ble Supreme Court and the SLP filed in this connection stands rejected. In the case of CIT Vs. Makhani and Tyagi (P) Ltd 267 ITR 433 (Del), it was held as under:-

"This Court is of opinion that when documentary evidence was placed on record to prove the identity of all the shareholders including their PAN/GIR numbers and filing of other documentary evidence In the form of ration card etc., which had neither been controverter nor disproved by the Assessing Officer, then no Interference Is called for. It may be noted that as pointed out by a full bench of this Court in CIT- Vs. Sophia Finance Ltd 205 if still in the opinion of the Assessing Officer it was necessary to enquire further then, it was for him to issue coercive process to see that the shareholders are before him and they are questioned about the investment. In the case of CIT Vs. Precision Finance (P) Ltd. 208 ITR 465, the High Court of Calcutta was required to examine the question from a different angle as in that case the enquiry of the Income Tax Officer revealed that either the assessee was not traceable or there was no such file and accordingly the first ingredient as to the identity of the creditors had not been established. In the instant

I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 8 of 10 case, when necessary materials have been produced before the assessing officer to establish the identity of the persons with their PAN/GIR numbers and other details, it was for the assessing officer to enquire further if he felt that it was necessary. Instead of doing so, after issuance of summons when these materials were produced before him, he thought that he is helpless and he passed the burden on the assessee to bring the shareholder before him”.'

In case of CIT Vs Antartica Investment (P) Ltd 262 ITR 493 (Del), the facts were that the assessee had received Rs.1.345 crores as advance against share application money from 2 Private Limited Companies on 31.03.1992. The assessee had produced the confirmation letters, the copies of Accounts In their Books, the copies of memorandum and Articles of Association of both the companies, copies of Bank Account of the Companies from where the cheques were Issued and also the certified copy of the Accounts and the Auditors Report. The AO being not satisfied was of the view that the assessee has failed to prove the genuineness of the share subscription recorded In the Books and he added it u/s.68 of the Act. This was deleted in by the CITCA) and the findings of the CIT(A) were upheld by the Hon'ble ITAT. On further Appeal, the Hon'ble High Court upheld the deletion and observed that It was not the case of the AO that any amount found credited In the Account of the 2 companies had direct or Indirect nexus with the assessee company. It is further noticed that in CIT Vs. Orissa Corporation Ltd 159 ITR 78 (SC), it has been held that;

"Where the assessee produced confirmation letters and discharges hundis (in this case the copies of cheques) giving the particulars of the creditors who themselves were income tax assessee and whose income tax index numbers (in this case PAN) were available with the revenue, finding of Tribunal that the assessee discharges its initial onus is a finding of fact warranting no interference. ".

5.3.2. Even in the subsequent communication of the AO, dtd. 04.04.2007, there is no material to show the non genuineness of any of the specific company or the transaction in regard to the said company with the Appellant. The AO has himself accepted the share application money receipt as genuine from 4 parties, where the 133(6) notice could be served. For the other a cases, where he made the addition, there is a valid explanation about change of address, which is verifiable from register of members and which was informed to AO. The AO has not disputed this position. Thus, when the correct address was known, in view of the above discussion, there was no reason for the AO to suspect these 8 parties as non genuine. There can be no addition on surmises and presumptions. In so far as taxability of the I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 9 of 10 amount is concerned, the position is clear from the findings in the cases referred above. Under the circumstances, in view of the decisions referred above, and also in view of the factual position brought out In this order, I am convinced that there is no case for making the addition u/s.68 of the Act by the AO in the hands of the Appellant. Thus Ground No.3 is decided In favour of the Appellant”.

I.T.A. No. 239/CTK./2007 Assessment year: 2004-2005 & Assessment year: 2004-2005 Page 10 of 10 under section 68 and upholding the same on this issue, we dismiss the appeal of the Revenue.