DCIT CC-45, MUMBAI vs. PARAMSHKTI DISTRIBUTORS P. LTD, MUMBAI

The appellant argued that law relating to the source of share application money/subscription to share capital received by a company is well-settled and in cases where share applicants are identifiable, as in the case of the appellant, it is for the share applicants to explain the source .

The appellant next argued that addition in respect of share capital could not be made in its case. It was submitted that addition in respect of share capital cannot be made u/s. 68 of the Act. The appellant submitted that once the identity of the subscribers was established, there can be no basis for treating the amount as unexplained cash credit u/s. 68 of the Act. It was submitted that the appellant had furnished the PAN Nos. and all other relevant details of the shareholders and established their identity. 15 In this respect the appellant relied upon Apex court's decision in case of CIT v Lovely Exports [216 CTR 195 (SC)] wherein it is held, that even 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 c:annot be regarded as undisclosed income of the appellant company.

By the impugned order the CIT(A) deleted the addition by considering assessee’s argument in the light of judicial pronouncement cited before him, after recording the following findings :- “ 17. I have considered the submissions of the appellant and the order of the AO. On considering the documentary evidences furnished during the course of assessment proceedings, written submissions made before me and arguments made in the course of assessment proceedings before me, I have noted the following facts of the case: 18. The appellant company had received share capital money from the shareholders. The name, PAN No., Balance sheet, bank account statements and confirmation letters signed by respective shareholders were submitted to the AO during the assessment proceedings.

Considering the facts of the case and the documentary evidences submitted by the appellant company, I am of the opinion that as per settled law, a credit entry is accepted as genuine, if the identity and creditworthiness of the creditor and the genuineness of the transaction is provided by the appellant. It is not disputed that the appellant had filed before the AO documents and details regarding the share subscribers in question so as to establish these ingredients of a genuine credit. The identity of the subscribers stood proved by the fact that their name, address. PAN No., Balance Sheet, Bank Statement and confirmation letters, share application and share allotment details were submitted by the appellant company.

All these factors go to prove the identity of the subscribers. The creditworthiness of these parties is provided by the fact that all the payments have been made through the banking channels through 5 account payee cheque and that the Bank statements were also submitted by the appellant company. As the monies towards purchase of shares have been drawn from bank, it is clear that the monies were available. The appellant company could not have been asked for information other than that required under the Companies Act, 1956. It was not the appellant company's responsibility to go and physically verify the address of the applicant and see that he had sufficient funds to invest so long as the formalities involved in applying for and allotment of shares were completed. Thus, in all these cases, the creditworthiness of the creditors was proved.

The appellant has brought on record considerable evidence to show that the transaction of issue of share capital was genuine. That being so no addition under the provisions of section 68 can be made in the hands of the appellant. In the case of CIT vs. Stellar Investments Ltd. 192 ITR 287 (Del) Hon'ble Delhi High Court held that provisions of section 68 cannot be applied to such sums received by a company and credited in the share capital account of the company. This judgment of Hon'ble Delhi High Court did not find favour with subsequent larger bench of Delhi High Court and in the case of CIT vs. Sophia Finance Ltd 205 ITR 98 (Del) (FB) full bench of Hon'ble Delhi High Court held that provisions of section 68 apply to the credits representing share application money /share capital subscription in the same manner as ordinary cash credits. In that judgment it was further held that if the shareholder exists then possibly no further enquiry need be made. But if the Income tax Officer finds that the shareholders do not exist, then it would mean that there is no valid issuance of share capital. To that extent Hon'ble Delhi High Court found earlier judgment of the court in the case of Steller Investment Ltd. (supra) to be incorrect. In that judgment Hon'ble full bench of Delhi High Court observed that the AO would be entitled to enquire, it' would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not. If the shareholder exists, then possibly no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist, in that case the ITO would have jurisdiction to treat such credits to be the income of the assessee by virtue of the provisions of section 68. Thereafter, the decision of Hon'ble Delhi High Court in the case of CIT vs. Stellar Investments Ltd. (supra) that was in part dissented from by the full bench of Hon'ble Delhi High Court in the case of Sophia Finance Ltd. (supra) came to be affirmed by Hon'ble 6 Supreme Court in the case of CIT vs. Stellar Investment ltd., 251 ITR 263(SC). In spite of affirmation of Stellar Investment Ltd’s judgment by Hon'ble Supreme Court; Hon'ble Calcutta High Court in a series of judgments reported in Hindustan Tea Trading Co. vs. CIT 263 ITR 289 (Cal); CIT vs. Ruby Traders & Exporters ltd. 263 ITR 300 (Cal); CIT vs. Nivedan Vanijya Niyojan Ltd. 263 ITR 623 (Cal) held that Hon’ble Supreme Court has not laid down any law and the provisions of section would squarely apply to share application money/share capital subscription and on the company's failure to satisfactorily explain the sum received, the same could be assessed as the company's income by virtue of the provisions of section 68 of the Act. The A. O. has relied upon these three judgments of Hon'ble Calcutta High Court and also the judgment of Calcutta High Court in the case of Bhola Shankar Cold Storage vs. JCIT 270 ITR 487 (Cal). In the case of Sophia Finance Ltd., Hon'ble Delhi High Court, in effect, held that the jurisdiction of the AO to apply section 68 should be restricted to find out whether or not the shareholder in fact exists. Now, Hon'ble Supreme Court have upheld this view and finally quelled the controversy whether section 68 applies or not in the case of CIT vs. Lovely Exports (P) Ltd. 216 CTR (SC) 195. In that judgment Hon'ble Supreme Court have addressed to the question, "Can the amount of share money be regarded as undisclosed income under section 68 of I T Act, 1961 and answered, "if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A. 0., then the department is free to proceed to reopen their individual assessment in accordance with law." With these observations, Hon'ble Supreme Court has dismissed Special Leave Petition of the Department. It, therefore, follows that in the case of share application money or share capital contribution the enquiry in the case of the issuing company has to be confined to whether or not the shareholders do exist. In a case where existence of shareholder is not in doubt, any further action would lie in the assessment of the shareholder and not in the assessment of company.

Recently, the Hon'ble High Court of Delhi in the case of CIT-IV vs. M/s Dwarkadhish Investment Pvt. Ltd. (2010-TIOL-617-HC- DEL-IT) has held as under: "The onus of proof was not static. Initially, the burden of proof was on the assessee. Yet, once, the assessee had proved the identity of the creditors or share applicants by either furnishing their PAN number or income tax assessment number and showed the genuineness of the transaction by showing the receipt of the money in his books either by account payee cheque or draft or by any other mode, then the onus of proof would shift. to the Revenue. Just, because the creditors or share applicants could not be found at the address given, it would not give the revenue the right to invoke section 68. Moreover, it was settled law that the assessee need not have to prove the source of the source.

In the case of the appellant herein, all shareholders whose contributions have been assessed by the AO as appellant's income under the provisions of section 68 are duly incorporated companies. In the case of an incorporated company, the existence of the party cannot be denied. Once incorporated, a company exists until liquidated in accordance with law. If it is the case of the AO that these are bogus shareholders then the department is free to proceed to reopen their assessments in accordance with law. But in the case of the appellant, once existence of shareholder is not in doubt, no further action lies and the amount of share capital cannot be assessed as appellant Company's income chargeable to tax. In view of this legal position declared by the highest court of the land, I hold that the additions of Rs.21,96,00,000/- made by the AO in this behalf are required to be deleted in all the impugned assessment years.” 6. Against the above order of CIT(A), the revenue is in further appeal before us. 7. We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that the AO has made addition in respect of share application money received during the year. The CIT(A) has found the share capital to be genuine after considering various documentary evidence filed before AO. The CIT(A) has also applied the proposition of law laid down by various Hon’ble High Courts and Hon’ble Supreme Court to the facts of instant case and concluded that the existence of shareholders was not in doubt and held that as per documentary evidence submitted by the assessee company, the credit entry is liable to be accepted as genuine, insofar as identity and creditworthiness of the creditor and genuineness of the transaction is provided by the assessee. A finding has also been recorded by the CIT(A) to the effect that the assessee has filed before the AO documents and details regarding share subscribers in question, so as to establish these ingredients of genuine credit. The identity of the subscribers stood proved 8 by the fact that their names, address PAN Number balance sheet, bank statement and confirmation letters, share application and share allotment details were submitted by the assessee company. All these facts go to prove the identity of the subscribers. The CIT(A) further recorded a finding to the effect that creditworthiness of these parties was also proved by the fact that all the payments have been made through the banking channels through account payee cheques and that bank statements were also submitted by the assessee company. It was also observed that since money is towards purchase of shares having drawn from bank, it is clear that moneys were available. The finding recorded by the CIT(A) is as per material on record and do not require any interference on our part. Accordingly, we do not find any infirmity in the order of CIT(A) deleting the addition made on account of share application money.

In the result, appeal of the revenue is dismissed. ITA No.8748/Mum/2010 (by the assessee) and AY 2005-06 : 9. These are the cross appeals filed by the assessee and revenue for the assessment years 2005-06 in the matter of order passed u/s.143(3) r.w.s147 of the I.T.Act.

Before the CIT(A), the assessee submitted as under :- “The statement of Director of M/s Chevron Metal Products Pvt. Ltd. Mrs. Mehrunnisa Hussaini, was not recorded in the case of the appellant company and the copy of the same were also not made available to them. Further, the AO had accepted the purchases from the said party and also accepted the trading results but only treated the credit balance in respect of the said party as unexplained cash credit u/s 68 of the Income Tax Act, 1961. The appellant stated that the section 68 cannot be invoked in this case because the amount does not deal with cash credit but with the sundry creditors from whom the goods have been purchased. In the books of accounts of the appellant there is no cash credit but a liability has been created on account of purchases made in the regular course of business.

It was further argued that the amount added has been paid to the party in the subsequent year. It was stated that if the goods purchased from Director of M/s Chevron Metal Products Pvt. Ltd. Mrs. Mehrunnisa Hussaini are paper transactions then the purchases made by her are also paper transaction and then in her case also similar addition should have been made by the department, whereas, the department has made addition of only 0.25% to the commission income of 0.25% shown by Mrs. Mehrunisa Husseini director of M/s. Chevend Technology F Ltd and Cheveron Metal Products (P) Ltd in the returned income. There is no addition made regarding the sundry creditors in her hand at all. In the case of the appellant also, following the same logic, the same should, be done by making addition of 0.50% as commission and no addition regarding the sundry creditors should be made.”

Against the above order of CIT(A), both assessee and revenue are in appeals before us.

We have considered rival contentions, carefully gone through the orders of the authorities below and found from the record that while completing the assessment, the assessing officer made the addition of Rs. 23,16,000/- u/ s 68 of the Act to the income of the assessee in respect of the purchases made from one M/s. Chevron Metal Products Private Limited for the reason 'that its director Mrs Mehrunissa Husseini had admitted that the transactions were merely accommodation entries. The assessing officer also referred to the orders passed in the case of SKS Ispat and Power Ltd. for A.Y. 2002-03 to 2007-08 wherein the additions had been made u/s.68 of the Act in respect of M/s Chevron Metal Products Private Limited on the ground that it was merely providing accommodating entries. The CIT(A) deleted the addition by observing that purchases were genuine, however, at the very same time, the CIT(A) directed the AO to estimate the gross profit at 6%. Thus, as against gross 12 profit of 2.59% declared by the assessee, the AO was directed to assess the GP rate at 6% meaning thereby net addition of 3.41% of the total turnover.

Ld. AR vehemently argued that quantitative tally of purchase and sale has not been doubted by the AO meaning thereby all the purchases have been accepted by the AO with its corresponding sales. Our attention was also invited to page No.2 of the assessment order wherein the AO has clearly stated that stock ledger reflecting purchases had been produced before him.

On the other hand, ld. DR relied on the order of AO and contended that the CIT(A) was not justified in deleting the addition made on account of purchases from Mrs. Mehrunissa Husseini’s company.

We have considered rival contentions, carefully gone through the orders of the authorities below and found that the contradictory statement was given by Mehrunissa with regard to the sales undertaken by her. However, nowhere she has stated the name of assessee company with regard to any bogus sales. It is a matter of record that nothing wrong was found by the AO in the books of account. All the purchases have been accepted by the AO and its corresponding sales. Once the sales have been accepted, there must be purchases. Under such circumstances, it is possible that bills have been taken from one party, whereas goods have been purchased from some other party. Keeping in view the totality of facts and circumstances of the case the total purchases cannot be disallowed. Accordingly, we direct the AO to restrict the addition to the 14 extent of 10% of the purchases so as to serve the end of justice. Accordingly, we uphold the addition of Rs.2,21,600/-.

In the result, appeal of the assessee is allowed, whereas appeal of the revenue is allowed in part in terms indicated hereinabove. Order pronounced in the open court on this 09/10/2015. Sd/- Sd/- (ऩर्न ससिंह) (आय.सी.शभमव) (PAWAN SINGH) (R.C.SHARMA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER भुिंफई Mumbai; ददनमिंक Dated 09/10/2015 प्र.कु.सभ/pkm, यन.स/ PS आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order forwarded to : अऩीरमथी / The Appellant 1. प्रत्मथी / The Respondent. 2.