MAHOTSAV CREATION PVT. LTD.,SURAT vs. PR. COMMISSION OF INCOME TAX, -1,, SURAT

आदेश / O R D E R PER DR. A. L. SAINI, AM: By way of these two appeals the assessee has challenged the correctness of the separate orders, all dated 31.03.2021 pertaining to Assessment Years (AY) 2010-11 and 2011-12, passed by the Learned Principal Commissioner of Income Tax-1, Surat [in short “ld. PCIT”] under section 263 of the Income Tax Act 1961 (hereinafter referred to as “the Act”).

2. Since the common and identical issues are involved in both the assessees` appeals, therefore these two appeals have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The facts as well as grounds of appeal narrated in 2010-11 have been taken into consideration for deciding these two appeals en masse.

3. Grounds of appeal raised by the assessee in “lead” case in are as follows:

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. “1. The Learned Pr. Commissioner of Income Tax grossly erred in setting aside the order of AO holding that the order passed by the AO is erroneous and prejudicial to the interests of law.

2. On the facts and under the circumstances of the case, the Ld. Pr. Commissioner of Income Tax, erred in initiating the proceedings under section 263 without appreciating that case of the appellant was selected for assessment u/s 148 of the Act. Hence revision u/s 263 and directing the AO to make fresh assessment is bad in law.

3. The Ld. Pr. Commissioner of Income Tax grossly erred in law by issuing notice at the fag-end of the extension period. Revising Order without providing adequate opportunity is not only unjustified but also against the principle of natural justice and bad in law.

4. The Ld. Pr. Commissioner of Income Tax grossly erred in law and on facts of the case in confirming order u/s 263 by invoking provisions of Section 68 by ignoring the fact that the proviso to Section 68 was introduced by Finance Act, 2012 with prospective effect from April 01, 2012. Hence, revising order is bad in law.Therefore, it is prayed that the order of revision may kindly be quashed.

5. The appellant craves leave to add, amend, alter, delete, change or modify any or all grounds of appeal before or at the time of the hearing”.

4. The relevant material facts, as culled out from the material on record, are as follows. Assessee before us, is a Private Limited Company and filed its return of income for assessment year 2010-11 on 29.09.2010 declaring total income to the tune of Rs. (-)1,51,162/-. A survey action u/s 133A of the Income Tax Act, 1961 was carried out on 09.09.2016 at the business premises and various documents and papers were impounded. Further, assessee`s case was re-opened by issue of notice u/s 148 of the Income Tax Act 1961 for assessment year 2010-11, after recording the reason and obtaining prior approval of competent authority u/s 151(1) of the Act. Subsequently, the assessment was completed u/s 143(3) r.w.s. 147 of the Income Tax Act for assessment year 2010-11, on 21.12.2017.

5. Later, Learned Principal Commissioner of Income Tax [in short “ld. PCIT”] has exercised his jurisdiction under section 263 of the Income Tax Act. The ld PCIT, on perusal of scrutiny records, it was observed by him that no ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. inquiry/addition has been made in respect of bogus share capital of Rs. 8,00,00,000/- received from Kolkata-based shell /paper companies during F.Y. 2009-10, relevant to assessment year 2010-11. As per facts on record, during the assessment year 2010-11, the assessee-company allotted 4,00,000 shares of having face value of Rs.10 at premium of Rs.190 per share to shell/paper companies and received share capital of Rs.8,00,00,000/-. Details of which are as under:

Name of investor/Share Date of No. of Face Premium Total Amount Applicant companies allotment shares value per share (Rs.) (Rs.) (Rs.) Novoflex Vyapaar Pvt Ltd 29.06.2009 1,50,000 10 190 3,00,00,000 Kumkum Suppliers Pvt Ltd 31.03.2010 2,50,000 10 190 5,00,00,000 In view of the above facts, a show cause notice bearing No. Ref: ITBA/REV/F/REV1/2020-21/ 1031741614(1) dated 25.03.2021 was issued to the assessee.

6. In response to the above show notice of Ld. PCIT, the assessee submitted its reply which is reproduced below:

“3. The assessee responded on 29.03.2021 online via ITBA; before the appointed date and time. The response is detailed and long as under: "...Sub: Objection to Show cause notice u/s 263 of the Income Tax Act, 1961 - A. Y. 2010-11 dated 25/03/2021 -Request for dropping the proceeding. Ref: ITBA/REV/F/REV1/2020-21/ 1031741614(1) In view of above show cause notice, details/explanations are given hereunder for your honour reference: First and foremost, the Assessee repeats and reiterates that whatever has been stated by your honour in the show cause is far from the truth and therefore the Assessee denies each and every contention, averment and allegation made in the show cause. The show cause served by your honour is vague and bad in law. Nothing contained in the reply to the above show cause should be deemed to have been admitted by the Assessee for want of specific denial.

2. Furthermore, it is pertinent to note that the Ld. PCIT had only allowed 4 days to file reply, out of which, 2 days are weekend and date of filing reply is on Public Holiday (Holi and Dhuleti). Hence, effectively only 1 day was given to file the reply to the impugned show-cause notice.

3. The investor company i.e. Kumkum Suppliers Pvt. Ltd. had available the fund since the AY 2006-07 and the assessment for the same AY has been also completed u/s 143(2) by the Jurisdictional AO, ITO 1(4), Kolkata, Order date: 28/11/2008. The copy of said assessment order along with the Audited Financial Statement for the FY 2005-06 are furnished as per ANNEXURE -

1. 1.

4. It is pertinent to note that that the status of the investor company till dated is active company and the same can be verified from the Master Data of the MCA The screen shot of the Company Master Data of the Investor Company is furnished as under: 5. As apparent from the extract above extract of the MCA, the directors viz Shri Dilip Chopra and Smt. Parmeshwari Chopra appointed as director on 24/12/2009 and it is submitted that all the investments (as stated above) are made after such appointment 6. Further recently the assessment of the investor company has been completed u/s 143(3) for the AY 2.017-18 by the ITO Ward - 1(1)(3), Surat by passing the order dated 10/12/2019. The copy of the said assessment order is attached as per ANNEXURE - 2.

7. It is also submitted that the investor company i.e. Kumkum Suppliers Pvt. Ltd. have made exclusive investment in the assessee company only. This fact is verifiable from the perusal of the financial statements for the FY 2011-12 to FY 2016-17 of the assessee company. The copy of the same are furnished as per ANNEXURE- 3.

8. Further, from the perusal of the financial statements, it is apparent fact that the investor company had made the total investment of Rs. 15.75 Crores in the assessee company and the history of such investment and status of the assessment is stated as under:... Copy of order passed by Hon'ble CIT(A)-3, Surat is attached herewith as per ANNEXURE - 4. As Hon'ble CIT(A)-3 had already favored the assessee ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. company on the very same issue, hence no adverse view in this regard may please be drawn. Moreover, during AY 2009-10, on the very similar issue, Hon'ble CIT(A)-3, Surat had already favored the assessee company on the very same issue, hence no adverse view in this regard may please be drawn. Copy of order is enclosed herewith as per ANNEXURE-5 9. Furthermore, first proviso to Section 68 of the Act was inserted by Finance Act, 2012 w.e.f. 01/04/2013. Please appreciate that, insertion of first proviso led to paradigm shift in the law, wherein onus of proof was placed on the company to prove the genuineness of money received by the shareholder.

11. Your Honour's attention is invited to the landmark ruling of Supreme Court in case of CIT Vs. Lovely Exports (P.) Ltd [2008] 216 CTR 195 (SC). where in the context to the pre-amended Section 68 of the Act has held that where the Revenue urges that the amount of share application money has been received from bogus shareholders then it is for the Income Tax Officer to proceed by reopening the assessment of such shareholders and assessing them to tax in accordance with law. It does not entitle the Revenue to add the same to the assessee’s income as unexplained cash credit. Relevant portion is reproduced below for your Honours reference: "If share application money is received by assessee-company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under sect/on 68 of assessee-company ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. "2. Can the amount of share money be regarded as undisclosed income under section 68 of IT Act, 1961? We find no merit in this Special Leave Petition for the simple reason 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. Hence, we find no infirmity with the impugned judgment."

12. Hence, considering above in the assessee's case, pre-amended Section 68 is applicable and law declared by the Hon'ble Supreme Court in case of CIT Vs. Lovely Exports (P.) Ltd (Supra) needs to be upheld- At this juncture assessee company places reliance on the following judicial pronouncements: CIT vs. Steller Investment Ltd. SUPREME COURT OF INDIA, [2001] 115 TAXMAN 99 (SC) 4. 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 an undisclosed income of the assessee. It may be that there are some bogus shareholders in whose name the 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. C.I.T Vs. KAMDHENU STEEL & ALLOYS LTD [Petition(s) for Special Leave to Appeal (Civil)....../2012 (CC 15640/2012), dated 17/09/2012 [2012] 19 taxmann.com 26 (Delhi)] Section 68 of the Income tax Act 1961 Cash credits Assessment year 200405 Whether once adequate evidence/material is given, which would prima facie discharge burden of assessee in proving identity of shareholders, genuineness of transaction and creditworthiness of shareholder, thereafter in case such evidence is to be discarded or it is proved that it is 'created' evidence, revenue is supposed to make thorough investigation before it could nail assessee and fasten assessee with a liability under sections 68 and 69 Held, yes Whether where assessee had given particulars of registration of investing/applicant companies confirmation from share applicants bank accounts details. Arceli Realty Limited (Formerly known as Ellora Electricals Ltd.) vs Income Tax Officer - 15(1)(1), Mumbai in dated 21.04.2017 "The satisfaction has to be derived from the relevant facts and that to on the basis of proper enquiry by the Assessing Officer and such enquiry must be reasonable and just. In the present case, the Assessing Officer has not brought any evidence on record that the amounts received from M/s Alka Diamond Industries Ltd. and M/s Yash-V-Jewels Ltd. are merely accommodation ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. entries. As mentioned earlier, the Ld. Assessing Officer has acted merely on the basis of information received from the Investigation wing. The ratio laid down by Hon'ble Delhi High Court in CIT vs Vrindaban Farms Pvt. Ltd. squarely gives shelter to the assessee, wherein, it was held that if the identity and other details of share applicant are available, the share application money cannot be treated as undisclosed income in the hands of the company. In the present case, the assessee even has proved the source of source. therefore, the creditworthiness was also proved, consequently, no addition made u/s 68 of the Act can be said to be justified. The ratio laid down in Creative World Telefilms Ltd. (supra) by Hon'ble jurisdictional High Court squarely comes to the rescue of the assessee. The assessee duly furnished the proof of identity like PAN, bank account details from the bank, other relevant material, genuineness of the transaction, payment through banking channel and even the source of source, therefore, the assessee has proved the conditions laid down u/s 68 of the Act. It is also noted that in spite of repeated request, the Ld. Assessing Officer did not provide opportunity to cross examine the concerned persons and even the relevant information and allegation, if any, made therein, which has been used against the assessee, was not provided to the assessee. At this stage, we add here that mere information is not enough rather it has to be substantiated with facts. The information may and may not be correct. For fastening the liability upon anybody, the Department has to provide the authenticity of the information to the person against whom such information is used. The principle of natural justice, demands that without confronting the assessee of such evidence, if any. or the information, no addition can be made. Even otherwise, as per Article-265 of the Constitution of India, only legitimate taxes have to be levied and collected. In our humble opinion, the assessee has duly discharged the onus caste upon it, therefore, respectfully following the decisions from Hon'ble Apex Court, Hon'ble High Courts and Hon'ble jurisdictional High Court, we reverse the order of the Ld. Commissioner of Income Tax (Appeal), resultantly, this ground of the assessee is allowed."

14. Accordingly, the Apex Court & various High Court cited supra had already decided the present issue in favour of the Assessee in toto that addition on account of raising share capital is not permissible in the case of the Company and the department is free to take necessary actions if required to the share applicants.

15. It is further submitted that, till date above shareholding remain as it is. Had above share capital and share premium were not genuine, assesses would have bought back it subsequently. 16- Prayer: - We hope above details shall fulfill your requirements. If your honour requires more details then Assessee may please be informed so as to make suitable submission to the best of your satisfaction. If your honour inclined to take any contrary view in this regard then Assessee may please be given a reasonable opportunity of being heard. Assessee also reserves right to make further submission if needed. We are requesting you to drop the revision proceedings u/s 263..."

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd.

7. However, ld. PCIT rejected the contention of the assessee and observed that assessing officer did not inquiry about share capital issue and intentionally ignored to examine the issue relating to share capital and share premium. Therefore, ld PCIT has directed the assessing officer as follows: (1) The Assessing Officer has to carry out any inquiry into the income tax records of the investors/shareholders keeping in view the facts and circumstances as elucidated in the case. (2) The Assessing Officer to verify the actual business of the shareholders viz. Moh Vogue Apparels Pvt. Ltd. (Former Novoflex Vyapaar Pvt. Ltd.) and Kumkum Suppliers Pvt. Ltd., the genuineness of the entities. (3) The Assessing Officer to investigate into the creditworthiness of the share applicants viz. Moh Vogue Apparels Pvt. Ltd. (Former Novoflex Vyapaar Pvt. Ltd.) and Kumkum Suppliers Pvt. Ltd., during the year under consideration and also into the income and earnings of the share applicants. (4) The Assessing Officer to inquire into the involvement of entry-operator, Shri Amit Kedia in the shareholder companies and also the role of proxies, Sh. Jwala Parasd Gupta and Sh. Sanjay Kumar Tibrewal in the investor companies of the assessee company as per relevant Reports of Investigation Wing. (5) This is a case of possible money-laundering by use of the web of Kolkata based entry operators. The basic and apparent premises are as per the Show Cause Notice in the case. However, the Assessing Officer is required to examine the fund flow of the shareholders for at least 5 layers and unearth cash deposits into Bank Accounts of the shareholders or their shareholders in the case for inquiry into money laundering, as per mandate of the Hon'ble Supreme Court of India in Rajmandir Estates (P.) Ltd. v. PCIT (supra). (6) The Assessing Officer to make an independent and detailed enquiry of the so-called investor companies from Kolkata to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions, as per the directions of the Hon'ble Apex Court in PCIT-1 v. NRA Iron & Steel (P.) Ltd. (supra);

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. (7) Further, the Assessing Officer is to make an inquiry into the commission expenses to arrange for accommodation entries (bogus share capital/share premium), if it is the case; (8) The A.O. is directed to inquire, call for, appreciate and if required; accept or, controvert nor disapprove the material filed by the assessee as the case may be.

11. On the other hand, Ld. CIT-DR for the Revenue submitted that assessee has shown nil income vide paper book Pg-81. The Ld. CIT-DR also pointed out that assessee was engaged in providing bogus entry and engaged in hawala transaction, therefore Ld. PCIT has exercised his jurisdictional power u/s 263 of the Act. The Ld. CIT-DR for the Revenue has also pointed out that Assessing Officer has not examined deliberately the issue of share application money to the tune of Rs.8 crores. Therefore, order of Ld. PCIT passed under section 263 may be upheld.

12. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld PCIT and other materials brought on record. First, we have to see whether the requisite jurisdiction necessary to assume revisional jurisdiction is there existing before the Pr. CIT to exercise his power. For that, we have to examine as to whether in the first place the order of the Assessing Officer found fault by the Principal CIT is erroneous as well as prejudicial to the interest of the Revenue. For that, let us take the guidance of judicial precedents laid down by the Hon’ble Apex Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC) wherein their Lordship have held that twin conditions needs to be satisfied before exercising revisional jurisdiction u/s 263 of the Act by the CIT. The twin conditions are that the order of the Assessing Officer must be erroneous and so far as prejudicial to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous order, that is (i) if the Assessing Officer’s order was passed on incorrect assumption of fact; or (ii) incorrect application of law; or (iii)Assessing Officer’s order is in violation of the principle of natural justice; or (iv) if the order is passed by the Assessing Officer without application of mind; (v) if the AO has not investigated the issue before him; then the order ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. passed by the Assessing Officer can be termed as erroneous order. Coming next to the second limb, which is required to be examined as to whether the actions of the AO can be termed as prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon’ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. “prejudicial to the interest of the revenue’’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Their Lordship held that it has to be remembered that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. When the Assessing Officer adopted one of the courses permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue “unless the view taken by the Assessing Officer is unsustainable in law”.

13. Taking note of the aforesaid dictum of law laid down by the Hon’ble Apex Court, let us examine whether order passed by the assessing officer under section 147 r.w.s. 143(3) of the Act, dated 21.12.2017 is erroneous and prejudicial to the interest of revenue. The learned Counsel invited our attention towards reasons recorded by the Assessing Officer which is placed at paper book Page no.162, and the same is reproduced below:

“Reasons for issuing notice u/s. 148 of the Income Tax Act, 1961 The assessee has filed return declaring income at Rs. Nil on 29.09.2010 which was processed u/s. 143(1). Subsequently, a survey u/s 133A of the IT Act, 1961 was carried out on 09.09.2016 at the business premises of the assessee and various documents/ papers/ GC cash book were impounded relating to P.Y. 2009-10 to 2016-17. During the survey statement of Shri Narendra M. Lunkar was recorded on oath, who is account head of the assessee company. In the statement he admitted that the impounded documents/ papers generated from the computer were written by him, which are relating to the business concern which is working here. He further admitted that cash transactions written on these documents/ papers are relating to unaccounted investment / payments of Shri Naresh Chopra director of the assessee- company. These transactions are not recorded in the personal books of accounts of the said director and the company. Various opportunities were provided to the ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. assessee company & its directors during the post survey proceedings as well as in the scrutiny assessment of the company (AY 2014-15) to verify the impounded material with the relevant regular books of accounts. But no compliance was made by the assessee. Hence, impounded materials are not reconciled from the regular books of accounts of the assessee.

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd.

Sr. No. Name of the party Amount 1 Aruna Kasat 870000 2 Mukesh Mali 483665 3 Aruna Tex 846105 4 Hypno Tex 538465 Total 2738235 Above advances/ loans are not accounted for in the regular books of accounts of the assessee. Hence, assessee has concealed income of Rs.27,38,235/-.

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. Accordingly the assessee has concealed income to the extent of Rs.1,74,25,000/- .

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. PCIT has selected the item (share capital and share premium) which is not subject matter of reassessment proceedings therefore, order passed by the assessing officer under section 147 r.w.s. 143(3) of the Act, dated 21.12.2017 is neither erroneous nor prejudicial to the interest of revenue. Therefore, jurisdiction exercised by the ld PCIT under section 263 of the Act to tax the share capital and share premium is not valid in the eye of law.

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd.

14. In view of the fact that the impugned order has applied the binding decisions of the apex court and this court, we see no reason to entertain the three questions of law as proposed by the Revenue.

15. Accordingly, the appeal dismissed with no order as to costs.”

ITA.49 &50/SRT/2021 (AY.10-11 & 11-12) Mahotsav Creation Pvt. Ltd. Based on these facts and circumstances, we quash the order dated 31.03.2021 passed by the ld PCIT under section 263 of the Act.

Registry is directed to place one copy of this order in all appeals folder / case file(s).

Order is pronounced in the open court on 22/08/2022 by placing the result on the Notice Board as per Rule 34(5) of the Income Tax (Appellate Tribunal) Rule 1963.