ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), RAIPUR (CG) vs. M/S VANDANA VIDYUT LIMITED,, RAIPUR (CG)

आदेश / ORDER PER RAVISH SOOD, JM:

The present appeal filed by the revenue is directed against the order passed by the CIT(Appeals)-1, Raipur dated 16.03.2017, which in turn arises from the order passed by the A.O. u/s.143(3) of the Income-tax Act, 1961 (for short ‘Act’) dated 29.03.2016 for A.Y. 2013-14. The revenue has assailed the impugned order on the following grounds of appeal before us:

“1."Whether on points of law and on facts & circumstances of the case, Ld. CIT(A) was justified in deleting the disallowance of Rs. 27,80,433/- made u/s 14A of the I T Act r.w.s 8D of the I T Rules made by the AO?". 2."Whether on points of law and on facts & circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made u/s 14A, when clause (3) of the Section 14A of the Act clearly prescribes that provision of section 14A(2) shall also apply in relation to case where any assessee claims that no expenditure has been incurred by him in relation to the income which does not part form part of the total income under this Act, as held in the case of Cheminvest Ltd. Vs ITO (ITAT, SB-Del) 121 ITD 318 and Pradeep Kar Vs ACIT(Kar) 319 ITR 416?". 3. "Whether on points of law and on facts & circumstances of the case, the Ld. CIT(A) having concurrent powers of the AO u/s 250(4) of the Act, was justified in deleting the addition of Rs. 10,09,50,000/- made by the AO in the absence of satisfaction of parameters prescribed u/s 68 of the Act?" 4. "Whether on points of law and on facts & circumstances of the case, the Ld. CIT(A) was justified in deleting the addition of Rs, 4,58,25,000/- received from M/s Dheera Vinimay Pvt. Ltd. by ignoring the facts as brought on record by the AO that the assessee company failed to prove the identity, genuineness and creditworthiness of the investor company as per the parameters of the legal provisions u/s 68 of the Act?"

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Sl. No. Particulars Name Amount (Rs.) 1. Dheera Vinimay Pvt. Ltd. 4,58,25,000/- 2. Wise Commodeal Pvt. Ltd. 4,83,75,000/- 3. Emerald Vintrade Pvt. Ltd. 67,50,000/- Total 10,09,50,000/-

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As the assessee had failed to substantiate the authenticity of the receipt of the aforesaid amount of share premium, therefore, the A.O held the same as an unexplained cash credit u/s.68 of the Act. Apart from that, it was observed by the A.O that the assessee had claimed to have received an amount of Rs.10,00,000/- from M/s. Graceful Vincom Pvt. Ltd. Observing that the aforementioned company as per details gathered from DIT (Inv.), Kolkata was a shell company, the A.O held the same too as an unexplained cash credit u/s.68 of the Act. Further, the A.O taking cognizance of the fact that the assessee despite having made non-current investments in exempt income yielding shares of Rs.57.20 crore (approx.) had not offered for disallowance any part of the same on a suo-motto basis, thus, made an addition u/s.14A r.w. Rule 8D(iii) of Rs.27,80,433/-. Accordingly, the A.O vide his order passed u/s.143(3) dated 29.03.2016 determined the income of the assessee company at Rs.10,37,85,580/-.

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that was made by the A.O with respect to the amount received by the assessee from M/s. Graceful Vincom Pvt. Ltd. was vacated by the CIT(Appeals). For the sake of clarity, the relevant observations of the CIT(Appeals) are culled out as under:

“4.3 Facts being above, AO has added back share premium of Rs.10,09,50,000/- received from three companies. Actually assessee had received capital of Rs.3,36,50,000/- and share premium of Rs. 10,09,50,000/-. The A.O had no objection regarding the subscription at face value. He found that the issue of shares at premium was not justified. As per the assessment order the amount was received from three companies Dheera Vinimay Pvt. Ltd., Wise Commodeal Pvt. Ltd., Emerald Vintrade Pvt. Ltd. in which directors of the assessee company were common directors. It does not transpires from the assessment order what documents were asked for from the assessee to prove the genuineness and creditworthiness of share capital and premium. The assessee has not received any eat)/ fpm M/s Graceful Vincom Pvt. Ltd as has been mentioned in the assessment order. In fact one of the three shareholder M/s Dheera Vinmay Pvt Ltd has received an amount of Rs. 10 lakhs from M/s Graceful Vincom Pvt. Ltd. No details of "numerous paper and shell companies are used to divert unaccounted money" is available in the assessment order. As per the details provided by the assessee to the AO, copy of which were made available during appeal proceeding, assessee company has received share capital and Rs. 1,52,75,000/- and premium of Rs. 4,58,25,000/- from M/s Dheera Vinmay Pvt Ltd on allotment of 1527500 no of shares at face value of Rs. 10 plus premium of Rs. 30/-. Then assessee company has received capital of Rs. 1,61,21,000/- and premium of Rs. 4,83,75,000 on allotment of 1612500 no of shares and face value of Rs. 10 plus Rs. 30/- from Wise Commodeal Pvt Ltd. And lastly it had received capital of Rs. 22,50,000/- and share premium of Rs. 67,50,000/- from M/s Emerald Vintrade Pvt Ltd on allotment of 225000 shares at face value of Rs. 10 plus premium of Rs. 30/-. Following documents have been submitted by the appellant before the AO. Copies of share application forms, Permanent Account Number, audited balance sheet and bank accounts from which shares subscriptions and premium were paid to the

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assessee company. In fact the assessee company has received share capital from several other persons besides these three companies. These included Vandana Ispat Ltd, Vandana Rolling Mills Ltd, Vandana Forgings Ltd, R.N. Navnirman Pvt Ltd, Shri Niranjan Lal Agrawal, Vandana Udyog Ltd, Manush Commodities P. Ltd and Smt Ganga Devi Agarawal. Identical set of documents were submitted by the assessee in respect of these shareholders. The AO has not commented whether or not these documents have been accepted. As per the assessment order the genuineness and creditworthiness was not proved by the assessee of these various companies. There is no discussion in the assessment order what were the documents submitted by the assessee and in spite of the evidences in the form of these documents, why the conclusion has been drawn that assessee has not been able to prove the genuineness and creditworthiness of the capital. In view of the above discussion the addition made by the AO is not sustainable. Once the assessee has discharged its onus, the AO has to accept or reject the same with reason which Itas not been done. Often companies having no worth or very little worth, receive funds from other companies at a premium which is often several times the net worth of the receiving companies. Naturally the department views such funds with suspicion as it has been found that often the management of receiving companies routes own funds of controlling persons as share subscription money. In the present case no inquiry has been caused by the AO to investigate the source of funds. After the subscriber companies have confirmed having made the subscription to the shares of the assessee company and furnished documents such as it balance she- et and bank account in evidence of making of payment, ROC documents as evidence of the existence of company, the AO should either accept or make inquiries to establish that the share capital is not genuine. In the present case no inquiry has been made. It should be noted that the subscriber companies are not un- related companies. In fact some of directors of assessee company are common directors in subscriber companies. Therefore if the AO accepts the existence of the assessee company and its directors, he is not right in questioning the existence of other companies in which same persons are directors. On examination of balance sheet of the assessee the position of capital is as under- Share capital Rs.166,80,91,020

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Reserve & surplus Rs. 432,81,64,222 Total Rs. 599,62,55,242 Number of equity shares 15,29,66,602 Book value per share Rs. 39.20 Thus the total of share capital plus reserves and surplus is Rs 599 cr and it has issued 15 cr number of shares. The net worth per share is Rs 39.20. The issue of shares at Rs 10 face value and Rs 30 premium is commensurate with the net worth of the assessee company and it is not a case of penny stock being sold at a huge premium, but the shares have been allotted at net worth. With effect from 1.4.2013 proviso has been added 410 section 68 as per which the share subscriber in the assessee company should explain the source of funds out of which payment has been made to the assessee. ---Assessee has furnished documents and balance sheet and bank accounts of the three investor companies explaining the source. Fund flow of the three companies having common director was also provided. AO has mentioned that the assessee had received an entry of Rs.10,00,000/- from Graceful Vincom Pvt Ltd. which information was received from Kolkata Investigation wing. On going through the balance sheets it is found that not the assessee company but M/s Dhira Vinimay Pvt Ltd has received the money from M/s Graceful Vincom Pvt Ltd. Therefore no adverse inference can be drawn in case of the assessee. In the case of Rajshree Synthetics v CIT 256 ITR 331 Raj 2002 it was held that sec 68 of the Act empowers the AO to make inquiries if he is not satisfied with entries of cash credits. The AO's satisfaction to invoke sec 68 must be derived from relevant factors on the basis of proper inquiry and collection of facts. If no proper inquiry is made, the cash credit entry cannot be assessed u/s 68 of the Act. In the case of PK Seth v. CIT 286 ITR 318 Gau. 2006 hon'ble HC appreciated the fact that out of the three requirements, the first two, viz. The identity of the creditors and their creditworthiness had been established since the creditors were being assessed to tax and their assessment particulars were before the AO which were not proved as false. In respect of the genuineness of the transactions as far as the assessee was concerned, he had proved that the entire amount involved was received by way of account payee cheques. The AO completing the assessments of the creditors had accepted them as genuine in the respective assessments

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of the creditors. However, in the case of the assessee, he held them as not genuine. Admittedly there was no other evidence or material in support of the finding of the Tribunal that the cash credits were not genuine, except substituting personal inferences. Hence the HC held that the order of the Tribunal was not justified. In the case of ACIT vs Venkateshwar Ispat (P) Ltd the jurisdictional high court on similar facts has ruled in assessee’s favour. The fats of the case were that the assessee company filed its return of for the assessment year 1989-90. In the assessment proceedings, the Assessing Officer called upon the assessee to establish the identity and creditworthiness of the share applicants as the balance-sheet reflected the capital amount of Rs. 26,45,200. In order to confirm the investment, notices were issued to the shareholders in their given addresses and in 29 cases, the letters sent were returned unserved with the remark that the address is not complete or other similar reason. The Assessing Officer, not satisfied with the explanation of the assessee, added Rs. 13,36,000 towards holdings of the shareholders, whose confirmation could not be adduced. Before the Commissioner of Income-tax (Appeals), the assessee sought permission for adducing additional evidence under rule 46A of the Income-tax Rules, 1962, which was accepted and appeal of the assessee was allowed on the basis of additional evidence adduced by the assessee as also keeping in view of the fact that for subsequent assessment year, the share holders investment was confirmed during the assessment proceedings. The appeal preferred by the Revenue was further dismissed by the ITAT. The learned senior advocate appearing for the respondent submitted that apart from the reasons assigned by the respondent, the Tribunal, wherein it has been held that the investment has been verified on the basis of the additional evidence adduced by the assessee, in view of the latest judgment of the hon'ble Supreme Court in the matter of CIT v. Lovely Exports P. Ltd. [2009] 319 ITR (St.) 5 ; [2008] 216 ITR (St.) 195, investment by the alleged bogus shareholders in a company cannot be regarded as the undisclosed income of the assessee-company, though individual investors can be proceeded against by the Department. The hon'ble HC noted that in the matter of Lovely Exports P. Ltd. [2009] 319 ITR (St.) 5, the question before the hon'ble Supreme Court was—whether the amount of share money can be regarded as undisclosed income under section 68 of the Act ? Answering the above question, the hon'ble Supreme Court has held that if the share application money is received by the assessee-company from alleged

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bogus shareholders, whose names are given to the Assessing Officer in 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-company in view of the binding judgment of the hon'ble Supreme Court as also the findings recorded by the Commissioner of Income- tax (Appeals), which have been subsequently confirmed in appeal by the Appellate Tribunal, we are of the opinion that there is no question of law, much less a substantial question of law, arising for adjudication of this appeal. The appeal is, accordingly, dismissed. Facts being in the same line, in short, the premium received by assessee is commensurate with its net worth per share, the investor companies have accepted having made investment and furnished required documents to explain the source of money advanced to assessee. Therefore respectfully following the above decisions, the addition made in the assessment order is hereby deleted and grounds of the assessee is allowed.”

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Sr. Particulars Shares allotted Amount of Amount of No. share capital share premium 1. M/s. Deera Vinmay 1,52,75,00 1,52,75,000/- 4,58,25,000/- Pvt. Ltd. (face value of Rs.10/- a/w. premium of Rs.30/-) 2. Wise Commodeal 1612500 1,61,21,000/- 4,83,75,000/- Pvt. Ltd. (face value of Rs.10/- a/w. premium of Rs.30/-) 3. Emerald Vintrade 225000 22,50,000/- 6750000/- Pvt. Ltd. (face value of Rs.10/- a/w. premium of Rs.30/-) Total 3,36,46,000/- 10,09,50,000/-

On a perusal of the records, we find that the A.O in the course of assessment proceedings in order to verify the authenticity of the investments made by the aforementioned share subscribers, had called upon the assessee company to furnish the requisite details. However, the assessee company in compliance to the aforesaid directions had only submitted part of the documents that were called for by the A.O. As observed by the A.O the details filed by the assessee though revealed that the investments made by the aforesaid share subscriber companies was sourced out of funds which were received by them from various other companies but no evidence was led by the assessee company to substantiate the nature and source of the said amounts in the hands of

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the investor companies. In sum and substance, the A.O observed that the assessee had failed to come forth with an explanation about the nature and source of the amounts received by the aforesaid investor companies which in turn were infused by them in the assessee company.

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enquiry as regards the source of funds received by the assessee company. The CIT(Appeals) on the basis of his aforesaid observations, was of the view that once the assessee on the basis of aforesaid documentary evidence had discharged the onus that was cast upon it as regards proving the authenticity of the investments made by the aforesaid investor companies, then the A.O was obligated to either accept the said claim; or make enquiries to establish that the investments so made were not genuine. Considering the fact that the A.O had not carried out any enquiry a/w. the fact that the subscriber companies were the assessee’s group concerns, the CIT(Appeals) was of the view that there was no justification for the A.O to have questioned the very existence of the investor companies. Apart from that, we find that the CIT(Appeals) had further observed that considering the net worth of the assessee company which worked out at Rs.39.20/- per share, the issue of shares at face value of Rs.10/- a/w. premium of Rs.30/- was commensurate with the net worth of the assessee company and it was not a case of a penny stock being sold at a huge premium. Referring to the “1st proviso” to Section 68 of the Act that was available on the statute vide the Finance Act, 2012 w.e.f. 01.04.2013, the CIT(Appeals) was of the view that as the assessee company had furnished requisite details a/w. balance sheets and bank accounts of the investor companies, therefore, the primary onus that was cast upon it to put forth an explanation as regards the nature and source of the sum credited in the

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bank accounts of the investor companies, which in turn was used for making investments in the assessee company was duly explained.

“Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory:”

On a careful perusal of the “1st proviso” to Section 68 of the Act, it transpires that the explanation offered by the assessee company of being in receipt of share capital/share premium from the aforementioned

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investor companies, was to be deemed to be satisfactory only if the said investor companies had also offered an explanation about the nature and source of such sum so credited. We are afraid that in the case before us the respective investor companies have clearly failed to come forth with any explanation as regards the nature and source of the share capital/premium that was credited in the books of account of the assessee company.

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accepted. Our aforesaid conviction is fortified by the judgment of the Hon’ble Supreme Court in the case of Pr. CIT-1 Vs. NRA Iron and Steel Pvt. Ltd. (2019) 262 taxmann.com 74 (SC). The Hon’ble Apex Court in its aforesaid order had enunciated the principles regulating the discharge of primary onus that are cast upon an assessee as regards proving the genuineness of share capital/premium as per the mandate of Section 68 of the Act, observing as under:

“i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and credit- worthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the credit- worthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. iii. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established.”

As observed by us hereinabove, in the case before us, not only the assessee company had failed to discharge the onus that was cast upon it as regards proving the authenticity of its claim of having received amounts towards share premium from the aforementioned investor companies, but we would mince no words in observing that the A.O had also adopted a most casual approach in the course of assessment proceedings. In so far the observations of the CIT(Appeals) are concerned, we are unable to

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concur with the basis that have been adopted by him for treating the investments made by the aforementioned companies as genuine. Although the CIT(Appeals) had stressed upon the half-hearted approach that was adopted by the A.O while verifying the authenticity of assessee’s claim of having received genuine share capital/premium from the aforementioned investor companies, but he had thereafter instead of carrying out any verification on his own or calling for a remand report from the A.O hushed through the matter and held the respective transactions in question as genuine. Also, we are unable to concur with the CIT(Appeals), for the reason that he had lost sight of the obligation that was cast upon the assessee company to establish the authenticity of its claim of having received genuine share capital/premium from the aforementioned investor companies in the backdrop of the “1st Proviso” to Section 68 of the Act. Considering the fact that the A.O had not carried out any verification, the CIT(Appeals) in our considered view was obligated to have called for a remand report from the A.O; or alternatively, being vested with the powers which were co-terminus with that of A.O should have carried out necessary verification on his own. The observation of the CIT(Appeals) that now when the assessee company had furnished documents, balance sheets a/w. bank account details of the investor companies explaining the source of the investments, therefore, no adverse inferences could have

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been drawn in the hands of the assessee company does not find favour with us.

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assessee company had made substantial investment of Rs.57.20 crore in exempt income yielding shares of Vandana Global Ltd, Vandana Energy and Steel Pvt. Ltd. and Ganga Shipping Logistics and Solution Pvt. Ltd., but had not offered any suo-motto disallowance u/s.14A of the Act. On being queried, it was submitted by the assessee company that as it had not incurred any expenditure for earning of exempt income, therefore, it had not offered any disallowance u/s.14A of the Act. However, the A.O did not find favour with the aforesaid explanation of the assessee company. The A.O was of the view that as per clause (3) of Section 14A of the Act, as the provisions of Section 14A(2) would also apply in a case where an assessee claimed that no expenditure was incurred by him in relation to income which does not from part of his total income, therefore, backed by his aforesaid conviction he worked out a disallowance under Rule 8D(2)(iii) at Rs.27,80,433/-.

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Order pronounced in open court on 03rd day of July, 2023.

Sd/- Sd/- ARUN KHODPIA RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायपुर/ RAIPUR ; �दनांक / Dated : 3rd July, 2023 SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant. 2. ��यथ� / The Respondent. 3. The CIT(Appeals)-1, Raipur (C.G.) 4. The Pr. CIT, Raipur-1 (C.G) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, रायपुर ब�च, रायपुर / DR, ITAT, Raipur Bench, Raipur. गाड� फ़ाइल / Guard File. 5. आदेशानुसार / BY ORDER, // True Copy // �नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, रायपुर / ITAT, Raipur.