SHREE DURGA SYNTEX PRIVATE LIMITED,SURAT vs. DCIT, CIRCLE-2(1)(2), SURAT

On the facts and in the circumstances of the case as well as law on the subject, the learned CIT(A) has erred in confirming the action of (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. Assessing Officer in making disallowance of employee’s contribution to ESI of Rs.63,097/- u/s 2(24)(x) of the Act.” Revenue’s appeal (ITA No.58/Ahd/2020):- (i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made on protective basis of Rs.4,42,60,000/- on account of share capital / share premium amount received from the director of the ae company treating as bogus despite of the fact that long term capital gains received by the director are from bogus / paper concerns, managed by Shri Ashok Kayan who duly admitted in his statement that those companies are used for facilitating accommodation entries and the assessee company is the real beneficiary. (ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made of Rs.4,42,60,000/- without considering the facts of the case and provisions of first proviso to section 68 of the Act. (iii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.2,40,038/- made on account of disallowance made u/s 14A of the Act despite the AO had satisfactorily established the applicability of provisions of section 14 r.w. Rule 8D of the I.T. Rules, 1962. (iv) On the facts and in the circumstances of the case and in Law, the Ld. CIT(A), Surat ought to have upheld the order of the Assessing Officer. It is, therefore, prayed that the order of the Ld. CIT(A)-2, Surat may be set-aside and that of the Assessing Officer’s order maybe restored.”

Brief facts of the case are that assessee is a company engaged in the business of manufacturing of polyester chips, FDY yarn, grey fabrics and job work of yarn. The assessee filed its return of income for assessment year 2013-14 declaring income of Rs.6.208 crores. The case was selected for scrutiny. During the assessment, Assessing Officer noted that assessee-company has issued total 68,79,750 shares having face value @ Rs.10/- and share premium @ Rs.10/- out of such share, the assessee’s total ITA Nos30&58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. 22,13,000 shares at the same rate premium to one of its Director, namely, Pawan Begani. On further verification of source of investment, it was noted by Assessing Officer that the investor / Director sold the shares of Bakra Pratisthan and BSR Finance and has claimed Long Term Capital Gain (for short to as “LTCG”) of Rs.7.87 crores. The Assessing Officer was of the view that Bakra Pratisthan and BSR Finance were bogus companies based at Kolkata, managed by Shri Ashok Kumar Kayan. The assessing officer recorded that a survey was carried out by the Department on 27.01.2015 and the statement of Shri Ashok Kumar Kayan was recorded, wherein he accepted in his statement that they provided LTCG entries through Bakra Pratisthan and BSR Finance listed at Kolkata Stock Exchange with the help of Shri Sunil Dokania controller / manager of both the scrips. On the basis of aforesaid observation, the Assessing Officer issued a valid show cause notice to the assessee and asked the assessee as to why the investment should not be treated as unexplained cash credit under section 68 of the Act. The assessee filed its reply dated 19.03.2016. The contents of assessee’s reply was recorded in para 5.1 in assessment order. In the reply besides 3 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. other contents of the fact the assessee contended that Pawan Begani made investment out of LTCG earned by him. He is assessed to tax and has shown total income of Rs.31.50 lakhs after claiming exemption of LTCG of Rs.7.86 crores. His assessment is also under scrutiny, whether the genuineness of the LTCG in case of Shri Pawan Begani is accepted or not, no addition in case of assessee can be made as Pawan Begani has made investment out of his own income. The assessee also furnished the evidence to substantiate the creditworthiness and genuineness of said transactions. The assessee denied of any transaction with bogus companies. The reply of assessee was not accepted by the Assessing Officer by taking view that Shri Ashok Kumar Kayan during survey action admitted that they have provided accommodation entry of bogus LTCG through Bakra Pratisthan and BSR Finance. The Assessing Officer accordingly on ‘protective basis’ by taking view that to protect interest of revenue in addition of Rs.4.42 crores is being made as the assessee-company is ultimate beneficial owner of transaction.

The Assessing Officer also made addition of Rs.63,097/- on account of delay in depositing of Employee’s contribution to ESI. 4 ITA Nos30&58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. The Assessing Officer also noted that during the assessment year 2013-14, the assessee made investment in equity shares of Rs.1.10 crores as on 31.03.2013. The assessee has also shown interest expense under the head “short term investments” of Rs.2.71 crores. The Assessing Officer asked the assessee to furnish the details of investment and further asked as to why disallowance under section 14A should not be applicable. The Assessing Officer has not recorded its reply was received from assessee or not. The Assessing Officer invoked the provision of Rule 8D of the IT Rules, 1962 and made addition of Rs.2,40,038/- [Rs.1,84,625/- under Rule 8D(2)(ii) and Rs.55,413/- under Rule 8D(2)(iii)].

Aggrieved by the additions on the assessment order, assessee filed appeal before Ld. CIT(A). Before Ld. CIT(A) assessee filed detailed written submission on all three additions. On the addition of alleged unexplained cash credit made under section 68 of the Act on protective basis, the assessee stated that the company had issued 22,13,000 equity shares of face value Rs.10/- with premium of Rs.10/- having aggregate value of Rs,.4.42 crores to its Director / Pawan Begani. Shri Pawan 5 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. Begani is regularly assessed to tax and his tax having PAN No.ABQPB9210N. The assessee furnished a copy of his IT return, computation of income and confirmation of bank account etc., The assessee further submitted that said Director / Pawan Begani was having substantial income of his own and his own capital and Director made his investment out of his own income by earning LTCG of Rs.7.86 crores. The transaction is supported by Board resolutions for share application and share allotment, Form No.2 filed with the Registrar of Companies etc. The addition was made only on protective basis on the ground that Director / Pawan Begani had made investment on sale of shares of Bakra Pratisthan and BSR Finance. The Assessing Officer wrongly made addition on protective basis in the hand of assessee as the Assessing Officer himself accepted that Director / Shri Pawan Begani made investment in assessee on out of LTCG earned by him. This fact clearly suggests that assessee has established its source of capital gains by investor. Therefore, there is no reason to make addition on protective basis in the hand of assessee- company. The assessee also submitted that a substantive addition has already been made in the hand of Director / Shri 6 ITA Nos30&58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. Pawan Begani, wherein his LTCG was not accepted by department, therefore no addition can be made on protective basis. Even if the addition in case of Director is concerned then also said capital gains would be treated as income of assessee- company by treating the same as “income from other sources”. The assessee further explained that assessee being a ‘company’ is different from the shareholders as different legal entities. The assessee is not concerned with the source of in the hand of investor. There is no evidence in the possession of Assessing Officer to prove that cash amount was given to the Director / Pawan Begani by the assessee-company against the investment in shares.

On the issue of disallowance of Rs.63,097/- on ESI under section 2(24)(x) the assessee stated that there was only delay of 3 days in depositing of employees’ contribution on ESI the assessee has not deposited the amount on ESI and PF had deposited as soon as it is evidence assessee.

On the disallowance of under section 14A, the assessee stated that there is no exempt income earned during the year nor was any claim made for exemption of any exempt income. Under such 7 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. circumstances, there is no question of any disallowance under section 14A r.ws. Rule 8D.

The ld CIT(A), on considering the submissions of assessee, deleted the addition of Rs.4.42 crores under section 68 of the Act by taking view that Pawan Begani is one of the Director who has invested Rs.4.42 crores out of his income shown in his return of income. Even if LTCG on sale of penny scrips are treated as taxable income in his head, investment in assessee-company is duly explained. Thus, identity, creditworthiness and genuineness was explained. On his such observation, Ld. CIT(A) deleted the addition of Rs.4.42crores made on protective basis.

On the addition of ESI disallowance, Ld. CIT(A) affirmed the disallowance by following decision of Hon'ble jurisdictional High Court in the case of Gujarat State Roadway Transport Corporation (GSRTC) Vs CIT dated 26.12.2012. On the additions/ disallowance of section 14A, the ld CIT(A) held that the assessee has claimed that they have not received any exempt income during the year under consideration, thus, as per the decision of Jurisdictional High Court in Corrtech Energy Pvt Ltd &58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. [TA No. 239 of 2014], the disallowance of Rs. 2.40 Lakhs is not sustainable.

Further aggrieved both the Revenue challenged the deletion of Rs.4.42 crores under section 68 and on the other hand, assessee has challenged the sustaining the addition of disallowance on account of employee’s contribution to ESI.

We have heard the submissions of both the parties and have gone through the orders of the lower authorities carefully. Ground No.1 & 2 in Revenue’s appeal relate to deleting the addition of Rs.4.42 crores under section 68 of the Act. The Ld.CIT-DR for the Revenue submits that the Assessing Officer during the assessment clearly held that the investor / Director of assessee-company is beneficiary of penny stock. The assessee- company issued share to its Director, Pawan Begani. The said director is beneficiary of penny scrips of Bakra Pratisthan and BSR Finance, which are actually bogus Kolkata based company managed by Shri Ashok Kumar Kayan. The Assessing Officer made addition on protective basis to save the interest of revenue as the assessee is the ultimate beneficiary.

On the other hand, Ld. Authorized Representative (AR) for the assessee supported the order of Ld. CIT(A). The Ld. AR for the assessee submits that during the assessment, the assessee proved the creditworthiness of investor and genuineness of transactions. The identity of investor is, in fact, not in dispute. The creditworthiness of investor was also accepted by Assessing Officer by bringing fact on record that he was having sufficient fund to invest huge share with the assessee-company. The assessee-company issued a share of face value of Rs.10/- at a premium value of Rs.10/- only. The assessee is a profit making company and share was issued to its existing Director.

In alternative submission, Ld. AR for the assessee submits that addition of Rs. 7.86 Crore on account of alleged penny stock was made in the hand of Director / investor in the assessment order passed under section 143(3) dated 30.03.2016 for assessment year 2013-14. The said Director accepted the addition and filed application under Vivad Se Vishwas Scheme, 2020. The application of assessee was accepted by Department and Form-5 was issued to Pawan Begani vide certificate dated 11.02.2022. The investor / Director / Shri Pawan Begani has paid due tax on 10 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. the substantive addition therefore protective addition would not survive against the assessee.

In other alternative submission, the Ld. AR for the assessee submits that similar receipt which has been added in the hand of Pawan Begani cannot be taxed twice i.e. in the hand of assessee- company as well as in the individual capacity of director, therefore, the addition is liable to be deleted on this score alone as well. The Ld. AR for the assessee furnished copy of assessment order of Pawan Begani having PAN No.ABQPB9210N for assessment year 2013-14 dated 30.03.2016 and Form-5 of Vivad Se Vishwas Scheme, 2020 dated 11.02.2022 bearing acknowledgement No.162588551110222.

We have considered the rival submission of both the parties and have gone through the orders of authorities below. Now, a very well short controversy is left for our consideration. That when the protective addition is accepted and due tax has been paid by the person at whose hand the substantive additions were made, if still the protective addition would survive or not. The answer is no. There is no dispute that the Assessing Officer made addition of Rs.4.42 crores under section 68 on protective basis and 11 ITA Nos30&58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. substantive addition has already been made in the hand of Shri Pawan Begani / investor. We find that Shri Pawan Begani accepted the substantial addition in his hand and availed the benefit of Vivad Se Vishwas Scheme, 2020 and the Department has already issued Form-5 dated 11.02.2022. It is settled position of law that once the substantive addition is accepted and due tax has already been paid by a person on whose ends, the substantive addition was made, no protective addition would not be survived. Therefore, we accept the alternative submission made by Ld. AR for the assessee that once the due tax on the substantive addition has already been paid, the protective addition would not survive. Thus, Ground No.1 & 2 raised by Revenue is dismissed on this score alone.

Considering the fact that we have accepted one of the alternative plea of ld AR for the assessee and dismissed the Grounds No.1 & 2, therefore adjudication on other submission and merit of addition have become academic.

Ground No.3 relates to deleting the addition of Rs.2.40 lakh under section 14A. the Ld. CIT-DR for the Revenue supported the order of Assessing Officer. The Ld. CIT-DR for the Revenue 12 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. submits that assessee made huge investment for earning exempt income and assessee also debited interest expense in its profit and loss account. Therefore, provision of section 14A would attract.

On the other hand, Ld. AR for the assessee submits that during the relevant period under consideration, the assessee has not earned any exempt income. Therefore, there is no question of making disallowance under section 14A.

We have heard the rival submission of both the parties and perused the orders of authorities below. We find that the Assessing Officer made disallowance under section 14A on the ground that assessee has made investment for earning exempt income. The Assessing Officer has nowhere mentioned that assessee has shown any exempt income or has claimed any expenditure for earning such exempt income. The Assessing Officer made disallowance as per the prescribed under Rule 8D. We find that before Ld. CIT(A) assessee categorically stated that there is no exempt income during the year. Thus, no disallowance under section 14A is warranted. The assessee also relied on the case law of Hon'ble jurisdictional High Court in the 13 ITA Nos30&58/SRT/2020 (A.Y.13-14) M/s Shree Durga Syntex Pvt. Ltd. case of CIT vs. Corrtech Energy Pvt. Ltd. (supra). The Ld. CIT(A) on appreciation of fact found that assessee has not shown any expenditure or exempt income. We are also in agreement with the submission of Ld. AR for the assessee that once assessee has not earned any exempt income under section 14A can be made. This ground of Revenue’s appeal is also dismissed.

In the result, Revenue’s appeal is dismissed.

Now adverting to assessee’s appeal . The assessee has raised solitary ground of appeal