|CORAM:||Bhavnesh Saini (JM), L. P. Sahu (AM)|
|CATCH WORDS:||bogus share capital, unexplained cash credit|
|DATE:||April 17, 2017 (Date of pronouncement)|
|DATE:||May 23, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 68 Bogus share capital: (i) The AO cannot ignore the documentation produced by the assessee to show that the investors are genuine, (ii) A s. 132(4) statement cannot be relied upon if the assessee is not give right of cross-examination, (iii) Fact that the shareholders did not respond to s. 133(6) notices does not warrant an adverse inference, (iv) Fact that the shareholders have low income does not warrant adverse inference, (v) Assessee is not required to prove source of source|
(i) The assessee company is engaged in the business of investment and it had received share application money to the tune of Rs.5.75 crores from Puneet & Oil Chemicals Pvt. Ltd. and M/s Tanish Tale Tradecom P.Ltd. The AO asked the assessee to file confirmation and other documents of the share applicants in order to prove identity, creditworthiness and genuineness of the transaction. The assessee admittedly produced several documentary evidence before the AO in order to prove the above ingredients of section 68 of the Act i.e. the assessee furnished address of the share applicants, CIN No., Incorporation date of company, PAN, Authorized capital, paid up capital, names of Directors, certificate issued by Registrar of Companies and return filed before ROC, net worth of both the companies, confirmation of accounts, copy of bank statement with reconciliation statement, copy of acknowledgement of filing of income tax return for AY under appeal 2011-12 with audited accounts, affidavits of Directors and copies of assessment orders u/s 143(3) for both the investors companies for AYs 2011-12 to 2013-14. The AO did not verify any of these documentary evidences in order to find out the truth in the matter. Thus, the AO failed to make any inquiry on these documentary evidences which are part of Revenue record as well. The search is also conducted in the case of Mr. Suresh Kumar Jain & KJS Group of cases with whom the AO alleged that the investor companies have relations. Therefore, these documentary evidences clearly proved that both the investor companies are existing and genuine companies registered with Registrar of Companies as well as assessed to income tax. No material is produced on record that during course of search in the case of the assessee or other parties as referred to above, any material was found to prove that the assessee received any accommodation entries from these investors companies. Therefore, the AO did not object to the material evidence furnished and did not undertake any verification. The AO also failed to conduct any scrutiny of the documents and merely relied upon the statement of Mr. Suresh Kumar Jain and others for the purpose of making the addition. The decision of Hon’ble Delhi High Court in the case of Pr.CIT vs Laxman Industrial Resources Ltd. (supra) clearly apply to the facts of the case of the assessee that the assessee received genuine share application money from both the investor companies. The assessee on the basis of these documentary evidences have been able to establish that both the shareholders are genuine parties and they are not bogus and fictitious. The decision of the Hon’ble Supreme Court in the case of Earthmetal Electrical Pvt.Ltd. vs CIT dated 30.07.2010 in SLP No.21073/99 clearly support the case of the assessee. It may also be noted that the facts considered in this case by ITAT, Mumbai Bench and Hon’ble Bombay High Court (copies of the judgement are placed on record) are not on better footing as brought on record in the case of the assessee. The facts of the case of the assessee and material evidence brought on record are on better footing as compared to the facts considered in the case of M/s Earthmetal Electrical P.Ltd. (supra). The assessee specifically pleaded before the CIT(A) and filed the details supported by evidence that net worth of both the investor companies are very substantial so as to make investment in assessee company. They were having sufficient funds with them to make investment in assessee company. The material produced by the assessee have not been doubted and rebutted by the authorities below.
(ii) The authorities below heavily relied upon the statement of Mr. Suresh Kumar Jain who is stated to be associate of KJS Group of cases whereas the assessee company was distinct from the KJS Group. The statement of Mr. Suresh Kumar Jain recorded u/s 132(4) referred to accommodation entry provided to the KJS Group. The statement of Mr. Suresh Kumar Jain was not recorded during the course of search in the case of the assessee. The statement of Mr. Suresh Kumar Jain have not been confronted to the assessee during the assessment proceedings. He was not produced at assessment stage to allow cross-examination by the assessee. No right to cross-examination have been given to assessee to cross-examine the statement of Mr.Suresh Kumar Jain, therefore, his statement cannot be read any evidence against the assessee. We rely upon the decision of the Hon’ble Supreme Court in the case of Kishanchand Chellaram vs CIT 125 ITR 713 (SC) in which it was held that any material collected at the back of the assessee and not confronted and no opportunity given to cross-examine, such material cannot be relied upon against the assessee. It may also noted here that Mr. Suresh Kumar Jain has later on retracted from the statement on which no adverse finding has been given. The search was also conducted in the case of KJS Group of cases and statement of Sh.K.J.Ahluwalia was also recorded during search wherein he has explained and confirmed/admitted to have invested in assessee company. No addition has been made against the assessee on the basis of statement of Sh.K.J.Ahluwalia. The statement of Sh.Dinesh Gupta, Director of the assessee company was also recorded in which he has confirmed that KJS Group of companies made investment in assessee company as reflected in the books of accounts but no share certificates have been issued because it was mutually agreed that investment made by them shall be refunded by paying minimum 24% p.a. of such investment. The authorities below did not make the above addition on the basis of statement of Sh. Dinesh Gupta. The authorities below however, inferred from these statements that accommodation entries would have been received by the assessee company despite Sh.Dinesh Gupta and Sh.K.J.Ahluwalia confirmed the genuineness of the transaction in the matter. As noted above, the statement of Sh.K.J.Ahluwalia cannot be read in evidence against the assessee. Therefore, there was no other material available on record to prove that the investors have no creditworthiness or they have not genuinely made investment in assessee company.
(iii) The AO doubted the genuineness of the transaction because notice u/s 133(6) could not be served upon the investors and that the assessee was directed to produce both the parties by 19.03.2014. The Ld. Counsel for the assessee however, referred to Paper Book page 157 which is the reply before the AO dated 24.03.2014 in which the assessee has provided correct and updated address of the entity as per MCA website. The AO instead of issuing fresh notice u/s 133(6) at the correct address of the investor companies merely relied upon the fact that the earlier letter under the above provision has returned unserved. Since the AO did not issue fresh notice at the correct address provided by the assessee and no coercive action has been taken for the production of investors, therefore, no adverse inference could be drawn against the assessee. We rely upon the decision of the Delhi High Court in the case of CIT vs Divine Leasing & Finance Ltd. 299 ITR 268 in which it was held that “no adverse inference should be drawn if shareholders failed to respond to the notice by AO.” The duty of the AO to investigate creditworthiness of shareholders. It was further held in the case of CIT vs Peoples General Hospital Ltd.  356 ITR 65 (M.P. High Court) that “dismissing the appeals, that if the assessee had received subscriptions to the public or rights issue through banking channels and furnished complete details of the shareholders, no addition could be made under section 68 of the Income-tax Act, 1961, in the absence of any positive material or evidence to indicate that the shareholders were benamidars or fictitious persons or that any part of the share capital represented the company’s own income from undisclosed sources. It was nobody’s case that the non-resident Indian company was a bogus or nonexistent company or that the amount subscribed by the company by way of share subscription was in fact the money of the assessee. The assessee had established the identity of the investor who had provided the share subscription and that the transaction was genuine. Though the assessee’s contention was that the creditworthiness of the creditor was also established, in this case, the establishment of the identity of the investor alone was to be seen. Thus, the addition was rightly deleted. CIT v. LOVELY EXPORTS P. LTD.  319ITR (St.) 5 (SC) applied.”
(iv) Hon’ble Delhi High Court in the case of CIT vs (i) Dwarkadhish Investment P. Ltd. (ITA No.911 of 2010) & (ii) Dwarkadhish Captial P.Ltd. (ITA No.913 of 2010)  330 ITR 298 (Delhi High Court) held “In any matter, the onus of proof is not a static one. Though in section 68 of the Income Tax Act, 1961, the initial burden of proof lies on the assesses yet once he proves the identity of the creditors/share applicants by either furnishing their PAN number or income-tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the Revenue. Just because the creditors/share applicants could not be found at the address given, it would not give the Revenue the right to invoke section 68. One must not lose sight of the fact that it is the Revenue which has all the power and wherewithal to trace any person. Moreover, it is settled law that the assessee need not to prove the “source of source“. The assessee-company was engaged in the business of financing and trading of shares. For the assessment year 2001-02 on scrutiny of accounts, the Assessing Officer found an addition of Rs.71,75,000 in the share capital of the assessee. The Assessing Officer sought an explanation of the assessee about this addition in the share capital. The assessee offered a detailed explanation. However, according to the Assessing Officer, the assessee failed to explain the addition of share application money from five of its subscribers. Accordingly, the Assessing Officer made an addition of Rs.35,50,000/- with the aid of section 68 of the Act, 1961 on account of unexplained cash credits appearing in the books of the assessee. However, in appeal, the Commissioner of Income-tax (Appeals) deleted the addition on the ground that the assessee had proved the existence of the shareholders and the genuineness of the transaction. The Income-tax Appellate Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) as it was also of the opinion that the assessee had been able to prove the identity of the share applicants and the share application money had been received by way of account payee cheques. On appeal to the High Court: Held, dismissing the appeals, that the deletion of addition was justified.”
(v) Hon’ble Delhi High Court in the case of CIT vs Winstral Petrochemicals P. Ltd. 330 ITR 603 (Del.) held that “dismissing the appeal, that it had not been disputed that the share application money was received by the assesseecompany by way of account payee cheques, through normal banking channels. Admittedly, copies of application for allotment of shares were also provided to the Assessing Officer. Since the applicant companies were duly incorporated, were issued PAN cards and had bank accounts from which money was transferred to the assessee by way of account payee cheques, they could not be said to be non-existent, even if they, after submitting the share applications had changed their addresses or had stopped functioning. Therefore, the Commissioner (Appeals) and the Tribunal were justified in holding that the genuineness of the transactions had been duly established by the assessee.”
(vi) It may also be noted here that the AO at the fag end of assessment directed the assessee to produce the investor companies by 19.03.2014. However, the AO passed an assessment order on 29.03.2014 without giving sufficient time to the assessee or to issue notice or summon at the correct address of the investors. Therefore, such circumstances would clearly prove that the assessee genuinely received share application money and investors were having sufficient fund to make investment in assessee company.
(vii) The authorities below have also considered low income of the investor and that they are not existing parties. As noted above, the KJS Group of cases and Mr. Suresh Kumar Jain were subjected to search, therefore, the investor companies were existing companies. They are also assessed to tax u/s 143(3). Copies of the assessment orders in their cases are filed on record. They have also net worth to make investment in assessee company, therefore, low income earned by investors company by itself is no ground to treat the share application money received by the assessee as not genuine. The decision of the Delhi High Court in the case of CIT vs Vrindawan Farms Pvt.Ltd. (supra) squarely apply to the facts of the case. The authorities below, therefore, should not have drawn adverse inference against the assessee. The authorities below have also did not produce any material on record that such investments made in the assessee company was made from coffers of the assessee. We rely upon the decision of the Delhi High Court in the case of CIT vs Value Capital Services P.Ltd.  307 ITR 334 (Delhi High Court) in which it was held that “dismissing the appeal, that the additional burden was on the Department to show that even if the share applicants did not have the means to make the investment, the investment made by them actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. No substantial question of law arose.”
(viii) It may be noted again that the investor companies have confirmed making investment in assessee company who were having sufficient net worth to make investment in assessee company. Therefore, the assessee has been able to prove identity of the share applicants, their creditworthiness and genuineness of the transaction in the matter. The decisions cited by the Ld. Counsel for the assessee clearly support our findings.
(ix) Ld. DR however, relied upon several decisions of Delhi High Court referred to above. In these cases, the gist of the findings are that the assessee failed to prove identity and capacity of the subscriber companies to pay share application money or that amount was received as accommodation entries or that when assessee managed to secured documents like income tax return and bank account of the subscribers in such circumstances, the AO was justified in drawing adverse inference against the assessee and that the AO has doubt on the documents produced by the assessee. The facts of these decisions are clearly distinguishable from the facts of the case because in the present case, the assessee has been able to prove identity of the investors, their creditworthiness and genuineness of the transaction in the matter. Therefore, the authorities below should not have made or confirmed the addition of Rs.5.75 crores in the hands of the assessee. In view of the above discussion, we set aside the orders of the authorities below and delete the addition of Rs.5.75 crores. This ground of appeal of the assessee is allowed.
(x) In view of the above findings, whereby we have deleted the addition on merit, there is no need to consider the issue of initiation of proceedings u/s 153A of the Act. However, we may briefly note that the assessee’s sole reliance was on the decision of the Delhi High Court in the case of CIT vs Kabul Chawla (supra) in which it was held that “On the date of search the said assessment already stood completed. Since no incriminating material was unearthed during the search, no addition could be made to such income already assessed.”