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Royal Rich Developers Pvt. Ltd vs. DCIT (ITAT Mumbai)

DATE: August 24, 2016 (Date of pronouncement)
DATE: November 14, 2016 (Date of publication)
AY: 2007-08
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Bogus share capital: Interplay between s. 56(2)(viib) and s. 68 explained. Amendment to s. 68 casting onus on assessee and requiring it to explain source of source of share subscription is clarificatory and retrospective. Law in Lovely Exports 299 ITR 268, Sophia Finance 205 ITR 98 etc does not apply as they are prior to the Money Laundering Act 2002

(i) There are companies which are widely held companies in which public are substantially interested which comes out with an initial public offers wherein shares are listed on stock exchanges and widely traded , wherein members of public make subscriptions in pursuance to the Prospectus issued by the company . Issue of shares in these cases to general public in India as well abroad are approved, regulated and monitored by various authorities who are engaged in regulating and managing securities market such as Securities and Exchange Board of India (SEBI), Stock Exchanges, Government of India etc. These members of public who make subscription are widely scattered all over the country or even outside India as any person entitle to apply as per the conditions prescribed in the prospectus can place an application subscribing to the shares of the company by depositing duly filled in application along with application money with the designated authorized recipients of the company stipulated in the prospectus such as bankers, brokers, under-writers, merchant bankers, company offices etc . These shareholders who are member of public are un-known persons to the company issuing shares and the company issuing shares have no control/mechanism to verify their creditworthiness etc. and the burden of proof in such cases is different , but there is another class of companies which are closely held companies in which public are not substantially interested who are mostly family controlled closely held companies and they raise their share capital from their family members, relatives and friends and in these companies since share capital is received from the close knit circles who are mostly known to the company/promoters, the onus as required u/s 68 of the Act is very heavy to prove identity and capacity of the shareholders and genuineness of the transaction. The onus of widely held company could be discharged on the submissions of all the information contained in the statutory share application documents and on not being satisfied the AO may proceed against the shareholders u/s 69 of the Act instead of proceeding against the company, but in the closely held companies as in the instant case the share capital are mostly raised from family, close relatives and friends and the assessee is expected to know the share subscribers and the burden is very heavy on the assessee to satisfy cumulatively the ingredients of Section 68 of the Act as to identity and establish the credit worthiness of the creditors and genuineness of the transaction to the satisfaction of the AO , otherwise the AO shall be free to proceed against the assessee company and make additions u/s 68 of the Act as unexplained cash credit. The use of the word ‘any sum found credited in the books ‘ in Section 68 indicates that it is widely worded and the AO can make enquiries as to the nature and source thereof. The AO can go to enquire/investigate into truthfulness of the assertion of the assessee regarding the nature and the source of the credit in its books of accounts and in case the AO is not satisfied with the explanation of the assessee with respect to establishing identity and credit worthiness of the creditor and the genuineness of the transactions, the AO is empowered to make additions to the income of the assessee u/s 68 of the Act as an unexplained credit in the hands of the assessee company raising the share capital because the AO is both an investigator and adjudicator. In our considered view, merely submission of the name and address of the share subscriber, income tax returns, Balance Sheet/statement of affairs of the share subscriber and bank statement of the share subscriber is not sufficient as the AO is to be satisfied as to their identity and creditworthiness as well as to the genuineness of the transaction entered into. The share holders in this instant case did not appear before the AO at the instance of the assessee as well in pursuance to the summons u/s 131 of the Act issued by the AO and thus, the onus shifts back to the assessee to produce the shareholders before the AO and if the assessee falters the additions can be made u/s 68 of the Act.. The Hon’ble Supreme Court dealt with this issue in A. Govindarajulu Mudaliar v. CIT (1958) 34 ITR 807(SC). In the instant case, we have noted that at first the assessee raised the bogey in appellate proceedings before the learned CIT(A) that the AO in assessment proceedings has not given adequate and proper opportunity to the assessee to produce the shareholder but when adequate , proper and sufficient opportunity was afforded to the assessee in remand proceedings by the AO to produce the shareholders, the assessee failed to produce them despite sufficient , proper and adequate opportunity granted by the AO. The shareholder also did not appear before the AO even on being summoned by the AO directly u/s 131 of the Act. Section 68 of the Act has been amended by Finance Act, 2012 w.e.f. 01-04-2013 whereby the onus is cast upon the assessee company to justify the sources of share subscription including share premium raised, to explain the source of the source of raising the share subscription. Thus, Section 68 of the Act has been amended by insertion of proviso casting the onus on the assessee company to explain the source of source of raising share subscription which has been held to be clarificatory in nature and hence retrospective by the decision of the Kolkata Tribunal in the case of Subhlakshmi Vanijya (P.) Ltd.

(ii) We fail to find out any parallel between the amendments made to section 68 and section 56(2)(viib) except for the fact that these provisions have been added by the Finance Act, 2012. A conjoint reading of proviso to section 68 and section 56(2)(viib) divulges that where a closely held company receives, inter alia, some amount as share premium whose genuineness is not proved by the assessee company or its source etc. is not proved by the shareholder to the satisfaction of the AO, then the entire amount including the fair market value of the shares, is chargeable to tax u/s 68 of the Act. If however, the genuineness of the amount is proved and the shareholder also proves his source, then the hurdle of section 68 stands crossed and the share premium, to the extent stipulated, is chargeable to tax u/s 56(2)(viib) of the Act. It shows that only when source of such share premium in the hands of a shareholder is properly explained to the satisfaction of the AO, that the provisions of section 56(2)(viib) gets triggered. Approaching this section pre-supposes that the assessee genuinely received share premium from the share-holder having satisfactorily explained the transaction. Thus it is evident that sections 68 and 56(2)(viib) can never simultaneously operate. The later excludes the former and vice versa. Consequently, we are unable to accept the contention of the ld. AR that the proviso to section 68 attached a new obligation and hence should be declared as prospective. It is axiomatic that proving genuineness of a transaction of any credit, including share capital, was always an essential constituent of section 68. Since section 68 covers ‘any sum credited’ in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. We have noted it from several judgments dealing with share capital in pre-amendment period and the Memorandum explaining the provisions that proving the genuineness of share capital etc. by a company has always been considered a necessary requirement to escape the magnetization of section 68. The amendment has simply made express which was earlier implied. We, therefore, hold that though amendment to section 56(2)(viib) is prospective, but to section 68 is prospective. If that is the position, then the assessee is always obliged to prove the receipt of share capital with premium etc. to the satisfaction of the AO, failure of which calls for addition u/s 68.

(iii) Thus, it is for the assessee to explain the creditworthiness of the share subscribers and genuineness of the transaction including the source of source. The AO wanted to examine the share subscribers to go to bottom of the truth to find out the real nature of the transaction in order to verify genuineness of the transaction and to verify credit worthiness of the share subscribers that how persons with meager known sources of income and assets have invested huge amount of share money in the assessee company and that too at a huge premium. In the instant case, the business of the assessee is non-existent nor there is any project initiated by the assessee which could warrant justification and rationale for such a huge premium and consequentially investment of such a magnitude vis-à-vis reported and known sources of income and assets of the share subscribers. No rational person with sound mind will invest such a huge amount in the share subscription of a paper/shell company having no worthwhile business/project in hand at such a huge premium and it was for the assessee to have brought on record cogent material to prove the genuineness of the transaction as well credit worthiness of the share subscribers. The assessee scuttled the investigation launched by the AO wherein no share subscriber appeared before the AO during the assessment and remand proceedings even at assessee behest when the AO called the assessee to produce the shareholders , nor the shareholder appeared in pursuance to summons issued by the AO u/s 131 of the Act directly to these shareholders. The contentions of the assessee that the AO did not gave proper and adequate opportunity to the assessee to produce share subscribers during assessment proceedings are merely hollow words and such a plea is nothing but an attempt to thwart and delay justice . In any case adequate, proper and sufficient opportunity was given to the assessee to produce share subscriber in remand proceedings. The heavy onus was on the assessee to prove the genuineness of the transaction and the reasons for collecting the premium at Rs. 30/- per share as against the face value of the shares of Rs 10 per share wherein the assessee company was merely a paper/shell company having no business/known project in hand. The assessee is not able to demonstrate the reasons and justification for charging of Rs. 30/- premium per share as against the face value of Rs. 10 per share and during the course of search and survey action on 30-05-2008 and post enquiries, the two Directors namely Mr Vinod K Faria and Suresh V Faria of the assessee company have admitted in statement recorded on oath that these share subscription entries are accommodation entries and are bogus transactions whereby cash is paid in lieu of share subscription. It is not shown and brought on record that these statements recorded on oath were retracted by the Directors of the assessee at any stage of proceeding till now. The Director of the Company Mr. Vinod K. Faria in statement recorded u/s 132(4) of the Act on 31-05-2008 surrendered Rs. 10 crores over and above regular income recorded in the books of accounts maintained by the assessee and one of the grounds for the surrender of Rs. 10 crores was that the assessee company will not be able to prove the genuineness of the share capital of Rs.5.5 crores ( both in AY 2006-07 and 2007-08) raised by the assessee company to the satisfaction of the AO.

(iv) We are of the considered view that the onus is on the assessee company to bring on record the cogent evidences to prove the identity and creditworthiness of the share subscribers and genuineness of the transaction which in the instant case the assessee is not able to prove the same as per the facts emerging from the records and material before us as set out above and in our considered view in the instant case the transactions were nominal rather than real . The creditworthiness of the shareholders is not proved because they did not had their own money as every cheque/draft issued in 62 ITA 1835 & 1836/Mum/2014 favour of the assessee is preceded by deposit of cash/cheque in the bank account of the shareholder and these share holders are merely name lenders. The genuineness of the transactions is also not proved as to how such a huge sum of money got invested by the share subscribers and that too at a huge premium when the company was merely a paper/shell company having no business/project worth in its hand. The shareholders could not be interrogated by the AO which was essential to unearth the truth as the assessee did not produced the shareholders nor they appeared before the AO in response to summons issued u/s 131 of the Act. The Directors namely Mr. Vinod K Faria and Mr Suresh V. Faria of the assessee company have admitted in their statement recorded on oath u/s 132(4)/131 of the Act that these share subscription was bogus and were merely accommodation entries. The blank transfer forms and receipts from the shareholders were found during survey with respect to transfer of these shares from shareholders to the persons to be nominated by the promoters, all the share application forms were filled in the same handwriting, there was no serial numbers in share application form, the acknowledgment of receipt of share application forms were not given to the share subscribers by the assessee and these are not usual conduct of the carrying on of business. Under these circumstances keeping in view of cumulative reasons and summation of our discussions as set out above, we are of the considered view that the Revenue has rightly made the addition of Rs.1.60 crores received as share subscription as unexplained cash credit u/s. 68 of the Act which we sustained and we do not found any infirmity in the orders of the learned CIT(A) which we sustain/upheld.

(Subhalakshmi Vanijya Private Limited v. CIT (2015) 60 60(Kol. Trib) and Rajmandir Estates Private Limited v Pr. CIT (2016) 70 124(Cal.HC) followed.)

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