2015 (11) TMI 1304 - AT - Income Tax

Addition made on account of share application money - CIT(A) deleted the addition - Held that - The assessee has filed before the AO documents and details regarding share subscribers in question, so as to establish these ingredients of genuine credit. The identity of the subscribers stood proved by the fact that their names, address PAN Number balance sheet, bank statement and confirmation letters, share application and share allotment details were submitted by the assessee company. All these facts go to prove the identity of the subscribers. The CIT(A) further recorded a finding to the effect that creditworthiness of these parties was also proved by the fact that all the payments have been made through the banking channels through account payee cheques and that bank statements were also submitted by the assessee company. It was also observed that since money is towards purchase of shares having drawn from bank, it is clear that moneys were available. The finding recorded by the CIT(A) is as per material on record and do not require any interference on our part. - Decided against revenue Reopening of assessment - receipt of accommodation entries - CIT(A) deleted the addition by observing that purchases were genuine, however, at the very same time, the CIT(A) directed the AO to estimate the gross profit at 6% - Held that - carefully gone through the orders of the authorities below and found that the contradictory statement was given by Mehrunissa with regard to the sales undertaken by her. However, nowhere she has stated the name of assessee company with regard to any bogus sales. It is a matter of record that nothing wrong was found by the AO in the books of account. All the purchases have been accepted by the AO and its corresponding sales. Once the sales have been accepted, there must be purchases. Under such circumstances, it is possible that bills have been taken from one party, whereas goods have been purchased from some other party. Keeping in view the totality of facts and circumstances of the case the total purchases cannot be disallowed. Accordingly, we direct the AO to restrict the addition to the extent of 10% of the purchases so as to serve the end of justice. Accordingly, we uphold the addition of ₹ 2,21,600/-. There is no merit in the action of CIT(A) for directing the AO to estimate the assessee s GP rate at 6%, which was upheld by him in case of SKS Ispat & Power Limited,a group company. Neither it is the case of AO nor it is case of CIT(A) that assessee has not maintained proper books of accounts and that it had not reported true and correct state of affairs.any justification in estimating GP rate without rejecting the books of account. As we have already upheld the addition of ₹ 2,31,600/- on account of purchases which was pointed out by the AO, there is no justification for applying the higher GP rate to the entire sales of the assessee which was ₹ 151 crores. In case of Girish M. Mehta (2005 (2) TMI 494 - ITAT RAJKOT), the Tribunal has elaborately explained the principle of rejection of books of accounts and estimating GP rate in para 9 of the said order is precisely applicable to the facts of the case. It is also pertinent to mention here that the AO has nowhere doubted the quantitative tally/stock register maintained by the assessee. No incriminating material or evidence in respect of other transactions of the assessee have been brought on record. Therefore, addition in the GP, if any, should be restricted to the extent of part of the purchases made from M/s Chevron Metal Products Private Limited. Since we have already upheld the addition of ₹ 2,31,600/-, there is no justification for estimation of assessee s GP at 6% as directed by CIT(A). We direct accordingly.

Summary

Issues Involved:
1. Deletion of addition made on account of share application money.
2. Deletion of addition made on account of sundry creditors and enhancement of Gross Profit (GP) rate.

Issue 1: Deletion of Addition Made on Account of Share Application Money

The solitary issue in this appeal relates to the deletion of the addition made on account of share application money. The Assessing Officer (AO) made the addition on the grounds that the assessee failed to prove the identity, creditworthiness, and genuineness of the share application money received from 15 companies. The AO alleged that the assessee company paid cash and took accommodation entries of share application money.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee submitted various details such as the address, PAN identity of the subscribers, confirmation of investment, copies of audited balance sheets, bank statements showing receipt of amounts by cheques, signed share applications, resolutions, and extracts from the Ministry of Corporate Affairs website. The assessee argued that the law regarding the source of share application money is well-settled and that it is for the share applicants to explain the source if they are identifiable. The assessee cited several judicial pronouncements, including the Apex Court's decision in CIT v. Lovely Exports, to support their argument that section 68 cannot be invoked if the identity of the subscribers is established.

The CIT(A) deleted the addition by considering the assessee's arguments and judicial pronouncements. The CIT(A) noted that the appellant company had received share capital money from shareholders and had provided documentary evidence to prove the identity, creditworthiness, and genuineness of the transaction. The CIT(A) concluded that the AO had not made a case of unexplained cash credits and that the share application money could not be added as undisclosed income in the hands of the company.

The Tribunal upheld the CIT(A)'s order, noting that the CIT(A) had found the share capital to be genuine after considering various documentary evidence and applying the propositions of law laid down by various High Courts and the Supreme Court. The Tribunal found no infirmity in the CIT(A)'s order deleting the addition made on account of share application money.

Issue 2: Deletion of Addition Made on Account of Sundry Creditors and Enhancement of Gross Profit (GP) Rate

These are cross-appeals filed by the assessee and revenue for the assessment year 2005-06. The AO made an addition of Rs. 23.16 lakhs on account of sundry creditors, specifically from M/s Chevron Metal Products Pvt. Ltd., based on the statement of its Director, Mrs. Mehrunnisa Hussaini, who admitted that the transactions were only accommodation entries. The AO also referred to the orders passed in the case of SKS Ispat and Power Ltd., wherein similar additions were made.

The CIT(A) deleted the addition, noting that the AO had accepted the purchases from the said party and the trading results but treated the credit balance as unexplained cash credit. The CIT(A) observed that the amount added had been paid to the party in the subsequent year and that similar additions were not made in the hands of the Director's company. The CIT(A) directed the AO to apply a GP rate of 6%, resulting in an enhancement of Rs. 4.92 crores.

The Tribunal considered the rival contentions and found that the AO had merely relied on the statement of Mrs. Mehrunnisa Hussaini, which contained contradictory statements regarding the genuineness of the transactions. The Tribunal noted that the AO had not carried out any inquiry to show that the purchases were not genuine and that the quantitative tally of purchase and sale had not been doubted by the AO. The Tribunal directed the AO to restrict the addition to 10% of the purchases, amounting to Rs. 2,21,600/-, to serve the ends of justice.

Regarding the CIT(A)'s direction to estimate the GP rate at 6%, the Tribunal found no merit in estimating the profit without rejecting the books of accounts. The Tribunal observed that the AO had not doubted the quantitative tally/stock register maintained by the assessee and that no incriminating material or evidence in respect of other transactions had been brought on record. The Tribunal concluded that the addition in the GP should be restricted to the extent of part of the purchases made from M/s Chevron Metal Products Pvt. Ltd. and upheld the addition of Rs. 2,31,600/-.

Conclusion:

1. The appeal of the revenue regarding the deletion of addition made on account of share application money was dismissed.
2. The appeal of the assessee regarding the addition made on account of sundry creditors was allowed, and the appeal of the revenue was partly allowed, with the Tribunal directing the AO to restrict the addition to Rs. 2,21,600/- and rejecting the CIT(A)'s direction to estimate the GP rate at 6%.