2020 (2) TMI 350 - AT - Income Tax

Addition u/s 68 - bogus share premium and share capital during the assessment year under consideration - whether shareholding companies are only paper companies not carrying out any substantial business activities? - HELD THAT - The assessee company has not commenced its business activity at the time of preparation of valuation report by the Auditor and subscription of share by 35 companies, as the clearance for mega project was accorded by the Competent Authority on 18-2-2009. It is preposterous and against the human probability that the third party company would buy shares with such huge share premium of a paper company which has no business background and track record, without looking into the assets, business, model and strong fundamentals of the company. All these aspects have been meticulously examined by the Assessing Officer in the assessment order. Ironically the CIT(A) has glossed over the findings recorded by the Assessing Officer CIT(Appeals) had merely decided the appeal on the lines of findings recorded by the Hon ble Supreme Court in the case of Lovely Exports 2008 (1) TMI 575 - SC ORDER - We do not concur with the view adopted by the CIT(A) while allowing the appeal of the assessee. No exercise was carried out by the learned CIT(A) to go into the root of the matter and find out the actual business carried out by the assessee and the investing companies and he had also not examined the issues from the prospective of a prudent businessman , i.e. whether the prudent business man would like to invest and buy shares of a paper company having a negative NAV at a premium of ₹ 190/- per share or not. CIT(Appeals) has not dealt with any of the findings recorded by the Assessing Officer on merit whereby he had brought on record the financial status of these companies, the working of these companies from the same premises through the key person. The Ld. CIT(Appeals) has not discussed anything with respect to the report of the Inspector and operation of these companies being carried out by Shri Praveen Kumar Jain. We deem it appropriate to remand this matter to the file of Ld. CIT(Appeals) to decide the appeal in accordance with the decision of the Hon ble Supreme Court in the matter of NRA Iron Steel Pvt. Ltd. 2019 (3) TMI 323 - SUPREME COURT and also in the matter of NDR Promoters Pvt. Ltd. 2019 (1) TMI 1089 - DELHI HIGH COURT Needless to say, the primary onus to prove genuineness, creditworthiness and identity of the 35 shareholders companies is on the assessee as per parameter mentioned in Para 11 of the decision in the matter of Principal Commissioner of Income Tax (Central)-1 Vs. NRA Iron Steel Pvt. Ltd. (supra) Para 13 of the NDR Promoters Pvt. Ltd. (supra. Delhi High Court). The assessee is required to discharge the same. In the light of above, we direct the Ld. CIT(Appeals) to decide the issue afresh - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition made under Section 68 on account of share premium and share capital.
2. Evaluation of whether the shareholding companies were genuine or merely paper companies.
3. Applicability of the Supreme Court decision in Lovely Exports Pvt. Ltd. vs. CIT.
4. Consideration of decisions from Bombay High Court and Delhi High Court.
5. Genuineness of the transaction of subscribing share premium.
6. Consideration of a report from the Investigation Wing, Mumbai.
7. Violation of the principle of natural justice by not allowing JCIT to represent the case.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made under Section 68:
The Revenue contested the deletion of the addition made under Section 68 on account of share premium and share capital by the CIT(A)-II, Nashik. The Assessing Officer (AO) had added ?8,52,50,000/- to the total income of the assessee, treating the share capital of ?42,62,500/- and share premium of ?8,09,87,500/- as unexplained cash credit under Section 68. The CIT(A) deleted this addition, citing the Supreme Court decision in Lovely Exports Pvt. Ltd. vs. CIT, which stated that if the share application money is received from alleged bogus shareholders whose names are provided, the Department can only proceed to reopen their individual assessments.

2. Evaluation of Whether the Shareholding Companies Were Genuine:
The AO conducted a detailed examination of the financial statements and affairs of the assessee and the investor companies, concluding that the 35 share-investing companies were paper companies. Inspectors were deputed to verify the business activities of these companies, and it was found that most companies operated from common addresses with minimal infrastructure, indicating they were not carrying out substantial business activities. The AO also recorded statements from the Managing Director and the Auditor, revealing that the valuation of shares was not based on any scientific formula or rationale.

3. Applicability of the Supreme Court Decision in Lovely Exports Pvt. Ltd. vs. CIT:
The CIT(A) relied on the Supreme Court decision in Lovely Exports Pvt. Ltd. vs. CIT to grant relief to the assessee. However, the Revenue argued that the recent Supreme Court decision in Principal Commissioner of Income Tax (Central)-1 vs. NRA Iron & Steel Pvt. Ltd. laid down principles that the assessee must prove the genuineness of the transaction, the identity of the creditors, and the creditworthiness of the investors. The AO's detailed investigation revealed that the assessee failed to discharge this onus, making the Lovely Exports decision inapplicable.

4. Consideration of Decisions from Bombay High Court and Delhi High Court:
The CIT(A) also relied on the Bombay High Court decision in CIT vs. Creative World Telefilms Ltd. and the Tribunal's decision in M/s. Orchid Industries Pvt. Ltd. vs. DCIT. The Revenue argued that the Delhi High Court's decision in NDR Promoters Pvt. Ltd. and the Supreme Court's dismissal of the SLP in that case were more relevant. The Delhi High Court emphasized that the identity, creditworthiness, and genuineness of the transaction must be tested in-depth, considering human probabilities and normal conduct.

5. Genuineness of the Transaction of Subscribing Share Premium:
The AO found that the share premium of ?190/- per share was not justified based on the company's fundamentals, as the assessee had not commenced business activities and had shown losses. The valuation report by the Auditor was deemed fabricated and misleading. The CIT(A) did not address these findings in detail, focusing instead on the legal precedents.

6. Consideration of a Report from the Investigation Wing, Mumbai:
The AO considered a report from the Investigation Wing, Mumbai, indicating that the assessee had obtained accommodation entries from Shri Pramod Jain, who admitted to providing such entries to various beneficiaries. This report was not adequately addressed by the CIT(A).

7. Violation of the Principle of Natural Justice:
The Revenue argued that the CIT(A) violated the principle of natural justice by not allowing JCIT, Range 2, Nashik, to represent the case despite a request. This procedural lapse was highlighted as a significant issue.

Conclusion:
The Tribunal found that the CIT(A) did not adequately address the detailed findings of the AO and relied heavily on legal precedents that were not entirely applicable. The Tribunal remanded the matter to the CIT(A) to decide afresh in light of the Supreme Court decision in NRA Iron & Steel Pvt. Ltd. and the Delhi High Court decision in NDR Promoters Pvt. Ltd., emphasizing the need for the assessee to prove the genuineness, creditworthiness, and identity of the shareholders. The CIT(A) was directed to provide a reasonable opportunity of hearing to both the assessee and the AO, ensuring adherence to the principles of natural justice.