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TMI Blog2019 (9) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Urch Traders P.Ltd only to the tune of ₹ 55 lakhs, which stood added as unexplained cash credit u/s. 68. Assessing Officer s re-opening reasons have to be read on standalone basis and no substitution or deletion is permissible. Hon ble jurisdictional high court s decision in Equitable Investment [ 1988 (2) TMI 25 - CALCUTTA HIGH COURT] also holds that when section 148 notice is issued after the CIT s approval is challenged only the reasons recorded for obtaining such an approval. It transpires during the course of hearing that Shri Pransukha was neither promoter nor director of the said entity. We also find that Assessing Officer s reopening reasons formed do not satisfy the settled law as per hon ble Delhi high court s decision on the very issue in PCIT V/s. RMG Polyvinyl (I) Ltd. [ 2017 (7) TMI 371 - DELHI HIGH COURT] upholding the tribunal s order quashing similar re-opeing based on investments, wherein the Assessing Officer had nowhere undertaken any independent enquiry. Thus lordships hold that mere such an information could not be treated as tangible material for the purpose of initiation of 148/147 proceedings. Assessing Officer has erred in initiating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing and managing a number of shell/jamakharchi companies. He further deposed that has companies M/s. P.R Niryat Pvt. Ltd, Suman Vanijya Pvt. Ltd and Urch Traders Pvt. Ltd. Had invested in shares of M/s Nillampathy Tracon Pvt. Ltd M/s. Rozelle Sales Services P.Ltd . The Assessing Officer noticed in this factual backdrop that one of assessee s (seventeen) shares subscriber was M/s Urch Traders P.Ltd. He, therefore, framed reasons to before us this back drop of facts that the assessee company had ploughed back unaccounted income as share capital thereby giving rise an instance of the taxable income having escaped assessment. He set into to motion section 148/147 proceedings vide reopening notice served on the assessee on 30.03.2017 4. Case file suggests that the assessee filed its return on 20.04.2017 in response to section 148 notice. The Assessing Officer then issued section 133(6) notice to all of the assessee s subscriber companies. Thirteen out of said seventeen investors replied to his notice. His notices issued to M/s. Sumangal Developers P.Ltd., Nice Commotrade P.Ltd, Urch Traders P.Ltd and Dream Goods P.Ltd., which came back unserved with remark Left .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search team that all the shareholder companies are paper/jamakharchi companies, the AO has only relied upon making of verification by issuing notices u/s.133(6} and not making any field enquiry to ascertain genuineness of these shareholder companies. The pattern to provide funds by these paper/jarmakharchi companies is similar to what has been analyzed by the vs. Commissioner of Income Tax-1, Kolkata (supra) because ali these shareholder companies do not have any significant source of income but they have made investment of huge amount of money in share capital of the assessee company only by circulation of capital from one company to another company. Before accepting the amount of RsAA5 crore as genuine investment in share capital of the assessee company by 16(sixteen) companies out of 17(seventeen} companies being paper/jamakharchi companies, the AO has only relied upon the reply submitted in response to notice u/s.133(6) and did not verify the correctness of the reply by making field enquiries and hence, his acceptance of genuineness of transaction of subscription of share capital remained in dark cloud because of inadequate enquiry made by him. Such inadequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly filed all the evidences including acknowledgement of filing of the return by the shareholders, their Audited Profit and Loss Account and Balance sheet their bank statements, the source of investment made by them, the details of registration of shareholder companies with the registrar of companies, the evidence of existence of the companies at the given address and copy of PAN and the particulars and details of the directors. The AO issued notice u/s.131/133(6) to the shareholders and examined the same thoroughly. It is only thereafter that the AQ found that the sum of ₹ 55 lakhs being share capital received from Urch Traders was not explained by the assessee. Therefore, the Ld. AO added back the said amount as income: The assessee has already filed an appeal before the Ld. CIT( A) on 11/12/2017. In the back ground of the aforesaid facts it is submitted as under,' It is firstly submitted that the reopening of the assessment u/s.148 itself was bad in law. It is apparent from the reasons recorded that the Ld. AO reopened the assessment by replying on the uncorroborated information while reopening the assessment without application of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as considered as not a genuine company. The finding was that no enquiry was made at all. The facts of the assessee's case are altogether different. The assessee company is doing huge business, the turnover of which is more than 7 crores. The existence of the company and its business is not doubted or disputed. The capital of the company is is 78 lakhs whereas the serve and surplus is over ₹ 6.44 crores. This shows the creditworthiness of the assessee company. It is also submitted that in the notice u/s.263 there is no finding that the shareholder companies were not existing on the roll of the department or that they are not regularly filing their Income Tax Returns or return before the ROC. It appears that your honour have not looked into the assessment records. All the details and enquiries made by the AO in respect of share capital are on record. Therefore, provisions of sec.263 cannot be applied on mere subjective satisfaction. It may be submitted that there is nothing on record that the companies from whom the share capital was raised are not genuine companies. In view of the above the proceedings u/s.263 proposing revision of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjective but based on those enquiries that should have been made by the AO but has not been made as discussed in para 2 of this order. The issue, whether inadequate inquiry conducted by the Assessing Officer empowers the Commissioner to revise the assessment order, has been quite exhaustively dealt with in the order of ITAT, Kolkata in case of M/s. Subhlokshmi Vanijya Pvt. Ltd.(supra), holding that if the AO simply gathers documents and keep them on record, then such nominal enquiry falls within the overall category of 'no enquiry'. It is also wrong on part of the Ld. AR to say that in case of M/s. Subhlakshmi Vanijya Pvt. Ltd., no enquiry was made by the AO at all. In the case of M/s. Subhlakshmi Vanijya Pvt. Ltd. also, the Aa issued notices u/s.133(6) but he failed to comprehend the manner or logic behind issuing shares at such a high premium, nor to examine any of the Directors of the companies which were subscribers to share capital and he simply accepted the replies given by all the shareholders confirming making investment in share capital of the assessee company and showing payment by cheque. Facts of this case and facts of M/s. Subhlakshmi Vanijya Pvt. Ltd. are almo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2017) 88 taxmann.com 189 (Allahabad), it has been held that in case of private limited company, subscription to share capital is made through private invitation and not through public document. Therefore, it was the assessee company itself that ought to have known the person/s it invited to subscribe to its share capital and hence, the assessee cannot hide behind the shell of a corporate entity to feign ignorance of the real person who may have subscribed to its share capital. This is a special fact known only to the assessee who alone may have been aware of the real identity of such persons. Upon failure to disclose and establish the identity of such a person, an adverse inference and consequential addition had to be made in the hands of the assessee company itself under section 68 of the Act by disbelieving the cash credit entries found recorded in the books of the assessee being a private limited company. Therefore, in view of the above decision of the Allahabad High court, in case of a private limited company, if genuineness of the share capital of a private limited company is not explained, necessary addition under section 68 of the Act is to be made in the income of that pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and day to day affairs, such as administrative, accounts, audits etc. of these companies. These persons along with directors of these companies should be examined on oath u/s.131 of the Act. During examination of these persons, books of account of these companies should also be called for and examined while taking statements of these persons. This examination should be done in comprehensive manner in order to ascertain whether these companies are running any genuine business to earn income to generate fund out of which, investment in share capital fund of the assessee company has been made or they have only facilitated in circulation of capital from one company to another without doing any worthwhile business activity and they have come together to facilitate in issuing of shares at such a huge premium of ₹ 490/- per shares to the assessee company 2S observed by the ITAT, Kolkata in case of M/s. Subhlakshmi Vanijya Pvt. Ltd.(supra). In case, these shareholder companies are found to be having no worthwhile business and funds for investment in share capital of the assessee came only through circulation of funds, the directors of these companies should be questioned on ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al of the assessee company shown by these shareholder companies and necessary addition u/s.68 should be made on the basis of findings of the AO about Identity, credit worthiness of shareholders and genuineness of transactions keeping in view the provisions of section 68. Before passing revised order as per my directions as discussed in this para, the assessee should be confronted with .all the findings which are adverse to it, calling for its explanation on these findings and then decision for addition u/s.68 should be taken after considering the explanation of the assessee, if any filed. 8. In view of my above decision, the assessment order passed u/s. 147/143 (3) dated 30.11.2017 for A.Y.2010-11 is set aside to the extent and for the purpose of further examination and passing of a revised assessment order as discussed in previous para. The addition of ₹ 55 lakh made in original assessment order shall remain intact. 7. Learned counsel s first and former plea raised during the course of hearing is that the PCIT has erred in law and on facts in holding that assessee could not have challenged the correctness of re-opening / re-assessment in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the assessment order passed u/s 147 of the Act, the AO did not make any addition on account of unexplained investment in construction. It is the plea of the assessee that when no addition is made on the grounds on which re-assessment proceedings are initiated then no other addition can be made in such reassessment proceedings. 8. The first aspect which needs to be examined is as to whether the assessee is entitled to challenge the validity of initiation of proceedings u/s 147 of the Act in the present appeals in which he has challenged the validity of order passed u/s 263 of the Act. The Id. Counsel for the assessee submitted before us that it is open to an assessee in an appeal against the order u/.s 263 of the Act which seeks to revise an order passed u/s 147 of the Act, to challenge the validity of the order passed u/s.147 of the Act as well as initiation of proceedings u/.s 147 of the Act. In this regard the Id. Counsel for the assessee placed before. us two decisions one rendered by Lucknow Bench of ITAT in the case of Inder Kumar Bachani (HUF) vs ITA 99 ITD 621 (Luck) and ITAT Mumbai ' G ' Bench in the case of M/s. Westlife Development Ltd. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court to pass any decree and such a defect cannot be cured even by consent of parties. 10. The ITAT Mumbai bench made a reference to another decision of the Hon'ble Supreme Court in the case of Sushil Kumar Mehta vs Gobind Ram Bohra, (1990) 1 SCC 193 and the decisions in the case of Indian Bank vs Manilal Govindji Khona (201:;) 3 SCC 712. The IT A T Mumbai bench also held that if order of assessment passed u/s 147 of the Act was iI1egal and nullity in the eyes of law then that order cannot be revised by invoking powers u/s 263 of the Act by CIT. The Mumbai Bench has in this regard placed reliance on the decision of Hori' ble Delhi bench of the Tribunal in the case of Krishna Kumar Saraf vs CIT in ITA N0.4562/DeIl2007 order dated 24.09.2015 wherein it was held as follows :- 17. There is no quarrel with the proposition advanced by Id. DR that the proceedings u/s 263 are for the benefit of revenue and not for assessee. 18. However, u/s 263 the Id. Commissioner cannot revise a non est order in the 'ye of law. Since the assessment order was passed in pursuance to the notice U/S 143(2), which was beyond time, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings are non-est in law or void on the ground of lack of jurisdiction then the validity of such proceedings can be challenged even in an appeal arising out of collateral proceedings. We have already set out the ratio laid down in these decisions at cl we do not wish to repeat the same. Suffice it to say the law is well settled that invalidity of the primary proceedings for want of proper jurisdiction can be challenged even in appellate proceedings arising out of a collateral proceeding. In view of the aforesaid legal position we admit the additional grounds for adjudication. 10. We conclude in view of the abstracted detailed discussion that the assessee is very much entitled to challenge validity of the above said re-assessment in collateral proceedings. 11. We now proceed to read with latter most important issue of validity of reopening/ re-assessment framed on 30.11.2017. Both the learned representatives take us to the Assessing Officer s re-opening reasoning recorded as under:- Reasons for belief that income has escaped assessment: A search seizure operation was conducted on 25.08.2015 in the Ghnshyam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 35,00,000/- 6. Distant Vinimay Pvt. Ltd -do- 3000 15,00,000/- 7. Dream Goods Pvt. Ltd 161,Rabindra Sarani, Kol-7 2000 10,00,000/- 8. Donald Management Pvt. Ltd 2, N.C dutta Road, Kol-1 7000 35,00,000/- 9. Gazebo Commerce Pvt. Ltd. 37/1 Adinath Saha rd, Kol-48 6800 34,00,000/- 10. Nice Commotrade Pvt. Ltd 161 Rabindra Sarni, Kol- 7 2000 10,00,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68,79,000/- 90,00,000/- 4,12 crore -48,580/- 2010-11 78,79,000/- 5,80,00,000/- 6.94 crore -73,111 Clearly the sale and the net loss does not in any way justify the premium the company has commanded for issue of shares during financial year 2009-10. It may be pertinent 10 mention here that during the post search proceedings statement of Shri Suresh Kumar Pansukha, entry operator was recorded u/s 131, and he accepted that the share capital was raised through his shell/jamakharchi companies which ore managed and controlled by him (Page 277 10 280 of the appraisal report). Relevant portion of the statement is furnished below: Q7. Do you know the companies namely Rozelle Sales services Pvt. Ltd, Nillimapathy racon Pvt Ltd, P.R Niryaat pvt lld, Summon Vanijya lid and Urchi Traders Pvt Ltd? If yes, please stole the business relation between them and you. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assessment. which warrants issue of notice u/s 148. 12. The above extracted re-opening reasons sufficiently indicate that the Assessing Officer has narrated the relevant factual backdrop of the search action dated on 25.05.2015 in M/s. Ghnashyam Sarada Group cases. He thereafter found reasons to believe that the assessee had received share application and share premium of ₹ 5 crores including latter head figure of ₹ 4.90 crores @ ₹ 490 per share. He was of the view that the assessee s sales and net loss did not justify the aforesaid exorbitant premium. The Assessing Officer referred to the entry operator s statement (supra) that his shell/jama kharchi entities namely M/s. P. R Niryaat Pvt. Ltd M/s. Suman Vanijya, M/s. Urch Traders P.Ltd (supra) had invested in assessee s share capital. He thereafter rendered that the assessee s fundamentals could not justify the foregoing exorbitant premium. And that it had loughed back the group s unaccounted income in the guise of share capital received through shell/jamakharchi companies. 13. We observe that in this backdrop of facts of re-opening reasons that the Assessing Officer has nowhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 6.9.2017. We find no reason to accept the revenue s instant arguments as the fact remains that assessee has received share application of ₹ 55 lakhs only in case of one out of three jamakharchi companies and the same stood added u/s. 68 of the Act (supra). 15. It further transpires during the course of hearing that Shri Pransukha was neither promoter nor director of the said entity. We also find that Assessing Officer s reopening reasons formed do not satisfy the settled law as per hon ble Delhi high court s decision on the very issue in PCIT V/s. RMG Polyvinyl (I) Ltd. (2017) 396 ITR 5 (Del) upholding the tribunal s order quashing similar re-opeing based on investments, wherein the Assessing Officer had nowhere undertaken any independent enquiry. Thus lordships hold that mere such an information could not be treated as tangible material for the purpose of initiation of 148/147 proceedings. Similar case law CIT V/s. Insecticies (2013) 357 ITR 330, M/s. Sabh Infrastructure V/s. ACIT (2017) 398 198 also echoes the very ratio. The above latter judicial precedent holds that the Assessing Officer must also supply report/document as relied upon by him. Coupled w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... redit worthiness of the other parties. the entire introduced capital and share application money will be treated as your income for that year. I will therefore continue the proceedings for reassessment of your return U/S 147. Statutory notices u/s 143(2) and 142(1) are enclosed herewith. Yours faithfully. Sd/- ( Sanjay Mukherjee) DCIT ICir-6/Kol 8.2. The submissions of the learned counsel for the assessee before us was that the reasons recorded by the AO were mere information received from D.I.T.(Investigation), New Delhi. There was no independent application of mind by the AO based on which it can be said that he arrived at the satisfaction that the income of the assessee is chargeable to tax has escaped assessment. It was submitted that ITA No.660/KoIl20 11 Great Wall Marketing (P)Ltd. A. Yr.2002-03 information received by the AO was vague and uncertain and cannot be construed to be sufficient and relevant material on the basis of which reasonable person can form belief regarding escapement of income. Reliance was placed by the learned counsel for the assessee on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical to the case decided by the Hon'ble Delhi High Court. Following the said decision we hold that initiation of re-assessment proceedings is not valid. On this ground, the assessment is liable to be annulled. 16. We observe in the light of above narrated facts and judicial precedents that the Assessing Officer has erred in initiating the impugned re-opening, which is aggrieved the assessee. We therefore quash the same as non est. That being the case the PCIT s assumption of revision jurisdiction u/s. 263 of the Act must also follow the suit since it has no legs to stand. The assessee succeeds on the foregoing legal issue. All of its arguments on merits that PCIT has wrongly exercised sec 263 revision jurisdiction on various facts in the instant appeal are rendered infructuous. We make it clear that we have quashed the above stated re-opening/re-assessment to the extent of validity of PCIT revision jurisdiction exercise in the instant case only. Necessary consequences in pursuance to Assessing Officer s re-assessment dated 30-11-2017 shall continue to follow. 17. This assessee s appeal is allowed in above terms. Order pronoun ..... 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