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TMI Blog2024 (4) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal has committed substantial error in law in not considering the judicial Principles laid down in the matter of Pr. CIT 5, Kolkata Vs Swati Bajaj reported in 2022 SCC Online 1572 (Cal). C) Whether the order of the Learned Tribunal is perverse inasmuch as the same has been passed without considering the facts of the case in its proper perspective. D) Whether the learned Tribunal has committed substantial error in law by failing to appreciate that neither the identity and creditworthiness of the creditors nor the genuineness of the transactions has been established and that being no addition made by the AO and CIT(A) were perfectly justified. 2. We have heard Mr. Om Narayan Rai and Mr. Soumen Bhattacharjee, Learned Senior Standing Counsel for the appellant and Mr. JP Khaitan learned Senior Counsel assisted by Ms. Swapna Das and Mr. Siddharth Das learned Advocates for the respondent assessee. 3. The assessee filed its return of income for the Assessment Year 2012-13 declaring income of Rs. 20,555,090/-. The case was selected for scrutiny and notice under Section 143(2) was issued on 12.08.2013 and subsequently notice under Section 142(1) along with the questionnaire was is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 68 of the Act as undisclosed cash credit. The assessee was informed that penalty proceedings under Section 271(1)(c) is being initiated separately. Aggrieved by such order, the assessee preferred appeal before the Commission of Income Tax (Appeal)-11 Kolkata, [CIT(A)], contending that in the course of assessment proceeding the details/ documents in respect to the share applications were furnished before the Assessing Officer, all the share applicants are body corporate assessed to income tax and the share application money was received through proper banking channels. The details of source of fund was submitted to the Assessing Officer. However, the addition has been made on the ground of not responding to the notice issued under Section 131 of the Act. It was further contended that the Assessing Officer did not conduct any enquiry with regard to the genuineness of the transaction and did not allow the adequate liberty to the assessee to produce the Directors of the share-holders and the addition is wholly unjustified and has to be deleted. The CIT(A) first noted the factual position, that the assessee had credited an amount of Rs. 14,63,00,000- in its books towards s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8991250 11412349 1003982 Nil 363404.30 2012-13 109267600 65868034.90 163291250 11809307 1113508 Nil 491348 6. After setting out the above details the CIT(A) examined the bank accounts of the five companies as mentioned above and has recorded the findings that the account receives a certain amount from one entity and immediately remits to another entity. The entire bank account statement shows that the bank account is being used only for one activity i.e. receiving and transferring funds and all through the year in the said bank account Gainwell Textrade Private Limited has received cheques from somewhere and has immediately issued in favour of another company and therefore came to the conclusion that the bank account is being used solely for the purpose of receiving and issuing cheques and there hardly remains any significant balance in the account. 7. The another bank account was also examined and the CIT(A) observed that the Gainwell Textrade Private Limited is being used only to receive funds from one entity and transfer the same to another and no other transaction worth noticing is recorded in the account and the account shows that it is being used to reta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... routing of funds, the capital of each of the companies is enhanced and this inflated capital is then used for providing loans etc. to desired entities. 8. The CIT(A) further points out that the bank accounts of the above companies show that huge sums are receive from one concern through cheques or through RTGS and are immediately diverted to another company of the group. The bank balances remain negligible before and after such transfers. Further each of these companies invests in each other at very high premium even though there is no business being conducted. Further it is observed that there is no reason or logic provided by any of the companies as to on what basis and calculation they arrived at a value of premium on shares. Neither the assessee not its investors has followed the guidelines of the Reserve Bank of India or Institute of Chartered Accountants of India for determining the rate of premiums on their shares and the rates so fixed appears to be arbitrary and devoid of any financial or accounting rationale. Further the CIT(A) points out that the investors company do not have any business operation, yet they have raised huge capital through issue of shares at a premium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had not followed any of the guidelines issued by the Reserve Bank of India or the Institute of Chartered Accountants of India for ascertaining the value at which premium as high as Rs. 40/- on a share of face value of Rs. 10/- could be charged. The CIT(A) held that there is no logic or rationale behind the decision of the assessee. In paragraph 31 of the order of CIT(A), the decision of the Delhi tribunal dated 23.08.2018 in the case of M/s. Pee Are Securities Limited Versus Deputy Commissioner of Income Tax, Circle 14(1) was referred to. The paragraph from the said decision was quoted which makes an interested reading. The tribunal held that the faith reposed in the tribunal by the Hon'ble Courts above makes the job of the tribunal even more onerous and demanding and does requires the tribunal to take a holistic view of the matter, in the light of the surrounding circumstances, preponderance of probabilities and ground realities, rather than being swayed away by the not so convincing, but apparently in order, documents and examining them, in a pedantic manner, with blinkers on. That the phenomenon of shell entities being subjected to deep scrutiny by tax and enforcement off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare applicants are assessed to income tax regularly, the share application money was received through banking channels, the shareholders had sufficient funds for the purpose of investment and the investments are reflected in their bank accounts and the shareholders have confirmed the transactions. Further the tribunal held that the assessee is a steel industry and the future prospects of the assessee is great, that they were in needs of funds as they were expanding its operations and at the given point of time there was increase in fixed assets and the turnover of the assessee increased by 73% and the reason to invest also included strategic relation and are made by the associates/group companies having directors directly related to assessee's directors. 12. The tribunal faulted the assessing officer and the CIT(A) for having not brought on record any evidence to show that it was the assessee's own funds that was brought back in the form of share application money. Further the CIT(A) has not pointed any doubt or discrepancy with regard to the identity of the investor and the only finding rendered by the CIT(A) is that the investor companies have low income. Thus, the tribunal hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessing officer is both an investigator and an adjudicator; when a fact is alleged and stated before the assessing officer by an assessee, he must and should examine and verify, when in doubt or when the assertion is debatable. Normally a factual assertion made should be accepted by the assessing officer unless for justification and reasons the assessing officer feels that he needs/requires a deeper and detailed verification of the facts alleged. The assessee in such circumstances should cooperate and furnish papers, details and particulars, this may entail issue of notices to third parties to furnish and supply information or confirm facts or even attend as witnesses. The assessing officer can also refer to incriminating material or evidence available with him and call upon the assessee to file their response. A universal procedure or method which should be adopted by the assessing officer when verification of facts is required cannot be laid down. The manner and mode of conducting assessment proceedings has to be left to the discretion of the assessing officer and the same should be just, fair and should not cause harassment to the assessee or third person from whom th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is evidence to show that assessee may not be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the "transaction" and that it was not entirely an arm's length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity and justice. The doctrine is not an eldritch or a camouflage to circulate ill gotten and unrecorded money. Without being oblivious to the constraints of the assessee, an objective and fair approach/determination is required. Thus, no assessee should be harassed and harried but any dishonest façade and smokescreens which masquerade as pretence should be exposed and not accepted. 21. With regard to the identity, creditworthiness and genuineness of the transaction and the onus of prove the Hon'ble Court held as follows:- 30. What we perceive and regard as correct position of law is that the court or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al questions of law which fell for consideration was whether the finding of the CIT(A) that unaccounted money was or could have been laundered as clean share capital by creating façade of paper work, routing the money through several bank accounts and getting the seal of statutory approval by getting the case re-opened under Section 147 suo motu and whether the same is perverse. The facts of the said case was noted wherein 19 out of the 13 applicants secured funds for the purpose of contributing to the share capital of the assessee therein, on account of share application money. In other words, those 19 applicants collected funds on account of share application money in their respective companies and that money was contributed to the share capital of the assessee. 15 out of the 39 applicants procured the requisite funds by selling the shares and the rest of the applicants of shares, in the share capital of the assessee company, did not disclose the nature of receipt at their end though the source of funds were identified. Further the shares were offered to and subscribed by closely held companies owned by the promoter/director or their close relatives and friends. After noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rised as follows:- 13.1. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. 13.2. The assessing officer is duty-bound to investigate the creditworthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. 13.3. If the enquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack creditworthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act. 25. In Principal Commissioner of Income Tax, Kolkata Versus Swati Bajaj 2022 SCC Online Cal 1572 this court considered as to in what manner the allegation against the assessee has to be proved. It was held that to prove the allegation against the assessee, it can be inferred by a logical process of reasoning from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the person. That certain judicial pronouncements have created doubts about the onus of proof and the requirements of Section 68, particularly in cases where sum is credited as share capital, share premium etc. That courts have drawn a distinction and emphasised that in case of private placement of shares the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large. In the case of closely held companies, investments are made by a known person; therefore, a higher onus is required to be placed on such companies besides the general onus to establish, identity and creditworthiness of the creditors and genuineness of the transaction. This additional onus needs to be placed on such companies to also prove the source of money in the hands of such shareholders or person making payments towards issue of shares before such sum is accepted as genuine credit. If the company fails to discharge the additional onus, the sum shall be treated as income of the company and added to its income. Therefore, it was proposed to amend Section 68 of the Act to provide the nature and onus of any sum credited, as share capital prem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if we take the case of Gainwell Textrade Private Limited, they have invested Rs. 8,10,00,000/- in the assessee company. The said company receives a total of Rs. 1,65,00,000/- on 01.06.2011 and 02.06.2011 from eight private limited companies/entities. Out of the said amount, Rs. 1,50,00,000/- was remitted to the assessee's bank account on 02.06.2011 by three cheques of Rs. 50,00,000/- each. The balance remained at Rs. 15,09,039/-. On 02.06.2011, an amount of Rs. 38,00,000/- was remitted to the account by a private limited company and the balance rose to Rs. 53,09,039/- out of this an amount of Rs. 50,00,000/- was remitted to the assessee account on the same day. On 04.06.2011, Divine Suppliers Private Limited deposited another sum of Rs. 60,00,000/- of which Rs. 50,00,000/- was remitted to the assessee on 06.06.2011. On 06.06.2011 Highlight Goods Private Limited transferred a sum of Rs. 10,00,000/- to this account by taking a closing balance to Rs. 23,08,819/-. On the same day an amount of Rs. 20,00,000/- was remitted to the assessees account. On 06.06.2011 Divine Suppliers Private Limited RD Fashion transferred Rs. 25,00,000/-, Rs. 38,00,000/- and Rs. 37,00,000/- to this account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are well planned and stage managed to show genuineness behind which a clean and simple "round tripping" of funds is taking place. The CIT(A) on examination of the facts found that the bank accounts act as "highway" in the "journey of money" on a rotation and laundry trial from one entity to another and by this way these bank accounts create a façade of documentary evidence for clean money in the form of account payee cheques for any kind of accommodation entries. 31. The CIT(A) did not stop with the above findings but proceeded to analyse the data which was made available in the form of return of income, bank statements etc. and found that the investors have purchased the shares of the assessee at a premium and all have shown similar characteristics, the revenue from operations are either nil or are negligible; the returns are either of loss or of insignificant income below taxable limit; they have been issued shares at very high premium without having earned any revenue from business operations; they have invested on shares at very high premium in companies who also have not earned anything from business operations; their balance sheet shows that even though they do not ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Registrar of Companies can in no manner be sufficient to discharge the onus under Section 68 of the Act. The learned tribunal did not examine the factual matrix in the depth and in the manner it ought to have done. Therefore, we would be well justified to hold that the findings rendered by the tribunal are perverse. It was argued by the learned Senior Advocate appearing for the respondent assessee that there is no material to show "round tripping" of funds; there is no finding that the money which has come to the assessee is ill gotten money and that the CIT(A) did not examine how the money came to the investors and failed to note that the company had requisite share capital resource. Various documents which were placed before the tribunal in the form of a paper book was submitted to the court for its perusal. 32. In our view it is not required to show that the money which came to the assessee is ill gotten and what is required to be seen is whether the transaction was genuine. It may be true that the identity of the investor company has been established as they are registered with the Registrar of Companies and they are regularly assessed to income tax. Assuming without admittin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created through rotating of money in between the group companies and the assets mainly consists of cash and cash equivalents are not enough to prove that any unaccounted money of the assessee has been introduced in the assessee company warranting addition under Section 68 of the Act. This finding in our opinion upon consideration of the facts is perverse. 35. The CIT(A) has made an elaborate exercise to assess the creditworthiness of the investor companies as well as the genuineness. All the investor companies are group companies and the directors are closely related to the director of the assessee company and the director Mr. Agarwala himself is one of the directors in one of the investor companies namely Pawapuri Mercantile Private Limited and the spouse of Mr. Agarwala is the director of Mubarak Cosmetics Private Limited, an investor company. Therefore, on a deeper scrutiny of the factual position would show that the investor company did not have a genuine creditworthiness and consequently the transaction has to be held to be not genuine. As held in N.R. Portfolio Private Limited (supra) whether or not the onus is discharged depends on facts of each case as well as it depends o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e body corporate registered with the Registrar of Companies and individually assessed to income tax and therefore the genuineness of the parties is beyond doubt. However, this is not the litmus test to discharge the burden on the assessee to establish creditworthiness of the investing companies as well as the genuineness of the transaction. Thus, we have no hesitation to hold that the explanation offered by the assessee is neither proper, reasonable or acceptable. 37. In Swati Bajaj, the court held that based on the foundational facts the department has adopted the concept of "working backward" leading to the assessee. The department would be well justified in considering the surrounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over and then arrive at a decision. 38. Thus the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges are founded so as to reach a reasonable conclusion and rightly applied the test t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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