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TMI Blog2024 (9) TMI 1509X X X X Extracts X X X X X X X X Extracts X X X X ..... ail the same. However, it is observed that written submissions and paper book have been filed and vide letter dated 16/04/2024, the assessee has requested to treat the paper book already submitted before the Tribunal on 29/01/2024 as the representation/appearance before the Tribunal and has also requested the Tribunal to rely on the written submissions. Ld. Sr. DR has also filed the written submissions. Therefore, after hearing the Ld. DR and considering the written submissions of the assessee as well as the Ld. Sr. DR, the appeal is being decided. 3. The grounds of appeal raised by the assessee read as under : "1. For that the Ld. CIT(A)-3, Kolkata has erred in law as well as on facts of the case by not paying heed to the assessee's grounds of appeal raised before his Honour and dismissing the grounds of appeal filed by the assessee against the addition of Rs. 4,91,00,000/- u/s 68 of the I. T. Act, 1961 on the grounds which are not correct. 2. For that the observations and contentions of the Ld. CIT(A)-3/Kolkata while passing the order u/s 250 of the I. T. Act, 1961 regarding arbitrary disallowances and additions under different heads on the grounds which are not correct. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT Vs. M/s Nipun Builders & Developers Pvt. Ltd. [2013] 30 Taxmann.com 292 (Delhi). The assessing officer relied upon the following judicial pronouncements for the applicability of section 68 and for the inference that the receipts are of assessable nature: i. Govindarajulu Mudaliar Vs. CIT [1958] 34 ITR 807 ii. CIT Vs. Davi Prasad Vishwanath Prasad [1969] 72 ITR 194 (SC) iii. Commissioner of Income Tax Vs. Independent Media (P.) Ltd. [2012] 25 taxmann.com 276 (Delhi). Accordingly, in the light of the facts of the case and the exposition of the legal position with regard to the identity and creditworthiness of the subscriber companies and the genuineness of the transactions, the assessing officer was of the opinion that the credit of Rs. 4,91,00,000/- should be considered as income of the assessee, which included share premium and the sum was added as unexplained credits in the books of this is the company and as against the returned income of Rs. 3,518/-, the assessment was made at the total income of Rs. 4,91,03,50/-. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A), who confirmed the action of the Ld. AO by holding as under: "The Hon'ble ITAT has disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The company does not have fixed assets or inventories and did not display any signs of a company engaged actively in business. The Ld. CIT(A) therefore observed that the subscriber companies which had subscribed to the shares of assessee company with substantial premium did not have the capacity or the financial standing to do so. He also noted that during the course of assessment proceedings, the identity, the capacity and the genuineness of the transaction had not been established by the appellant therefore, on preponderance of probabilities the contention of the assessee company regarding share capital and premium could not be accepted. Besides noting that the subscribing companies did not have any financial credibility, he also analysed the audited profit and loss account in detail which are discussed on pages 2 to 5 of the appeal order. None of these companies has any fixed assets or infrastructure required to carry on business and none of them had reported any substantial income as per their income tax returns. The Ld. CIT(A) further relied on the decision of the Ahmedabad Bench of the Tribunal in the case of MAP Steels (India) Pvt. Ltd in ITA No. 411/AHD/2015 and conclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee of its duty cast u/s 68. An assessee's duty to establish the source of the funds does not cease by merely furnishing the names, address and PAN particulars or relying on entries in the Registrar of company's website. The relationship of the assessee to the applicants should be at arm's length in such cases and this is what the appellant was required to establish. Also, the concept of "shifting onus" does not mean that once certain facts are provided, the assessee's duties are over. If on verification the information becomes false, unsatisfactory or unverifiable, the onus shifts back to the assessee. Therefore, the assessee was required to present himself before the AO for examination and verification of the documents. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. The details available reflect some paper work or documentation but genuineness, creditworthiness and identity are deeper and obtrusive. Thereafter, he relied upon the decisions in the cases of CIT Vs. Durga Prasad More [1971] 82 ITR 540 (SC) and in the case of Sumati Dayal Vs. CIT [1995] 214 ITR 801 (SC) and applying the test of human probabilities and prepon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not justify the premium charged as none of the companies reported any significant income in their return of income filed and the appellant had not explained this discrepancy. He further relied on the decision of the ITAT 'C' Bench Kolkata in the case of ITO, Ward 5(3), Kolkata Vs. M/s Blessings Commercial Pvt. Ltd. in ITA No. 271/Kol/2014 for AY 2010-11 and held that the issue is squarely covered by the judgment, paras 12 to 18 from which have been extensively reproduced in the order of the Ld. CIT(A). He further held that in the case of the assessee, Rs. 10/- share has been issued at a premium of Rs. 990/- for which no valid explanation has been given nor the assessee has even attempted to justify the amount of share premium. The financials of the assessee as well as the subscribers are not in line with the premium charged. The additions made by the Ld. AO was accordingly confirmed. 9. During the course of the appeal before us, the Ld. AR, vide elaborate written submissions filed, has filed the copy of ITR acknowledgement, audit report and audited financial statements of the assessee for the AY 2012-13 along with other documents which have been perused. The facts of the case have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Sheet of the company. This itself shows the creditworthiness of the company. Therefore, all the three limbs i.e., identity, genuineness and creditworthiness are proved and no addition is called for. Similar submissions have been made in respect of other share applicants as well and the documents relating to the copies of ITR acknowledgement, the auditor's report and audited financial statements as on 31 March 2012, memorandum of association and articles of association, bank statement highlighting the transaction, form of application for equity shares and copy of allotment advice have been filed in respect of all the share applicants. Elaborate submission has been made justifying the share premium charged, the contention that the premium can be taxed if it exceeds the fair market value only from the AY 2013-14 and not from the AY 2012-13. It is submitted that the assessee had discharged its initial onus as required under section 68 of the Act and the appearance of directors was not at all required under the law if all relevant documents to prove the capital were submitted and nothing had been brought on record to controvert the same and reliance has been placed on several judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tement furnished by the assessee, the transactions relating to the allotment of shares are duly reflected. The initial onus to prove the receipt of the share capital u/s 68 was therefore discharged. The department has not brought on record any evidence to prove to the contrary and shift back the onus on the assessee. The CIT(A) has not even made further enquiry by sending the matter to AO so that necessary enquiry can be made from the assessment records of the shareholders. Even otherwise, appearance of directors is not at all required under the law if all relevant documents to prove the capital were submitted and nothing has been brought on record to controvert the same. It is submitted that section 68 nowhere speaks of production of the creditor for acceptance of the cash credit. It only requires that the assessee has to prove the nature and source of the credit. The assessee has proved that the amount was received towards the share application, there was no legal obligation on the assessee to present itself physically before the AO and the same cannot be a ground for making addition u/s 68 before the Ld. AO. In view of the above the addition confirmed by CIT(A) under sec. 68 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the shareholders is negligible. In such a situation, inflow of share capital can only be achieved through paper manipulation from own group companies or through underhand dealings. He has submitted that it is against the human probability and common man's prudence to make unsecured investment in lesser-known shares from where no monetary benefit is likely to accrue. Such fact is in contrast to the fact that the shareholder can fetch the interest of around 6% on almost the secured investment in form of time deposits of banks and post offices. The share floating company and share holding company, both having weak financials, have managed to receive premium against sale of shares and have paid premium against purchase of shares, justification for such premium has not been evaluated on rational legal basis. The involved companies, despite receipt of huge share capital with premium, did not declare dividend and neither received dividend against invested fund of huge share capital with premium. The specific, distinct and visible business is not discernible from the accounts of the Assessee and the shareholders. Further, the assessee is virtually an unknown company on the count of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed from the side of assessee and hence, after observing due formalities, addition u/s 68 was made for Rs. 4,91,00,000. The Ld. CIT(A) after thorough facts based discussion under columns III two V on pages 2 to 5 and case laws based discussion from page 15 to 17, upheld the addition. On the basis of the objective findings of the assessing officer and the Ld. CIT(A), the addition was made and upholding of addition is rationally justified. It is thus concluded in the written submissions by the Ld. Sr. DR that in the light of the contents, and the accounts of the involved companies, it is crystal clear that the involved companies have very poor fundamentals during the relevant financial year with respect to the concerned assessment year and therefore the assessing officer is rationally justified in making the addition, which deserves to be upheld. As regards the bank statements, it is submitted that the bank transactions simply create the appearance of legitimate transactions but the reality is different from what appears. The relevant bank statements reflect almost matching debit and credit entries, revealing the nature of transaction through which accommodation entries are provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med share premium is equally not justified. Still further, where there is no security against the invested share capital of the shareholder, no man of common prudence can purchase the shares of such company whose past record of monetary benefit accruing to the shareholders is negligible. In such a situation, inflow of share capital can only be achieved through paper manipulation from own group companies or through underhand dealings. Here it is worth mention that it is against the human probability and common man's prudence to make unsecured investment in lesser-known shares from where no monetary benefit is likely to accrue. Such fact is in contrast to the fact that the shareholder can fetch the interest of around 6% on almost the secured investment in form of time deposits of banks and post offices. Hence in the light of the analysis of final accounts of the involved companies and the facts narrated above, neither the inflow of premium nor outflow of premium, in respect of corporate creditors is justified. What to talk of share premium, the assessee company and the transacting company as well, do not command even the face value of share. Thus, what appears from financial tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after, the assessee would be entitled to the benefit of (deletion of) disallowance [CIT v. Saravana Constructions (Lid, (2012) 22 taxmann.com 259 (Karn)=(2012) 208 Taxman 188 (Mag)).The Ld. Sr. DR has relied upon various citations and has also submitted that the case laws quoted by the A.R. of the assessee are having different facts in comparison to the facts of this particular case and therefore, the case laws being distinguishable, are not applicable to this case and hence, there is no need to take into consideration the claimed case laws. The mechanical reference to the claimed case laws, as referred to by the learned A/R of the assessee and claimed to be apparently applicable in this case, are not at all applicable as these are distinguishable on the facts and circumstances of the case. In conclusion it is stated that on basis of above narrated data, facts, analysis of final accounts of the corporate creditors, non-justification of premium in both purchase and sale of shares in respect of the corporate creditors, settled issues relating to establishing identity and creditworthiness of the creditor and genuineness of transaction, it is crystal clear and objectively evidenced tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 re-sponse. 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 assess-ment 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 the confirmation or verification is required. 18. It was further held that the provisions of the Evidence Act are not applicable but the assessing officer being a quasi-judicial authority must take care and caution to ensure that the decision is reasonable and satisfies the cannons of equity, fairness and justice. The principle of Preponderance of Probability applies. On the question of creditworthiness and genuineness of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 con-trary 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 facade and smokescreens which masquerade as pretence should be exposed and not accepted. 20. 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 tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erverse. The facts of the said case was noted wherein 19 out of the 13 appli-cants 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 noting the facts, the Hon'ble Court held that the identity of the alleged shareholders is known but the transaction was not a genuine transaction. The transac-tion was nominal rather than real; creditworthiness of the alleged shareholders is also not estab-lished because they did not have money of their own, each one of them received from somebody and that somebody received fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investigate the creditworthiness of the creditor/sub-scriber, 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 estab-lished. In such a case, the assessee would not have discharged the primary onus contemplated by Section 68 of the Act. 24. In Principal Commissioner of Income Tax, Kolkata v. 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 the totality of the attending facts and circumstances surrounding the allega-tion/charges made and levelled and when direct evidence is not available it is the duty of the court to take note of the immediate and proximate facts and circumstances surrounding the events on which the charges/allegations are founded so as to reach a reasonable conclusion and the test would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in case of a company seeking share capital from the public at large. In the case of closely held com-panies, 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 cred-itors 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 dis-charge 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 premium etc. in the books of a closely held company shall be treated as explained only if the source of fund is also explained by the assessee company in the hands of the resident shareholders. However, even in the case of closely held companies, it is pro-posed that this additional onus of satisfactorily explaining the source in the hands of the share-holder, could not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 as-sessee 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 and out of this amount Rs. 1,00,00,000/- was remitted to the assessee's account in two transactions on 07.06.2011. On 14.06.2011, Magnificent Distributors Private Limited remitted an amount of Rs. 35,00,000/- to the account which was immediately transferred to the assessee's ac-count. On 18.07.2011, Superior Retail Private Limited credited an am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts create a facade of documentary evidence for clean money in the form of account payee cheques for any kind of accom-modation entries. 30. 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 earn anything, they invite huge investments in their ac-counts and this money is used to make further investments at high premiums in other companies and they have also issued unsecured loans to other companies; money obtained from the route of share premium is rerouted for supplying sources of receipts of money to other companies; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgued 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. 31. 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 admitting that at the relevant point of time when the investor companies invested in the assessee company by purchasing shares at high premium, they had sufficient funds in the bank accounts, the question would be as to whether this by itself will establish the creditworthiness of the investor companies. This is a fit case where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration of the facts is perverse. 34. The CIT(A) has made an elaborate exercise to assess the creditworthiness of the investor com-panies 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 com-pany 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 on whether the two parties are related or known to each other; the manner or mode by which the parties approach each other, the quantum of money, the object and purpose for which payment/investment was made. As held earlier certificate of in-corporation of the companies, payment by banking channel etc. cannot tantamo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he genuineness of the transaction. Thus, we have no hesitation to hold that the explanation offered by the assessee is neither proper, reasonable or acceptable. 36. 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. 37. 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 that a reasonable/pru-dent man would apply to arrive at a conclusion. On facts we are convinced to hold that the assessee has not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies is questionable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer and ought to have produced the directors of the subscribing companies before the Assessing Officer so that they could explain the sources from which the share subscription was made. It is stated that there is no complaint either from the end of the assessee-company or from the end of the alleged subscriber company. This finding recorded by the Assessing Officer as affirmed by the Commissioner (Appeals), if required to be set aside by the Tribunal, reasons have to be assigned. Therefore, the conclusion arrived at by the Tribunal is insufficient to support its ultimate conclusion in allowing the assessee's appeal. Therefore, the matter has to be remanded back to the Tribunal for fresh consideration. [Para 4] Accordingly, the appeal is allowed. The order passed by the Tribunal is set aside and the matter is remanded to the Tribunal to take a fresh decision on merits and in accordance with law and pass a reasoned order. [Para 5] 11.2 Both the decisions are squarely applicable to the facts of the case. Similar issue also came up before the ITAT Kolkata Bench for the case of Nexcare Agency Pvt. Ltd. Vs. ITO Ward 7(1), Kolkata, dated 26.07.2024. The relevant extract of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares at a high premium. The credit worthiness of those investors companies is questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source. The assessee has miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. As noted above merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or the credit worthiness has not been established 38. In the light of the above discussion, we hold that the assessee has failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which has shown to be so by a "round tripping" of funds. For all the above reasons, the revenue succeeds. 39. In the result the appeal is allowed, the order passed by the learned Tribunal is set aside and the order passed by the CIT(A) dated 28.11.2019 is restored and the substantial questions of law are answered in favour of the revenue." 5.2. We also draw considerable strength from the case of PCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus. ii. 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 namelenders. iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, 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. [Para 11] In the instant case, the Assessing Officer had conducted detailed enquiry which revealed that: i. There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee. The genuineness of the transaction was found to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share applicants who did file certain documents, were not sufficient in the eyes of law to discharge the burden cast on the assessee regarding proving the genuineness of the transaction. The profit and loss account statement extracted (supra) would normally paint a grim picture to any prudent investor, however, in this case it seems to have encouraged 11 entities to transfer huge sums of money by way of share premium. 6.1. Considering the case laws cited (supra) the financial health of the assessee and the inadequate discharge of onus, we hold this case to be a fit case for application of Section 68 of the Act and thereby confirm the impugned addition. 12. Having considered the submissions filed, the facts of the case and the judicial pronouncement discussed above, there is no justification for the huge premium charged by the assessee nor the assessee has been able to establish the same before the Ld. AO nor even before the Ld. CIT(A). As discussed above, mere identity of the creditor is not sufficient but the genuineness of the transaction as well as the creditworthiness of the creditor has to be established which the assessee has miserably failed to do. The onus is heavy on th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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