Addition for share capital & share premium deleted by ITAT Pune

Fact and Issue of the case

Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of Iron and steel marketing. The assessee in the year under consideration has issued 40,00,000 equity shares having face value at ₹10 and share premium at ₹90 per share aggregating to ₹40 crores only. The details of the companies which acquired the shares at premium of the assessee company stand as under:

S. No	Name of shareholder	Face value (in₹)	Premium (in₹)	Gross amount (in₹)
1	Sangam Infratech Ltd.	2,20,00,000/-	19,80,00,000/-	22,00,00,000/-
2	Dhanlaxmi Re-Rolling Mill	90,00,000/-	8,10,00,000/-	9,00,00,000/-
3	Swift Venture Pvt Ltd	90,00,000/-	8,10,00,000/-	9,00,00,000/-
4	Total	4,00,00,000/-	36,00,00,000/-	40,00,00,000/-

The assessee, besides the above, has also received share application money pending for allotment of shares amounting to ₹ 25,23,27,371/- only from the companies as detailed under:

(1)	Sangam Infratech Ltd.	Rs.13,95,00,000.00
(2)	Swift Ventures Private Limited	Rs. 2,95,00,000.00
(3)	Dhanlaxmi Re-rolling Mills.	Rs.5,21,78,717.00
(4)	Shri Ramkishan Mantri	Rs. 50,000.00
(5)	Shri Sanjay mantra	Rs.1,05,98,654.00
(6)	Shri Nilesh Chechani	Rs. 5,00,000.00
(7)	Kalyan Sangam Infratech Ltd.	Rs.2,00,00,000.00
	*Total*	*Rs.25,23,27,371.00*

Out of the above amount of ₹ 65,23,27,371/-( i.e. share capital of ₹ 4 crore, Premium of ₹ 36 crore and share application money for ₹ 25,23,27,371/-) the assessee during the year received a sum of Rs. 37,02,25,000/- through banking channel detailed as under:

1. Sangam Infratech Ltd.	Rs. 17,85,00,000/-
2. Swift Venture Pvt Ltd	Rs. 8,10,00,000/-
3. Dhanlaxmi Rolling Mills	Rs. 9,07,25,000/-
4. Kalyan Sangam Infratech Ltd	Rs. 2,00,00,000/-
Total	Rs. 37,02,25,000/-

However the AO found that the assessee company was established dated 10 August 2004 i.e. during the financial year 2004-05 corresponding to the assessment year 2005-06 and it did not carry out any business activity till the year under consideration. Conversely, it has issued shares at a premium of ₹ 90 per share aggregating to ₹ 36 crores as well as it has received share application money for the amount as discussed above. Accordingly, the AO had a doubt on the genuineness of the share capital, share premium and share application money and thus sought an explanation from the assessee by issuing notice dated 10^th September 2012 under the provision of section 142(1) of the Act.

The assessee vide letter dated 15^th March 2013 submitted that it is going to set up an integrated steel plant at Wardha which is very much viable and profitable. The assessee filed a detailed project report in support of its contention. Accordingly the management of the company decided the fair value of the shares at Rs. 100 only which were issued to the promoters and their associate concerns without calling any money from the public or any other outside person.

However, the AO disagreed with the contention of the assessee by observing that the assessee being a newly start-up company, having no experience in the line of its business, failed to prove the valuation of shares at Rs. 100/- based on cogent reason.

Accordingly, the AO to verify the genuineness of the capital cost shown by the assessee under the project with respect to certain items issued notices to the suppliers of the capital goods but none of them replied. Thus the AO was of the view that the assessee has inflated the project cost of the capital goods in order to avail higher funds from the banks. In other words the assessee claimed the high project cost so that it could take the money back from the supplier which could be reinvested in the guise of share capital/share premium in the name of the companies as discussed above. Likewise, the AO found that the companies, namely Sangam Infratech Limited (in short SIL) and Swift Venture Private Limited (in short SWPL), which invested in the assessee company were either showing the meagre income or the losses. Furthermore, these companies (SIL and SWPL) have shown sources of funds in their respective hands by way of issuing shares on premium which was not possible for the simple reason that there was no major activity carried on by them.

The AO, further to verify the share capital in the hands of SIL and SWPL issued commission under section 131(1)(d) of the Act which submitted its report. The same is placed on pages 18 to 20 of the paper book. The AO based on such commission report found that the company namely SWPL was owned by M/s Mandhani Group. Shri Yogesh Mandhani was the key person of the group who had no experience of the steel business but joined the assessee company as a director in the FY 2008-09. Thus, the AO was of the view that the assessee has introduced its unaccounted money through the collusion of SWPL. Regarding the capital introduced by SIL in the company, the AO found that the director of SIL could not justify the sources of funds available in its hands. Likewise, M/s Kalyan Sangam Infratech Ltd., a company invested share application money for Rs. 2 crores in assessee company, failed to explain the sources of funds in its hands satisfactorily.

Similarly, the capital of M/s Sanjay Mantri HUF, proprietor of M/s Dhanlaxmi Rerolling Mills as on 31^st March 2009 stands at ₹ 3,14,19,954/- and the loan increased during the year stands at ₹ 2.33 crores whereas it has invested in the shares of the company for an amount of ₹ 9,07,25,000/- only. In other words, there was not sufficient balance available with M/s Dhanlaxmi Rerolling Mills for acquiring the shares of ₹ 9,07,25,000/. Thus the source of funds in the hands of the company were not satisfactorily explained.

In view of the above the AO treated the sum of ₹ 37,02,25,000/- as unexplained cash credit under section 68 of the Act and added the same to the total income of the assessee. Aggrieved assessee preferred an appeal to the learned CIT(A).

Observation of the Tribunal

The Court has heard the rival contentions of both the parties and perused the materials available on record. The dispute in the instant case relates to the share capital received by the assessee in the year under consideration from certain parties amounting to Rs. ₹ 37,02,25,000/- which was treated as unexplained cash credit under section 68 of the Act. The initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act. These are:

(i) identity of the investors;

(ii) their creditworthiness/investments; and

(iii) Genuineness of the transaction.

The Revenue exercise starts only when these three ingredients are established prima facie, by the assessee and the department is required to investigate into the facts presented by the assessee. As per the statutory provision of Sec 68 and jurisprudence of the Hon’ble court, it is clear that primarily the onus is on the assessee to discharge that the credit received by it is from the sources whose identity can be proved, the genuineness of the transaction and the creditworthiness of the creditor is also established by the documentary evidences. If the assessee presents all these details during the assessment proceeding before the AO, the responsibility shifts to the AO to prove it wrong. If the AO accepts such evidences without proving it wrong, it can be said that assessee has discharged its onus. If the AO presents some contrary evidences, the responsibility again shifts upon the assessee to rebut such contrary evidences.

Admittedly, in the case on hand, the assessee has discharged its onus by furnishing the necessary details such as a confirmation of the parties, copy of ITR-V, copy of bank statement of parties along with their balance sheet, share certificate, MOA, AOA etc. in support of identity of the parties and genuineness of transaction and credit worthiness of the parties. These details of the parties are available on pages 16 to 161 of the paper book. Similarly, there is also no dispute to the fact that all the transactions were carried out through the banking channel. What is the inference that flows from a cumulative consideration of all the aforesaid contending facts is that the assessee has discharged its onus imposed under section 68 of the Act. The details filed by the assessee were cross verified by the Revenue from the respective parties and no infirmity was pointed out in the same except doubting the credit worthiness of the parties on the reasoning that these parties are earning lower income/ incurring the losses/ capital was insufficient for such investment. Accordingly the AO had a suspicion that the investors as discussed above were acting as the conduit for converting the unaccounted money of the assessee in the guise of share capital /share application money and premium on shares. Conversely the AO has not brought anything on record suggesting amount credited in the books of assessee does not belongs to respective parties but the same belongs to the assessee. Now we proceed to look into the facts of each investors which invested money in the company in the form of share capital along with share premium.

Sangam Infratech Limited (Investment of Rs. 17.85 crores)

I) On perusal of the balance sheet of SIL, placed on pages 35 of the paper book, it was noticed that its position of the fund including the unsecured loan stands at ₹ 110 crores approximately as on 31-3-2010. Out of such fund there was the opening balance as on 1 April 2009 at ₹ 56.40 crores approximately. Thus what is transpired is this that the fund in the hands of the company i.e. SIL was not generated in the year under consideration for making the investments in the company. Similarly, the company i.e. has made investment in various other companies in the year under consideration as well as in the earlier assessment years which can be verified from the details placed on page 39 of the paper book. Thus, it is not the case that the entire capital of the company i.e. SIL was invested in the shares of the assessee company.

II) Likewise, there was an assessment under section 143(3) of the Act under CASS in the case of the company i.e. SIL wherein the capital generated by SIL was accepted by the revenue. The copies of the assessment orders for the year under consideration as well as for the assessment year 2011-12 are placed on pages 56 to 62 of the paper book. Here, it is pertinent to note that though the assessment was made under CASS but the same was not converted to the normal/complete scrutiny. In other words, it can be inferred that the Revenue was aware of the financial position of the company i.e. SIL and was satisfied with the same.

III) It was noticed that the assessee received a sum of Rs. 2 crores in the earlier assessment year from SIL which was accepted by the Revenue. In other words there was no doubt raised by the Revenue of whatsoever in the earlier assessment year for the amount of Rs. 2 crores received by the assessee. Thus a question arises whether the creditworthiness can be doubted in the year under consideration towards the amount received by the assessee in the year in dispute. To our mind, the answer stands in negative. It is for the reason that once the revenue has accepted the creditworthiness of the company in the earlier year, the same cannot be disturbed in the subsequent year until and unless the corroborative evidences require otherwise. But no such evidences were brought on record.

IV) It is also pertinent to note that the commission under section 131(1)(d) of the Act was issued upon the company SIL which submitted its report but there was no negative remark about the financial position of the company i.e. SIL.

V) It is also important to note that the assessee besides the share capital of ₹17.85 crores has also received share application money for ₹13.95 crores from the company i.e. SIL, which is pending for allotment as on 31 March 2010 but there was no doubt raised by the revenue with respect to such share application money which is pending for the allotment. In other words the revenue has accepted part of the amount shown as share application money pending for allotment as correct with respect to the identity /creditworthiness of the party as well as genuineness of the transaction. To our mind, the AO erred in accepting part of the amount as genuine and at the same time doubting the genuineness for part of the amount as discussed above.

Dhanlaxmi Re-rolling Mills (DRM)

I) On perusal of the balance sheet of DRM as on 31-3-2010, placed on pages 125 of the paper book, it was noticed that its position of the fund including the loan stands at ₹ 21.7 crores approximately. Out of such fund there was the opening balance as on 1 April 2009 at ₹ 31.81 crores approximately as evident from the balance sheet an on 31-3-2009, placed on page 116 of the PB. Thus what is transpired is this that the fund in the hands of the company i.e. DRM was not generated in the year under consideration for making the investments in the company.

II) Similarly, the company i.e. DRM has shown the turnover more than of Rs. 100 crores as evident from the audited profit and loss account, placed on page 124 of the paper book. Thus, it is the case that the firm i.e. DRM is not a paper entity which was used as conduit for converting the unaccounted money of the assessee as alleged by the AO.

III) It is also important to note that the firm i.e. DRM is a proprietary concern owned by Shri Sanjay Mantri HUF and KARTA of the HUF has also made investments in the share application money in the individual capacity which has been accepted by the revenue. Thus what is transpired that the revenue has not believed on the creditworthiness of the HUF but did not doubt on the creditworthiness of the KARTA of the HUF in his individual capacity.

IV) Likewise, there was an assessment under section 143(3) of the Act in the case of the firm i.e. DRM wherein the financial position of the firm was not doubted. The copy of the assessment order for the year under consideration is placed on pages 152 to 153 of the paper book.

V) It was also noticed that the assessee received a sum of Rs. 5,14,53,717/- in the earlier assessment year from DRM which was accepted by the revenue. In other words there was no doubt raised by the revenue of whatsoever in the earlier assessment year for the amount of Rs. 5.14 crores received by the assessee. Thus a question arises whether the creditworthiness can be doubted in the year under consideration towards the amount received by the assessee in the year in dispute. To our mind, the answer stands in negative. It is for the reason that once the revenue has accepted the creditworthiness of the company in the earlier year, the same cannot be disturbed in the subsequent year until and unless the corroborative evidences require otherwise. But no such evidences were brought on record.

V) It is also important to note that the assessee besides the share capital of ₹9,00,00,000/- crores has also received share application money for ₹ 5.21 crores, which is pending for allotment as on 31 March 2010 from the firm i.e. DRM but there was no doubt raised by the revenue with respect to such share application money which is pending for the allotment. In other words the revenue has accepted part of the amount shown as share application money pending for allotment as correct with respect to the identity /creditworthiness of the party as well as genuineness of the transaction. To our mind, AO erred in accepting part of the amount as genuine and at the same time denying part of the amount as not genuine.

Based on the above it was held the by the Hon’ble Apex Court, that the Assessee-Company failed to discharge the onus required under Section 68 of the Act. Therefore, the Assessing Officer was justified in adding back the amounts to the Assessee’s income. However in the case on hand, we find that the assessee has discharged its onus cast upon it under the provisions of section 68 of the Act which has been elaborated in the preceding paragraphs.

It is also significant to note that the entire thrust of the learned DR was based on the documents/informations collected in the course of search proceedings under section 132 of the Act which was conducted on 2 May 2013. As per the learned DR the information gathered during the search proceedings should also be considered while adjudicating the issue on hand. The learned DR further submitted that the matter of the assessee for the year under consideration against the search proceedings is pending before the learned CIT (A). Accordingly the learned DR contended that the matter on hand can also be restored to the file of the learned CIT (A) for fresh adjudication along with the search proceedings. However, we are not convinced with the argument of the learned DR for the reason that both the proceedings are separate and independent to each other.It is also significant to note that the entire thrust of the learned DR was based on the documents/informations collected in the course of search proceedings under section 132 of the Act which was conducted on 2 May 2013. As per the learned DR the information gathered during the search proceedings should also be considered while adjudicating the issue on hand. The learned DR further submitted that the matter of the assessee for the year under consideration against the search proceedings is pending before the learned CIT (A). Accordingly the learned DR contended that the matter on hand can also be restored to the file of the learned CIT (A) for fresh adjudication along with the search proceedings. However, we are not convinced with the argument of the learned DR for the reason that both the proceedings are separate and independent to each other.

The assessments in the search proceedings are special assessments to be carried out under the provisions of section 153A of the Act which begins with non-obstante clause. As a result of search, the proceedings under section 153A of the Act have already begun which are based on the search materials. Furthermore, the issue before us is arising against the assessment order framed under section 143(3) of the Act and we are not adjudicating the appeal/matter arising against the assessment framed under section 153A of the Act. It might be quite possible that search material has a bearing on the income to be determined for the year under consideration but for that purpose the proceedings have already been initiated and the same will be taken care by the revenue authorities in the respective proceedings. Accordingly, we are not convinced with the argument of the learned DR.

At the time of hearing both the ld. DR and the AR have cited series of judgments but we do not want to recapitulate all of them but it is suffice to hold that the cash credit received by the assessee during the year remains no longer unexplained as provided under section 68 of the Act for the reasons as discussed above. In view of the above, we do not find any infirmity in the finding of the learned CIT (A). Accordingly, we confirm the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed.