MANU/IK/0044/2012 IN THE ITAT KOLKATA 'B' BENCH ITA No.

2046 (Kol) of 2009 Assessment Year 2006-07 Decided On: 12.01.2012 Appellants: Dy. Commissioner of Income-tax Circle-8, Kolkata Vs. Respondent: Takshila Credit and Holdings Pvt. Ltd. Hon'ble Judges: Sri N. Vijayakumaran, Judicial Member and Sri C.D. Rao, Accountant Member Subject: Direct Taxation Catch Words Mentioned IN Disposition: Appeal dismissed ORDER C.D. Rao, Accountant Member 1. The department has filed this appeal for assessment year 2006-07 against order of ld. C.I.T.(A)-VIII, Kolkata dated 16/09/2009. The first issue vide grounds No. 1 and 2 below relates to deletion of addition of Rs. 2.31 Crores made by the ld. A.O. u/s. 68 of the Act :1. That Ld. CIT(A) erred on facts and circumstances of the case and in law by holding that addition of Rs. 2.31 crores u/s. 68 should not be there in the hand of the assessee even through the share applicants were found bogus and non-existent. 2. That Ld. CIT(A) erred on facts and circumstances of the case and in not appreciating the fact that assessee is the final beneficiary of the stage managed transaction in the form of share application money hence, the addit6ion of Rs. 2.31 crores u/s. 68 should be made in the hand of the assessee by piercing the corporate veil. 2. The relevant facts giving rise to the aforesaid grounds are that during assessment proceedings, the ld. A.O. found that the assessee received share application money of Rs. 2.31 crores from M/s. Deevee Commercial Ltd., Kolkata. There was a search & seizure operation conducted u/s. 132 of the Act on 18/03/2008 and subsequent dates at Gouri Business Centre, Camac Street, Kolkata and in course of such operation, statements of the following persons were recorded u/s. 132(4) of the Act :i) Sri Pritam Ghosh ii) Sri Giridhar Dhelia iii) Sri Deepak Kr. Agarwal iv) Sri Manoj Sharma v) Sri Pradeep Kr. Choudhari vi) Sri Mantosh Kr. Yadav.

The Ld. A.O. forwarded the copies of the statements of Sri Pritam Ghosh, party at Sl. No. (i) above vide letter dated 05/12/2008 and in respect of the remaining parties at Sl. Nos. (ii) to (vi) above vide letter dated 08/12/2008 to the assessee and required it to explain as to why the amount received from M/s. Deevee Commercial Ltd. should not be treated as its unaccounted money. The assessee filed its reply in respect of letter dated 05/12/2008 on 10/12/2008 and in respect of letter dated 08/12/2008 on 23/12/2008. The Ld. A.O. completed the assessment u/s. 143(3) of the Act on 22/12/2008 with the finding that no explanation was given in reply to letter dated 08/12/2008, although he has not pointed out or discussed any specific defect or adverse inference to the explanation filed on 10/12/2008. The Ld. A.O. determined the total income at Rs. 2,61,99,915/- as against returned by the assessee at Rs. 30,26,414/- and thereby made an addition of Rs. 2.31 crores u/s. 68 of the Act as assessee's unexplained cash credit holding that M/s. Deevee Commercial Ltd. is a paper company who used to channelise unaccounted money into regular books by way of share application money. 3. The assessee preferred appeal before the Ld. C.I.T.(A) and submitted that the basis of Ld. A.O.'s allegation was the statements recorded in course of search operation u/s. 132(1) of the Act from few persons. According to those statements found recorded in the assessment order, Sri Sandeep Sharma and Sri Pradeep Choudhari are the main persons who were not in any way connected with the assessee-company and its Directors and other Directors were not aware of the affairs of those companies. The assessee, therefore, submitted that it was wrong on the part of the Ld. A.O. to infer that the amount of share application money received from M/s. Deevee Commercial Ltd. is the unaccounted money of the assessee-company. It was further submitted that the Ld. A.O. himself has stated that the source of purchase of shares of Himadri Chemicals Ltd. was the share application money received from Deevee Commercial Ltd. and hence it was proved that share purchase was not made from assessee's own fund. The assessee further submitted that genuineness and creditworthiness of the share applicant M/s. Deevee Commercial Ltd. cannot be doubted in view of the fact that the share applicant is assessed to tax and the transaction was through account payee cheques out of the funds belonging to it. In support of the submissions, the assessee relied on several case laws which are mentioned in the appellate order. The Ld. C.I.T.(A) called for a remand report on the submissions made by the assessee from the ld. A.O., who reported in the following way :(a) The assessee was provided with complete statement of each of the six persons who were all present at the searched place of Gouri Business Centre and in the assessment order, only a small portion of each person's statement was reproduced which had direct relevance with the assessee, which the assessee is trying to state that such statement is not reliable. (b) From the statements of the above six persons, copies of which were annexed with the report, it was clear that Deevee Commercial Ltd. is nothing but a paper company/ jamakharchi company which is used to channelise unaccounted money by way of share application money. In counter reply of the said remand report, the assessee submitted its explanation in writing and the relevant portion of the same is appearing on pages 12 to 17 of the appellate order. 4. After considering the facts of the case, evidences on record, remand report of the ld. A.O. and counter reply by the assessee, the ld. C.I.T.(A) held that the conditions for invoking sec. 68 of the Act are not satisfied in this case and thus deleted the addition for the reasons as under :-

(a) In this case, the identity of the share applicant M/s. Deevee Commercial Ltd. is known. Details of the share applicant including PAN were submitted during assessment proceedings. The transaction was through account payee cheque, which remained uncontroverted by the ld. A.O. even in his remand report. (b) As regards creditworthiness also, there is no imputation in the assessment order that M/s. Deevee Commercial Ltd. was hard up for funds. The submission of the assessee that the share application money was received through account payee cheque out of the fund belonging to the share applicant and this was not contradicted by the ld. A.O. in the assessment order or even in his remand report as the assessment order is also silent about the enquiries into the sources of funds of the said share applicant. (c) The main basis of the ld. A.O. was the statements recorded u/s. 132(4) of the Act from several persons on 28/3/2008 and the questions therein all pertained to the relationship of these persons to a group of concerns of which one is the share applicant. One of the deponents Sri Sandeep Sharma was having full knowledge about the group activities and the assessment order does not mention the fate of enquiries with the said person. (d) The fact that the share applicant company has Directors who are not aware of its activities does not vitiate either its identity or the genuinity of transaction through banking channel or its creditworthiness, especially when the deponents have identified that there is a particular person who knows about the affairs of the share applicant. (e) According to the ld. A.O., the share applicant was not found at 32, Ezra Street. Paradoxically, the statements the ld. A.O. relied upon have all indicated that the address of the share applicant is 8, Camac Street. (f) Therefore, the conditions precedent for invoking sec. 68 of the Act are not satisfied in this case. In support of such conclusion, reliance was placed on the following judicial pronouncement/Tribunal's orders CIT vs. Lovely Exports Pvt. Ltd. [216 CTR 195 (SC)] Bear Bull Distributors (P) Ltd. [ITA Nos.1731 & 1652/Kol/2008] Howrah Gases Ltd. [ITA No. 270/Kol/2009] Yashwi Securities Pvt. Ltd. [ITA No. 1276/Kol/2008] Hence this appeal by the department. 5. At the time of hearing before us, the ld. Departmental Representative relied on the order of the ld. A.O. He further submitted that when statements from different persons were recorded, these were primary evidence and the same should not be ignored. He, therefore, submitted that the action of the A.O. should be confirmed. 6. On the other hand, the learned counsel for the assessee supported the order of ld. C.I.T.(A) and made arguments in the lines as made before the ld. C.I.T.(A). He further submitted that in response to ld. A.O.'s letters dated 05/12/2008 and 08/12/2008 forwarding therewith copies of the statements obtained from several persons at the searched premises, the assessee filed its detailed explanation on 10/12/2008 and 23/12/2008 respectively, copies of which are filed in the paper book. The ld. A.O. has not pointed out any specific defect or adverse inference on the explanation filed on 10/12/2008 and without considering the explanation filed on 23/12/2008 in response to letter dated 08/12/2008 passed the assessment order on

22/12/2008 alleging non-submission of explanation. The learned counsel further submitted that the ld. A.O. while invoking sec. 68 of the Act mainly relied on the statements u/s. 132(4) of the Act of Sri Sandeep Sharma and Sri Pradeep Choudhari, who are in no way connected with the assessee-company or its Directors and as such reliance on their alleged statement misconstrues about the genuine transaction. He further submitted that the share applicant was identified and the transaction was through banking channel having fund to invest in share application. The ld. A.O. has not recorded any finding that the share applicant was short of fund to apply for shares of the assessee-company. He submitted that the assessee has established not only the identity and creditworthiness of the share-applicant but also the genuineness of the transaction and in such circumstances, addition made u/s. 68 of the Act as assessee's unaccounted money is uncalled for. The ld. C.I.T.(A) has rightly deleted the addition which should be upheld. In support of his submissions, the ld. counsel placed reliance, inter alia, on the following decisions :CIT vs. Active Traders (P). Ltd. [MANU/WB/0072/1992 : 214 ITR 583 (Cal)] CIT vs. Dolphin Canpack Ltd. [283 ITR 190 (Del)] CIT vs. Electro Polychem Ltd. [MANU/TN/7594/2007 : 294 ITR 661 (Mad)] CIT vs. Lovely Exports Pvt. Ltd. [216 CTR 195 (SC)] 7. We have heard the rival contentions of the parties and perused the orders of the authorities below and evidences on record. The facts of the case have been narrated above. After perusing the assessment order, we observe that the impugned addition u/s. 68 of the Act of Rs. 2.31 crores was made by the ld. A.O. mainly relying on the statements of six persons recorded on 18/3/2008 u/s. 132(4) of the Act. Provisions of Sec.68 of the Act have been judicially considered by several courts of law, as per which an addition u/s. 68 of the Act can be made where an assessee fails to prove identity of the creditor; his creditworthiness and genuineness of the transaction. In the present case it was necessary for A.O. to prove that on all the above three ingredients the assessee had failed and, therefore, addition was warranted. We observe that the ld. A.O. while framing the assessment did not make any independent enquiry before drawing any inference on the basis of the searched material and completed the assessment only on the basis of the statements recorded u/s. 132(4) of the Act. It has been held by Hon'ble Gauhati High Court in the case of Nemichand Kothari vs. CIT [MANU/GH/0171/2003 : 264 ITR 254 (Gau)] that where an assessee receives any money by account payee cheque from another person, then u/s. 106 of the Evidence Act the assessee can be said to have established the genuineness and creditworthiness of the payer. Hon'ble Delhi High Court in the case of CIT vs. Value Capital Services Pvt. Ltd. [307 ITR 334 (Del)] has held that there was additional burden on the department to show that even if the share-applicants did not have means to make investments, the investments made by them actually emanated from the coffers of the assessee. In this case we find no such evidence being brought on record by the ld. A.O. to prove that the assessee's unaccounted money routed through M/s. Deevee Commercial Ltd. or any cash was deposited in the share applicant's bank account prior to issuance of cheque for share application. On the other hand, we observe that the transaction was by account payee cheque. PAN details of the share applicant were provided to the ld. A.O. Therefore, the onus cast on the assessee u/s. 68 of the Act, in our considered opinion, was duly discharged by it. In that view of the matter, when all the ingredients contained in Sec. 68 of the Act are fulfilled, there is hardly any scope to invoke that section alleging introduction of unexplained fund by way of share application, more so when no evidence could be brought on record by the department to the contrary. 7.1. The Hon'ble Rajasthan High Court has held in the case of Barkha Synthetics Ltd. vs. ACIT MANU/RH/0214/2005 : [2005] 197 CTR 432 (Raj.) that the principle relating

to burden of proof concerning assessee is that whether the matter concerns the money receipts by way of share application from investors, through banking channels, assessee has to prove existence of persons in whose name the share application is received. Once the existence of investor is proved, it is no further burden of the assessee to prove whether that person itself has invested the said money or some person made investment in the name of that person. The burden then shifts on revenue to establish that such investment has come from assessee-company itself. Hon'ble Apex Court in the case of CIT vs. Daulat Rant Rawatmuli [MANU/SC/0290/1972 : 87 ITR 349 (SC)] has held that onus to prove that the apparent is not the real is on the person who claims it to be so. Therefore, the onus is on the department to prove that the share application money subscribed to the share capital of the assessee-company by the above named share applicant is not the money of the share applicant but of the assessee-company, is on the department. However, as stated above, the department has not brought any material on record to establish the same. We are of the considered view that the A.O. doubted the genuineness of the share application money on surmises and conjecture and has not brought cogent material on record to establish the bogus nature of transaction. 7.2. We may further refer to the Third Member decision of I.T.A.T., Jodhpur Bench in the case of Polymers (P) Ltd. vs. DCIT [111 TTJ 112] wherein it was held that in respect of share application money, assessee-company has to prove existence of persons in whose name share application is received. No burden is cast on the assessee to prove whether that person himself has invested or some other person has made investment in his name. The burden to prove that the money did not belong to him but to some body else is on the revenue. It was further held that if any of the shareholders is found to have made unexplained investment, then addition of such investment is required to be made in the hands of the shareholders and not in the hands of the assessee. Accordingly, it was held that the A.O. was not justified in treating the investment made by the several shareholders in the assessee-company as bogus and to make addition u/s. 68 of the Act. 7.3. The Hon'ble Supreme Court has considered the similar issue in the case of CIT vs. M/s. Lovely Exports (P) Ltd. (supra) and held as under :Can the amount of share money be regarded as undisclosed income under s. 68 of I.T. Act, 1961? We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A.O., then the Department is free to proceed to reopen their individual assessments in accordance with law. Hence, we find no infirmity with the impugned judgment. In the case of the assessee, as stated above, the assessee has furnished the details of shareholder with complete address, PAN details, cheque details showing bank name etc. Therefore, no addition on account of unexplained cash credit is warranted in the case of the assessee on the given facts and circumstances as discussed above. In view of the above, in our opinion, the action of the A.O. is contrary to the decision of Hon'ble Supreme Court in the case of CIT vs. M/s. Lovely Exports (P) Ltd. (supra). 7.4. In view of above facts and the decisions cited supra, we are of the considered view that there is no infirmity in the order of the ld. C.I.T.(A) in deleting the addition Rs. 2.31 crores made by the ld. A.O. u/s. 68 of the Act. Hence, we uphold his order and dismiss grounds No. 1 & 2 of the grounds of appeal taken by the department. 8. The only other ground, i.e. ground No. 3, in this departmental reads as under :3. That Ld. CIT(A) erred on facts and circumstances of the case and in holding that transaction in shares of M/s. Himadri Chemicals Ltd. and M/s. Indo-Tech Transformer Ltd. on which profit of Rs. 30,26,411/- has been earned, are not part of business activity although the assessee did not utilize its own surplus fund to transact in above shares.

9. The assessee submitted that the assessee is an investment company since its incorporation in 1992. Further, it has not done any trading in shares for various years nor has the company held shares as stock-in-trade in past. The assessee has been investing in shares and accounted for the same as its investment in its balance sheet and the gain out of transactions of such investments is being assessed as capital gains. During the previous year relevant to the assessment year under consideration, the assessee received share application money from M/s. Deevee Commercial Ltd., which was utilized for investment in 2,27,892 shares of M/s. Himadri Chemicals on 22/9/2005 and 23/9/2005. Out of these shares, the assessee sold 1,30,500 shares on 17/3/2006. Similarly the assessee sold 953 shares of Indo Tech Ltd. on 17/3/2006, which were acquired by way of allotment on public offer. The gains from such transaction were claimed as short-term capital gain. According to the ld. A.O., the investments in the above shares were not made out of the assessee's own fund but out of assessee's surplus money. He, therefore, treated the surplus resulting on sale of the shares of these two companies amounting to Rs. 30,26,414/- as business profit. 10. Before the ld. C.I.T.(A), the assessee filed a written submission, inter alia, stating that none of the propositions for treating the investment as trading activity were applicable in the transaction of shares of these two companies. The ld. C.I.T.(A) called for a remand report from the A.O. wherein he only stated about the statement obtained from six persons u/s. 132(4) of the Act and the remand report is silent on this aspect. The ld. C.I.T.(A) after considering the assessee's submission, observation of the A.O. and evidence on record did not find any merit in the ld. A.O.'s action in treating the surplus as business profit by observing as under :I am unable to appreciate the A.O.'s logic in stating that investment has to be always from surplus funds. By that token, no bank would ever be able to investment in anything. It is clearly identified by the A.O. that the source of funds for the purchase of shares is the share application money. If the appellant seeks to utilize that, I am unable to discern any penal action leviable under the Income Tax Act. The entire exercise here is concerned with the administration of the said Act only. As stated earlier, the appellant has given a submission in this regard which has not been contradicted by the A.O. in his remand report. It is also not the A.O.'s case that the appellant has indulged in business of share trading in the past. In my opinion, the facts of the case do not merit the treatment which the A.O. has given the receipt claimed by the appellant as short-term capital gain. This ground of appeal is, therefore, allowed and the A.O. is, therefore, directed to treat this receipt as short term capital gain. 11. At the time of hearing before us, the ld. Departmental Representative relied on the order of ld. A.O. On the other hand, the learned counsel for the assessee supported the order of the ld. C.I.T.(A). On requisition from the Bench, the assessee also filed a copy of Memorandum and Articles of Association of the assessee-company along with details of Demat Account. There is no dispute to the fact that the assessee purchased shares of M/s. Himadri Chemicals and M/s. Indo Tech Ltd. out of the share application money received from M/s. Deevee Commercial Ltd. Therefore, at the relevant point of time, the source of fund of the assessee was the share application money received from M/s. Deevee Commercial Ltd. Further, in his remand report also the ld. A.O. could not controvert the above position. It was also not the ld. A.O.'s stand that in past the assessee has been indulging in share trading business. In this view of the matter, we find no infirmity in the order of the ld. C.I.T.(A) in allowing the claim of the assessee. That being so, we uphold his order in directing the ld. A.O. to treat the surplus of Rs. 30,26,414/- as short-term capital gain instead of business income. We order accordingly and the ground of appeal of the department is dismissed. 12. In the result, the appeal of the department is dismissed.

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