ACIT, CIRCLE-1(1), RAJKOT, RAJKOT V. .SEZ VITRIFIED PVT. LTD. , MORBI

ITA 348/RJT/2023

AI Insights

The case involves two appeals by the Revenue against the orders of the CIT(A), which had deleted the additions made by the Assessing Officer under section 68 of the Income-tax Act, 1961, concerning unexplained cash credits in the form of share capital and unsecured loans. The Tribunal examined the legal and factual basis of the CIT(A)'s decision, focusing on whether the additions were justified under section 68, which deals with unexplained cash credits. The Tribunal found that the CIT(A) had erred in law and fact by not adequately addressing the creditworthiness of the shareholders and the genuineness of the transactions, leading to the decision to restore the additions made by the Assessing Officer.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 40434 (ITAT-RAJKOT)
• Duration Of Justice: 1 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2024
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2017-2018
• Appeal Filed On: 11-10-2023
• Other Referred Cases: CIT vs. Bharat Engineering & Construction Co., CIT vs. Smt. P. K. Noorjahan, Mitesh Rolling Mills (P) Ltd. vs. CIT, ACIT vs. Geera Finance Ltd., CIT vs. Five Vision Promoters (P.) Ltd., CIT vs. VLS Foods (P.) Ltd., ITO vs. Praful (Agarwal) Art Prints Pvt. Ltd., Saiyed Paper Mills Ltd. vs. ACIT, Garg Preservation Pvt. Ltd. vs. ACIT, Leopard Vitrified Pvt. Ltd. vs. PCIT-1, Rajkot, DCIT vs. Rohini Builders, CIT vs. Ranchhod Jivabhai Nakhava, PCIT v. Enrich Agro Foods Products (P.) Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: BIMAL BHADARKA
• Assessee Lawyers: ABHIMANYU SINGH YADAV
• Keywords: Set aside; Unexplained cash credit; Capital receipt; Principle of natural justice; Source of fund; Earning of tax free income; Bogus Share capital; Deemed to accrue or arise in india; Reason to believe; Bogus
• Section: 143(3); 142(1); 143(2); 143(1); 68; 208; 205; 22; 133(6); 13; 139; 44AB; 264; 20

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT BEFORE DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER AND SHRI DINESH MOHAN SINHA, JUDICIAL MEMBER आयकरअपीलसं./ITA Nos.347 & 348/RJT/2023 (Ǔनधा[रणवष[ / Assessment Years: (2016-17 & 2017-18) (Hybrid Hearing) The ACIT, Circle -1, Rajkot Vs. M/s. Sez Vitrified Pvt. Ltd., Survey No.327, Opp. Somnath Petrol Pump, Pipli Road, At. Bela, Morbi – 363642, Gujarat èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAWCS0462K (Appellant) (Respondent) Appellant by :Shri Bimal Bhadarka, AR Respondent by :Shri Abhimanyu Singh Yadav, Sr. DR Date of Hearing : 12/09/2024 Date of Pronouncement : 09/12/2024 आदेश / O R D E R PER DR. A. L. SAINI, AM: Captioned two appeals filed by the Revenue, pertaining to the assessment years 2016-17 and 2017-18, are directed against the separate orders passed by the Learned Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi [in short ‘Ld. CIT(A)’], which in turn arise out of separate assessment orders passed by Assessing Officer (in short ‘AO’) u/s 143(3) r.w.s. 263/143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 31.03.2022 and 31.12.2019. 2. Since the issue involved in both appeals, are common and identical; therefore, these two appeals have been clubbed and heard together and a Page | 2 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. consolidated order is being passed for the sake of convenience and brevity. The facts as well as grounds of appeal narrated in ITA No. 348/Rjt/2023 for the assessment year2017-18, have been taken into consideration to decide these appeals en masse. 3. The grounds of appeal raised by the Revenue in lead case in ITA No. 348/Rjt/2023, are as follows: “1. The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.4,10,91,250/- made u/s 68 of the I.T. Act on account of explained cash credits in the form of share capital / unsecured loan within the meaning of section 68 of the Act as creditworthiness of the shareholders/lenders of unsecured loans/transactions not established. 2. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.” 4. The grounds of appeal raised by the Revenue in ITA No.347/Rjt/2023, are as follows: “1. The learned CIT(A) has erred in law and on facts in deleting the addition of Rs.2,16,04,000/- made u/s 68 of the I.T. Act on account of explained cash credits in the form of share capital / unsecured loan within the meaning of section 68 of the Act, as creditworthiness of the shareholders/lenders of unsecured loans/transactions not established. 2. It is, therefore, prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. be restored to the above extent.” 5. The relevant material facts, as culled out from the material on record, are as follows. The assessee, is a Private Limited Company, incorporated on 03.08.2015 and engaged in the business of manufacturing of ceramic tiles during the year. The assessee, filed its return of income for A.Y.2017-18, declaring therein total income of Rs.(-)22,34,88,657/-, on 18/09/2017. The return of income so filed, was processed u/s. 143(1) of the Income Tax Act, 1961 without any modification. Since the books of Page | 3 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. accounts of the assessee were liable to get audited u/s. 44AB of the Act, audit report in Form No. 3CB & 3CD dated 20.08.2017 were also e-filed on E-filing portal. Subsequently, the return of income so filed, was selected for scrutiny through CASS under Limited criteria to verify the following issue: 1. Share capital/Capital 2. Sales Turnover / Receipts 3. Squared up loans 4. Custom duty paid Accordingly, a notice u/s 143(2) of the Act intimating the selection of return for scrutiny was issued on 11.08.2018, which has been duly served upon the assessee. Subsequently, notices u/s. 142(1) of the Act with detailed questionnaire was issued on 04.06.2019 and duly served. The assessing officer, examined the each shareholder and made the addition of Rs.4,10,91,250/-, u/s. 68 r.w.s. 115BBE of the Act on account of unexplained cash credit in respect of share capital subscription received from the 16 shareholders. The party-wise details of the investment in the share capital by the said 16 shareholders and the amount of addition there from by the assessing officer are as under: Sr. No. Details of Shareholders Allotment of Share Capital Amount of Addition 1. Dimple V Halvadiya [PAN: ACMPH 5369K] 4,95,000 4,95,000 2. Champaben R. Bavarva [PAN: ARAPB2075K] 13,30,000 4,30,000 3. Dipti B. Savsani PAN: COHPS6282K] 13,94,000 13,94,000 4. Rajeshree A Kalariya [PAN: AXDPK9387J] 15,50,000 3,50,000 5. Vimal S Halvadiya [PAN: ABPPH9980C] 16,00,000 5,30,000 6. Manjula M. Gadara [PAN: AIQPG1322H] 21,00,000 21,00,000 7 Rajesh D.Chhaniyara [PAN: BFBPC9305M] 23,20,000 5,83,000 Page | 4 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 8. Parth M. Gadara [PAN: BFAPG8462C] 25,00,000 5,50,000 9. Narendra B Detroja [PAN: AQQPD5266R 31,10,000 5,94,000 10. MukeshK. Padsumbia [PAN: CREPP7632L] 33,40,000 22,56,000 11 Arvindbhai N. Loh [PAN: AJCPL7525J] 34,20,000 2,17,25012 12 Sangita A. Detroja [PAN: AJNPD2786J] 44,00,000 44,00,000 13 ChetanbenB. Patel [PAN: AOBPP4481K] 70,00,000 31,90,000 14 Rajesh L.Savsani [PAN: AHPPS2536P] 85,00,000 85,00,000 15. Dinesh C. Patel [PAN: ADAPP3401D] 1,26,50,000 68,22,000 16 Nilesh L. Patel [PAN: AGWPP7342J] 1,38,80,000 86,80,000 Total Addition made by the A.O….. 4,10,91,250 During the assessment proceedings, the assessee submitted written submissions along with details and documents. On perusal of these details and documents, it was noticed by the assessing officer that there was immediate cash deposits/cheque deposit in case of shareholders and the part of the amount towards the source of funds in the books of the said shareholders remained unexplained for want of the ITR or bank statement of creditor/depositor of the said shareholders. From the audited books uploaded by the assessee-company, it was noticed by AO that the assessee has raised fresh Share capital of Rs.13,81,54,000/- during the year under consideration. On perusal of the details submitted by the assessee- company as well as collected / received from other sources, it was noted that many share applicants / shareholders / unsecured loan providers were having very limited earning capacity vis-à-vis their respective investment / exposure in the assessee-company. Even the accumulated personal capital as on 31/03/2017 of many of these persons was found short of the amount they have already invested in the assessee-company till Page | 5 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 31/03/2017. To match the requirement of funds these persons have stacked up huge loans on their respective books (mostly from friends and relatives). Even in case of persons having equal or more personal capital compared to their investment, their bank statements revealed immediate clearing entries just prior to transferring the sum in favor of the assessee- company. All the above observations were enough to indicate that all is not good with respect to the way the assessee-company has collected / received these funds. Thus, inquiries have been made by using provisions of section 133(6) of the Income tax Act wherever found necessary. Finally, after allowing sufficient time to submit satisfactory explanation, on 14.12.2019, a show cause notice has been issued giving person wise observations as to why the sum received from those persons were not found explained or not found satisfactorily explained as the case. 6. After considering the details furnished in response to the show cause notice, by the assessee and the explanation of the assessee-company, the assessing officer, analysed the each shareholder and made the addition as under: (1).DIMPLE V. HALVADIYA. Sum of Rs.4,95,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that the lady has reported income from EMBROIDERY & SILAI WORK and total annual earnings as per the copy of ITR submitted is Rs. 2,66,280/- (inclusive of exempt incomes, if any). Bank statement revealed substantial cash and cheque deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the Page | 6 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. assessee-company, it is noted that the bank statement of this person reveals prior cash deposit of Rs. 4,95,000 for no documentary evidence whatsoever (cash book or any other such document) produced. Moreover, this person has not reported any agriculture activity/ income. In absence of such basic details the explanation in respect of this person is not acceptable. (Addition of Rs.4,95,000/-) (2). CHAMPABEN R BAVARVA Sum of Rs.13,30,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.2,90,780/- (inclusive of exempt incomes, if any). On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that the person has utilized Rs.9,00,000 received by way of unsecured loans from Vinodbhai R Bavarva which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). Further, it is noted that amount of Rs.4,30,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.4,30,000/-) (3). DIPTI B. SAVSANI. Sum of Rs.13,94,000 has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.2,72,800/- (inclusive of exempt incomes, if any). On Page | 7 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that amount of Rs.13,94,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.13,94,000/-) (4). RAJESHREE A. KALARIYA. Sum of Rs.15,50,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that the person has reported earnings from TUITION WORK and total annual earnings as per the copy of ITR submitted is Rs.2,90,500/- (inclusive of exempt incomes, if any). Bank statement revealed immediate deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 7,50,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. Further, Rs. 4,00,000 received by way of unsecured loans from Narendra Bavarva which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). Further, it is noted that amount of Rs.3,50,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.3,50,000/-) (5). VIMAL S HALVADIYA. Page | 8 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. Sum of Rs.16,00,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.6,04,000/- (inclusive of exempt incomes, if any). On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 6,00,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. Further, it is noted that amount of unsecured loans of Rs.5,30,000 on the balance sheet of this share holder remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.5,30,000/-) (6). MANJULABEN M GADARA Sum of Rs.21,00,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that the lady has reported earnings from EMBROIDERY WORK and total annual earnings as per the copy of ITR submitted is Rs.2,90,347/- (inclusive of exempt incomes, if any). On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that amount of Rs.21,00,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.21,00,000/-) Page | 9 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. (7). RAJESH D. CHHANIYARA Sum of Rs. 23,20,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.2,80,650/- (inclusive of exempt incomes, if any). Bank statement revealed cash and cheque deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that the person has utilized Rs.17,37,000 received by way of unsecured loans from four persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). Further, it is noted that amount of Rs.5,83,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of credit remains unexplained. (Addition of Rs.5,83,000/-) (8). PARTH M. GADARA Sum of Rs.25,00,000 has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.5,05,570 (Inclusive of exempt incomes, if any).The person has invested/lent an amount which is 5 times his/her annual earning capacity. Bank statement revealed substantial cash and cheque deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 17,00,000/- was received during the year under consideration remaining share Page | 10 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. allotment was out of opening balance in the name of this person. From the balance sheet of the shareholder. It is noted that the person has reported Rs.11,50,000 received by way of unsecured loans from Manibhai Mavjibhai (10 Lac), Mansukhbhal J. Chhatrola (1 Lac) and Dayaben S. Saghani (0.50 Lac) which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). However, remaining amount of Rs.5,50,000/- left unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.5,50,000/-) (9). NARENDRA B. DETROJA Sum of Rs.31,10,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.6,10,072/- (inclusive of exempt incomes, if any). Bank statement revealed immediate deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 19,60,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. It is noted that Rs.25,16,000 reported as unsecured loans in the hands of the shareholder is explained satisfactorily with related documentary evidence (ITR and Bank Statement). However, remaining amount of Rs.5,94,000 remains unexplained either for the want of ITR or for the want of Bank Page | 11 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.5,94,000/-) (10). MUKESH K. PADSUMBIA. Sum of Rs.33,40,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.4,60,600/- (inclusive of exempt incomes, if any). The bank statement uploaded second time is also illegible and doesn't reveal the source of the money. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that the person has utilized Rs.10,84,500 received by way of unsecured loans from various persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). Further, it is noted that amount of Rs.22,56,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.22,56,000/-) (11). ARVINDBHAI N LOH Sum of Rs.34,20,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.5,09,030/- (inclusive of exempt incomes, if any). The bank statement uploaded second time is also illegible and doesn’t reveal the source of the Page | 12 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. money. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that the person has utilized Rs.32,02,750 received by way of unsecured loans from various persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). Further, it is noted that amount of Rs.2,17,250 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.2,17,250/-) (12). SANGITA A. DETROJA Sum of Rs.44,00,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that the lady has reported earnings from HANDWORK and total annual earnings as per the copy of ITR submitted is Rs.2,71,880/- (inclusive of exempt incomes, if any). Bank statement revealed immediate deposits just prior to transferring the money in account of assessee company highlighting a fact that the investment is made out of unsecured loans by this share holder. On perusal of reply to 133(6)by this person as well as the reply of SCN by the assessee-company, it is noted that only 10,00,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. It is, further, noted that entire amount of Rs.13,94,000 reported as unsecured loans in the balance sheet of this shareholder remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Page | 13 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. Therefore, the source of Rs.10,00,000/- received during the year under consideration remains unexplained. (Addition of Rs.44,00,000/-) (13). CHETANABEN B. PATEL Sum of Rs.70,00,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.5,79,852/- (inclusive of exempt incomes, if any). The bank statement uploaded second time is also illegible and doesn’t reveal the source of the money. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 40,00,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. it is noted that the person has reported Rs.38,10,000 received by way of unsecured loans from various persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). However, out of these an amount of Rs.31,90,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.31,90,000/-) (14). RAJESH L. SAVSANI Sum of Rs.85,00,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Page | 14 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. Rs.5,51,172/- (inclusive of exempt incomes, if any). The bank statement uploaded second time is also illegible and doesn’t reveal the source of the money. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that amount of Rs.13,94,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.85,00,000/-) (15). DINESH C. PATEL Sum of Rs.1,26,50,000/- has been recorded as share capital in the name of this person. From the details submitted till date in respect of this person, it is seen that total annual earnings as per the copy of ITR submitted is Rs.7,04,270/- (inclusive of exempt incomes, if any). Bank statement revealed immediate deposits just prior to transferring the money in your account. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that 1,16,50,000/- was received during the year under consideration, remaining share allotment was out of opening balance in the name of this person. It is noted that the person has reported Rs.58,22,000 received by way of unsecured loans from various persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement). However, an amount of Rs. 68,22,000 left unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of this credit remains unexplained. (Addition of Rs.68,22,000/-) Page | 15 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. (16). NILESH L. PATEL Sum of Rs.1,38,80,000/- has been recorded as share capital in the name of this person. On perusal of reply to 133(6) by this person as well as the reply of SCN by the assessee-company, it is noted that only 86,80,000/- was received during the year under consideration remaining share allotment was out of opening balance in the name of this person. Further, it is noted that the person has reported Rs.20,60,000 received by way of unsecured loans from various persons which is explained satisfactorily with related documentary evidence (ITR and Bank Statement), However, amount of Rs. 1,18,20,000 remains unexplained either for the want of ITR or for the want of Bank Statement of the source. Therefore, the source of these loans in the hands of this share holder to the extent of the money received during the year under consideration i.e. 86,80,000/- remains unexplained. (Addition of Rs.86,80,000/-) In view of the detailed factual remarks, the details submitted along with the submission were not found satisfactory in respect of the above persons and, therefore, sum of Rs. 4,10,91,250/- was treated as unexplained cash credits in the hands of the assessee-company within the meaning of section 68 of the Act and was being treated by the Assessing Officer as deemed income of the assessee-company for the year under consideration. 7. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before Ld. CIT(A), who has deleted the addition made by assessing officer. The Ld. CIT(A) deleted the addition mainly on the following two reasons: Page | 16 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. (1) First reason was that the share capital under consideration was received by the assessee-company either prior to or soon after the commencement of the commercial operations and income generating activities and therefore, there cannot be any inference of having earned any undisclosed/unexplained income by the appellant company, therefore, addition made by the assessing officer under section 68 of the Act, on account of introduction of share capital cannot be made. (2) Assessee- company has proved source of the source in respect of share capital received by it. 8. Aggrieved by the order of Ld. CIT(A), the Revenue is in appeal before us. 9. The Learned Senior Departmental Representative (Ld. Sr. DR) for the Revenue submitted that assessee has not proved the source of the source, as the assessment year involved in the assessee`s case under consideration, is the assessment year 2017-18, therefore, assessee needs to explain the source of the source, which he has failed to explain in case each shareholder. In some of the cases, share applicant`s, creditworthiness has not been proved, as they did not have sufficient source to subscribe for the share capital. Apart from this, before issuing the cheques, the cash or the cheques were deposited immediately in the account of the shareholder, therefore, genuineness of the transaction has not been proved and in these circumstances, source of the source needs to be proved by the assessee, whereas assessee has failed to do so. Apart from this, the ld DR for the revenue, submitted written submissions also, before the Bench, which are reproduced below. Page | 17 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. “2. Facts under dispute is credit worthiness of certain share applicant whose name, relevant year's ITR income and very high un-secured loan available to them is given below in a table. These very high unsecured loans available to them were without reason and justification and therefore the source of the source does not get established. Sr. No Shareholders Income as per ROI Unsecured Loan 1 Champaben R. Bavarva 2,59,250 24,15,000 2 Dipti Bharat Savasani 2,99,270 20,20,000 3 Parth Gadara 4,65,470 37,40,000 4 Narendra Detroja 2,58,430 35,96,488 5 SangettaDetroja 2,58,120 48,00,000 5 Nilesh Patel 13,20,650 B/s not available 7 Manjula Gudara 6,66,310 B/s not available 3. Legal Argument in Support of Revenue Regarding Section 68 of the Income Tax Act in the Context of Share Application Money in a Private Limited Company (As Applicable in Assessment year 2016-17) 4. Introduction Section 68 of the Income Tax Act, 1961, deals with unexplained cash credits and places the burden on the taxpayer to provide a satisfactory explanation for the nature and source of any credit entry found in their books of account. If the explanation is not satisfactory, the credit amount may be deemed as income of the taxpayer for that financial year. In the context of a private limited company receiving share application money, the issue of proving not only the capital source but also the source of the source, arises due to the complexity of potential money laundering or tax evasion schemes. The argument in support of the revenue centers around the need for transparency, accountability, and the prevention of the circulation of unaccounted money in the financial system. 5. Legislative Intent and Judicial Interpretation of Section 68 The legislative intent behind Section 68 is to prevent the flow of unaccounted or black money into the system under the guise of loans, share capital, or investments. It was enacted to ensure that taxpayers cannot escape their tax liability by introducing cash credits without a credible explanation of their source. In CIT v. Durga Prasad More [(1971) 82ITR 540 (SC)], the Supreme Court held that while the assessee may have submitted certain documents or explanations, the Revenue authorities are entitled to look beyond the form and examine the substance of the transaction. This case lays down the principle thatmere documentary proof does not suffice if the surrounding circumstances raise doubts. Page | 18 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. Relevance: This case establishes the principle that the substance of a transaction must be examined, not just its form. It allows the Revenue authorities to go beyond documentary evidence and question the actual nature of the transaction. In the context of Section 68, this principle is vital because merely providing paperwork to show receipt of funds is insufficient if the circumstances raise doubts. In Sumati Dayal v. CIT [(1995) 214 ITR 801 (SC)], the Supreme Court also held that the taxpayer's explanation must be plausible and must pass the test of human probabilities. Therefore, the genuineness of the transaction is crucial, and it is not enough to submit papers that merely show receipt of funds. The origin of the money must be traceable to an identifiable and legitimate source. Relevance: The Supreme Court in this case held that explanations for transactions must be plausible and realistic in light of human probabilities. This is particularly relevant under Section 68 when evaluating the genuineness of share application money and the need to establish the source of the source. If the transaction appears improbable, the explanation can be rejected. 6. Section 68 and the Source of the Source Requirement Under the 2016-17 provisions, when a private limited company receives share application money, it is not sufficient for the company to show that the money was received from a legitimate applicant. The company must also establish the genuineness of the transaction and the creditworthiness of the applicant. This includes proving: • The identity of the investor. • The genuineness of the transaction. • The creditworthiness of the investor. In CIT v. Lovely Exports Pvt Ltd [(2008) 216 CTR195 (SC)], the Supreme Court held that if the identity of the investor is established, the amount of share capital cannot be treated as unexplained income of the company. However, the Court also indicated that if the Revenue has reason to believe that the investor is a front or a bogus entity, further inquiry into the source of the money is required. This laid the foundation for further scrutiny, where the assessee is required not just to prove the identity of the share applicant but also to discharge the burden of explaining the source of the money introduced by the applicant — often referred to as the \"source of the source.\" Relevance: This case is often cited for the principle that if the identity of the investor is established, the amount of share capital received cannot automatically be treated as unexplained income under Section 68. However, the case also mentions that if the Revenue suspects that the investor is a bogus entity, further inquiry into the source of funds is required. This makes it relevant when discussing the need to prove the source of the source. Page | 19 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. In CIT v. Precision Finance Pvt. Ltd [(1994) 208 ITR 465 (Cal)], theCalcutta High Court elaborated on this, stating that the assessee must prove three things: 1. The identity of the creditor (shareholder in the case of share application money). 2. The capacity of the creditor to advance the money. 3. The genuineness of the transaction. The onus does not stop merely at establishing the identity of the shareholder but extends to proving the creditworthiness of the person investing in the shares. This is where the source of the source comes into play. The assessee company must provide documentary evidence, such as bank statements or financial statements of the share applicant, to show that the funds used to purchase the shares have come from legitimate, traceable sources. Relevance: This case is directly relevant as it emphasizes the need for the assessee to prove not just the identity of the person providing funds but also their financial capacity (creditworthiness) and the genuineness of the transaction. This aligns with the principle that the assessee must explain the source of the source. 7. Importance of Proving Source of Source to Prevent Abuse of the System The purpose of requiring proof of the source of the source is to avoid money laundering and prevent tax evasion. In many cases, private companies, especially closely held companies, may introduce unaccounted money by way of share capital, claiming it to be from investors whose financial capacity is dubious. The requirement for proving the source of the source ensures: 1. That the investor is not a mere conduit for siphoning black money back into the company's books. 2. That the funds invested are legitimate and have been subjected to tax in the hands of the investor or any other intermediary through which the money passed. 8. In CIT v. NR Portfolio Pvt. Ltd. [(2014) 264 CTR 258 (Delhi HC)], theDelhi High Court emphasized that the mere furnishing of the details of the share applicant, without a credible explanation of their financial capacity, would not suffice. The Court held that the assessee must prove the identity, creditworthiness, and genuineness of the transaction. Failure to do so would allow the Revenue to treat the entire amount as unexplained income under Section 68. Relevance: This Delhi High Court judgment reinforces that mere furnishing of documents is not sufficient unless there is credible evidence of the financial capacity of the share applicant. The company must prove the creditworthiness and genuineness of the investor, making it highly relevant for proving the source of the source under Section 68. Page | 20 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 9. The argument for the Revenue would be that the source of the source must be discharged because:  Without this, the possibility of introducing black money into the system is high.  A shareholder's mere confirmation cannot be taken at face value unless the Revenue can verify that the funds originate from a legitimate source.  Proving the source of the source ensures that both the shareholder and any other parties involved in the chain of transaction are accountable under the Income Tax Act. 10. Non-Satisfaction of Section 68 Can Lead to Deeming the Entire Share Capital as Income Section 68 empowers the Assessing Officer (AO) to treat any unexplained cash credits as the taxpayer's income if the explanation is unsatisfactory. The Assessing Officer is not bound to accept the company's mere claim that the share application money is genuine. If the source of the share capital is not satisfactorily explained, the AO can deem the entire amount as unexplained income. In the case of CIT v. Sophia Finance Ltd. [(1994) 205 ITR 98 (Del FB)],the Full Bench of the Delhi High Court held that Section 68 applies even to share capital received by a company. The company must provide satisfactory evidence regarding the identity and creditworthiness of the investors and the genuineness of the transaction. Thus, in the absence of a proper explanation, the share capital received by the private limited company could be considered as income under Section 68, and the entire amount would be taxable as the company's income for that year. Relevance: This Full Bench decision is critical to the discussion of Section 68 in the context of share capital. The case holds that unexplained share capital can be taxed under Section 68, provided the company fails to establish the genuineness and creditworthiness of the investors. It also supports the idea that deeper inquiry into the source is justified if the initial explanation is unsatisfactory. 11. Conclusion In conclusion, under Section 68 of the Income Tax Act, 1961, in the context of share application money received by a private limited company, the onus is on the assessee to not only prove the identity of the investor but also to establish the genuineness of the transaction and the creditworthiness of the investor. Furthermore, the assessee must discharge the source of the source to rule out any possibility of unaccounted money being funneled into the company through dubious means. The argument for the Revenue emphasizes the importance of this burden, as failure to do so leaves room for money laundering, tax evasion, and abuse of the Page | 21 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. system, and the unexplained cash credits can justifiably be deemed as income under Section 68. In addition to failure by CIT appeal to examine the creditworthiness of share applicant, some additional grounds were also raised which are answered below. The argument and stand taken at level of CIT Appeal that if company does not commence its operation, then books of account entry have no meaning is flawed argument due to provision of Companies act 2013, the revenue is relying upon following arguments and legal provisions based from Companies act 2013. 12. Meaning of Books of Account under the Companies Act, 2013 Books of account refer to the financial records that every company is required to maintain to provide an accurate and complete account of its financial transactions. As per Section 2(13) of the Companies Act, 2013, books of account include records such as:  Cash books,  Sales and purchase records,  Invoices, vouchers, and supporting documents for income and expenditure,  Assets and liabilities. These books must give a true and fair view of the state of the company's affairs, including its branch offices (if any), and comply with generally accepted accounting principles. 13. When Do Books of Account Come Into Existence? Under Section 128 of the Companies Act, 2013, every company must prepare and maintain its books of account from the date of its incorporation. The books of account are required to reflect the company's financial transactions and must be kept at the registered office of the company or at any other place approved by the Board of Directors. The company is required to maintain these records on a daily basis, documenting every financial transaction as it occurs. Thus, they come into existence from the start of the company's operations, immediately after incorporation when financial transactions, including receipt of share capital or operational expenses, begin. 14. When Do Books of Account Become Subject to Audit? Books of account become subject to audit after the end of each financial year. Section 139 of the Companies Act, 2013, mandates that every company appoint an auditor at its first Annual General Meeting (AGM), who will audit the financial statements and books of account. The audit ensures that: Page | 22 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 1. The financial statements provide a true and fair view of the company's affairs. 2.The books of account comply with the relevant accounting standardsand statutory requirements. 15. For each financial year, the books are audited to check the accuracy and authenticity of the entries made, including share capital receipts, income, expenditure, assets, and liabilities. 16. So even if a manufacturing company does not commence its act of manufacturing and yet it is liable to do audit of its account under Companies act 2013 is evidence that the intent of legislative was to examine every financial transaction even though it is prior to commencement of its actual business it is not exempted from audit. 17. How CIT(Appeal) order is bad in law also due to vague, ambagious language as well non-application of mind - Apart from the above-mentioned argument the revenue also relied upon on a specific mistake made by the learned CIT (appeal) on adjudicating in vague, ambiguous language and adopting a forgetful mannerism and causing these issue 18. The order of CIT (A) is bad in law and fact on this specific ground that he had not examined and commented on applicability of second proviso of section 68 of the income tax act 1961 on person who had given share application money. 19. Judgment and Supporting Argument to establish that what are the outcomes of vague and ambagious language: When an order is decided by the CIT (Appeals) using vague or ambiguous language, it is bad in law as it does not clearly indicate his legal findings as well fact findings. Such a decision can be challenged on the basis that it violates principles of natural justice, and it lacks clarity and precision, making it difficult for the parties to understand the outcome. 20. Legal Argument: (i). Ambiguity and Vagueness Violate Natural Justice: The Supreme Court in State of Orissa v. Dr. Binapani Dei [(1967) AIR 1269 (SC)] emphasized that any administrative or quasi-judicial decision must be clear and transparent. If the decision fails to communicate the reasoning clearly, it violates the principles of natural justice, which require that a party should have full knowledge of the decision against them and the reasoning behind it. The vague or unclear handling of a specific ground deprives the appellant of this basic right, making the decision legally unsustainable. (ii). Order Must Contain Reasons: Page | 23 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. In CIT v. Shukla and Brothers [(2010) 386 ITR 476 (SC)], the Supreme Court reiterated that every appellate order must provide clear reasons for acceptance or rejection of specific grounds of appeal. If the reasoning is ambiguous, it renders the decision legally defective because judicial orders must reflect clarity of thought and precise reasoning. In this case, the Court highlighted that an order that does not clarify whether a ground has been accepted or rejected is arbitrary and can be quashed. (iii). Doctrine of Certainty in Judicial Orders: In Mohinder Singh Gill v. Chief Election Commissioner [(1978) 1 SCC405], the Court held that an order must speak for itself. The doctrine of certainty requires that the decision of an authority must be clear and free from anyambiguity. A vague order violates this doctrine, leading to a situation where theaffected party cannot properly appeal or respond to the decision. This is particularly relevant in tax matters where the grounds for decision must be unequivocal. (iv). Absence of Clarity is Bad in Law: The decision of the Tribunal in ITO v. Eastern Scales (P) Ltd. [(2006) 102 TTJ 905 (Delhi)] emphasized that where the appellate authority's order is vague, ambiguous, or lacks specific findings on each ground of appeal, such an order cannot be sustained. The Tribunal held that the order must explicitly address each ground raised in the appeal with clarity and detail. If it does not, the order is liable to be set aside as it fails to provide the necessary conclusions on material facts. (v). Supporting Judgments: Commissioner of Income-Tax vs Walchand& Co. Private Ltd. [(1967) AIR 1435 (SC)]: It was held that the order of any tax authority must be specific and provide reasons for its conclusions; vague or unclear conclusions are invalid. CIT v. K. Y. Pilliah& Sons [(1967) 63 ITR 411 (SC)]: The Court highlighted that appellate authorities must make their orders specific and explicit. Lack of clarity in adjudicating the issues renders the appellate decision bad in law. Now since the Second proviso to section 68 had not been examined and commented by the learned CIT (A) the tribunal is not allowed to insert a presumption insertion as same is not allowed in the law due to following reason A higher court does not have the power to \"presumptively insert\" legal provisions into a lower court's judgment. The court must follow the rule of law and base its decision on the statutory framework and precedents. A judgment cannot be retrospectively corrected by presumption or speculation about what the lower court \"might have intended\" to do. Instead, a higher court may: Page | 24 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd.  Correct the error by applying the correct legal provision and passing a fresh judgment.  Set aside the order and remand the case for fresh consideration by the lower court. In Arjun Singh v. Mohindra Kumar [(1964) 5 SCR 946], the Supreme Court emphasized that an appellate court cannot rewrite the judgment of a lower court by adding reasons or presumptions that were not present in the original decision. 21. So due to vague, ambagious language and ignoring the mandatory nature of second proviso of section 68 of the income tax act, the judgement of CIT Appeal is either to be corrected by this court or need to be set aside.” 10. On the other hand, Ld. Counsel for the assessee argued that it was the first year of operation of the company, therefore, addition under section 68 should not be made. The assessee company has also explained the source of the source, therefore, ld CIT(A) rightly deleted the addition made by the assessing officer. The Ld. Counsel for the assessee relied on the following judgments: I. Hon'ble Apes Court in case of CTT vs. Bharat Engineering & Construction Ca-83 ITR 187 II. Hon' Ne Apes Court in case of CIT vs. Semt. P. K. Noorjahan - 237 ITR 570 III. Hon'ble Gujarat High Court in case of Mitesh Rolling Mills (P) Ltd. vs. CIT-258 ITR 278 IV. Hon'ble Gujarat High Court in case of ACIT vs. Geera Finance Ltd. judgment dated 10.11.2014 in Tax Appeal No. 67-68 of 2001 V. Hon'ble Delhi High Court in case of CIT vs. Five Vision Promoters (P.) Ltd. - 380 ITR 289 VI. Hon'ble Delhi High Court in case of CIT vs. VLS Foods (P.) Ltd.-341 ITR 570 VII. Hon'ble Ahmedabad ITAT in case of ITO vs. Praful (Agarwal) Art Prints Pvt. Ltd. decision dated 12.02.2010 in ITA No. 3568/Ahd/2007 VIII. Hon'ble Ahmedabad ITAT in case of Saiyed Paper Mills Ltd. vs. ACIT decision dated 30.04.2010 in ITA No. 1544- 1545/Ahd/2007 Page | 25 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. IX. Hon'ble Agra ITAT in case of M/s. Garg Preservation Pvt. Ltd. vs. ACIT 79/Agra/2012 decision dated 21.06.2013 in ITA No. X. Hon'ble CIT(A)-3, Rajkot in case of M/s. Hollis Vitrified Pvt. Ltd. - decision dated 02.05.2018 in Appeal No. CIT(A)- 3/A3/083/15-16 XI. Hon'ble CIT(A)-3, Rajkot in case of M/s. Welcome Tiles Pvt. Ltd. - decision dated 29.03.2018 in Appeal No. CIT(A)- 3/11018/16-17 XII. Hon'ble jurisdictional Rajkot ITAT in case of M/s. Leopard Vitrified Pvt. Ltd. vs. PCIT-1, Rajkot decision dated 07.07.2022 in ITA No. 83/Rjt/2021 for A.Y. 2016-17 XIII. Hon'ble Gujarat High Court in case of DCIT vs. Rohini Builders-256 ITR 360 XIV. Hon'ble Gujarat High Court in case of CIT vs. RanchhodJivabhaiNakhava - 21 taxmann.com 159 XV. Hon'ble Delhi High Court in the case PCIT v. Enrich Agro Foods Products (P.) Ltd - [2023] 148 taxmann.com 26 11. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. In our considered view, it was wholly erroneous on the part of the Ld CIT(A) to delete the addition based on the following reasoning: “6.1. Before going into the factual matrix of the case, it is noticed that the appellant, inter alia, has raised a significant legal argument in its further written submissions agitating that the share capital under consideration was received either prior to or soon after the commencement of the commercial operations and income generating activities and therefore, there cannot be any inference of having earned any undisclosed/unexplained income by the appellant company. Since such legal argument goes into the roots of the matter, I deem it fit to adjudicate the same first. On verification of the relevant notes forming part of the Tax Audit Report and first sale bill furnished by the appellant, it is observed that the appellant company started the production of ceramic vitrified tiles on 26.09.2016 and raised first sale bill on 28.09.2016 only and thus, the year under consideration was the first year of commencement of commercial operations. On perusal of the chart showing date-wise details of receipt of the funds towards share capital from the aforesaid 16 shareholders during the year, it is noticed that the amounts totaling to Rs.3,65,90,000/- were received prior to the commencement of commercial operations and income generating activities on 28.09.2016. Thus, the argument of the appellant that the share capital under Page | 26 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. consideration to the extent of Rs.3,65,90,000/- was received prior to the commencement of commercial operations is found to be correct. The appellant vehemently submitted that when the return of income or even existence of any source of income of its own, there cannot be any question of having earned any undisclosed/unexplained income or deemed any question in support of this proposition, the appellant has relied upon the following judicial pronouncements of Hon'ble Courts and Tribunals before me: CIT vs. Bharat Engineering & Construction Co. - 83ITR 187 (SC) CIT vs. Smt. P. K. Noorjahan-237ITR 570 (SC) Mitesh Rolling Mills (P.) Ltd. vs. CIT-258 ITR 278 (Guj. HC) ACIT vs. Geera Finance Ltd. -Tax Appeal No. 67-68 of 2001 (Guj. HC) CIT vs. Five Vision Promoters (P.) Ltd. - 380 ITR 289 (Del. HC) CIT vs. VLS Foods (P.) Ltd. - 341 ITR 570 (Del. HC) ITO vs. Praful (Agarwal) Art Prints Pvt. Ltd. -ITA No. 3568/Ahd/2007 (Ahd. ITAT) Saiyed Paper Mills Ltd. vs. ACIT -ITA No. 1544-1545/Ahd/2007 (Ahd. ITAT) M/s. Garg Preservation Pvt. Ltd. vs. ACIT-ITA No. 79/Agra/2012 (Agra ITAT) M/s. Leopard Vitrified Pvt. Ltd. vs. PCIT ITANo. 83/Rjt/2021for A.Y. 2016- 17 (Rajkot ITAT) On perusal of the aforesaid judicial pronouncements, it is noticed that the above judicial precedents clearly and unambiguously lay down the legal proposition that the Section 68 of the I.T. Act uses the word 'MAY' and thus, the addition u/s. 68 of the I.T. Act is not mandatory in all the cases. These judicial precedents laid down the legal principle that the capital receipts such as share capital, share application money, unsecured loans etc. which were received in the period prior to commencement of income generating activity cannot be treated as undisclosed/unexplained income or deemed income in the hands of recipient even in the situation when the explanations are not found to be satisfactory for want of documents. It is therefore evident that if there is no income or even existence of any source of income of the appellant, there cannot be any presumption of having earned any undisclosed/ unexplained income or deemed income. It is noticed that recently, vide judgment dated 07.07.2022, the Hon'ble jurisdictional Rajkot ITAT in case of M/s. Leopard Vitrified Pvt. Ltd. vs. PCIT-1, Rajkot (supra)as relied upon by the appellant has held that when the share capital/share application money and unsecured loans were received prior to the commencement of commercial operations, the same can never be regarded as undisclosed income of the assessee u/s. 68 of the Act in the hands of recipient company. Thus, the above judicial pronouncements are identical to case of the appellant and they are squarely applicable to the appellant's case. Further, the judgments from the jurisdictional Hon'ble Rajkot ITAT, Hon'ble Gujarat High Court and Hon'ble Apex Court relied upon by the appellant have binding force. Respectfully following the above judicial precedents, I hold that the share capital subscription received by the appellant prior to the commencement of commercial operation and income generating activity cannot be treated as its undisclosed/unexplained income u/s. 68 of the I.T. Act even in the situation where the explanations of the Page | 27 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. appellant are not found to be satisfactory. Thus, the addition to the extent of Rs.3,65,90,000/- being sums received prior to the commencement of income generating activity made by the A.O. deserves to be deleted on this count alone.” 12. Based on the above reason, to delete the addition made by the assessing officer, on account of share capital/share premium, is not acceptable, as, it is against the main provisions of section 68 of the Act, which are reproduced below: “68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year : 84[Provided that where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by such assessee shall be deemed to be not satisfactory, unless,— (a) the person in whose name such credit is recorded in the books of such assessee also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that] where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless— (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: 85[Provided also] that nothing contained in the first proviso 86[or second proviso] shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10.” Page | 28 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 13. From the above provisions of section 68, it is vivid that nowhere in this section, it is mentioned that addition should not be made when the assessee-company received, share capital/ share premium before the commencement of its business. By and large, the Private Limited companies, in India, normally receive the share capital/ share premium before the commencement of its business. The interpretation of section 68 of the Income Tax Act, made by the ld. CIT(A) is not acceptable on account of the following principles: (1).Intention of Legislature: The legislature enacts section 68 of the Act, with a view to tax uncounted money, introduced by way of share capital/ share premium and the legislature expects that the law enacted by him shall be understood by the courts in its true spirit and shall be administered in accordance with the intention with which the law had been framed. When the words of statute are clear, plain or unambiguous, i.e. they suggest only one meaning, the courts are bound to give effect to that meaning, without looking into consequences thereof. (2)Statutes must be read as a whole : (Ex Visceribus Actus) :Every part of the section must be constructed within the four corners of the Act.No provision should be interpreted in isolation. Section 68 of the Act, does not talk about commencement of business. (3)Ut res magis valeat quaum pereat (It may rather become operative than null). The provision of section 68 of the Act should not be constructed in such a way so as to section 68 itself becomes ineffective (useless). Page | 29 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. (4) Provision of section 68 to be constructed to make it effective and workable: The provision of section 68 of the Income Tax Act, must be constructed in such a manner so as it becomes workable. In the assessee`s case under consideration, the Ld. CIT(A) has interpreted the provisions of section 68 of the Act, in such a way, so that it will not work and every company who introduced the bogus share capital/ share premium would not pay tax to the government. Therefore, the case laws relied on by the ld CIT(A) are not applicable and distinguishable on the basis of the reasons given by us above. Therefore, we do not agree with the reasons given by the ld CIT(A) to delete the addition, under section 68 of the Act. 14. We also find that Assessee- company has not proved source of the source in respect of share capital received by it. The various decisions relied on by the learned CIT(A) pertain to “source” only. No decision pertains to “source of the source”. In para number six of this order, we have reproduced the findings of the assessing officer, shareholder- wise, where the assessing officer has clearly pointed out that assessee has failed to prove source of the source. During the appellate proceedings, before learned CIT (A), the assessee has not produced any new evidence and document to prove “source of the source” for each shareholder. We note that according to section 68 of the Income Tax Act, where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the assessing officer, the sum so credited may be charged to income tax as the income of the assessee of that assessment year. The assessing officer may consider such sum as cash credit due to lack of sufficient Page | 30 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. explanation. It is well known that provisions of section 68 have been introduced into the taxing enactments step by step in order to plug loopholes. Even long prior to the introduction of section 68 of the Act, in the statute book, courts had held that where any amounts were found credited in the books of the assessee in the previous year and the assessee offered no explanation about the nature and source thereof or the explanation offered was, in the opinion of the assessing officer, is not satisfactory, the sums so credited could be charged to income-tax as income of the assessee of the relevant assessment year. We note that with effect from assessment year 2013-14, section 68 of the Income Tax Act has been amended to provide that if a closely held company fails to explain the source of share capital, share premium or share application money received by it to the satisfaction of the assessing officer, the same shall be deemed to be the income of the company under section 68 of the Act. We note that the amended provisions of section 68, is applicable to the assessee company under consideration, therefore, assessee company needs to prove source of the source. The Hon`ble Bombay High Court, in the case of Gagandeep Infrastructure 80 Taxmann.Com 272 (Bom), held that amendment to section 68 is prospective and applicable only from assessment year 2013-14. In the assessee`s case under consideration, in case of most of the shareholders, there was a cash deposit/cheque deposit, in the account of shareholder, which comes in the definition of “source of the source”, and assessee needs to prove that such cash deposit in the bank account of the shareholder, belongs to assessee- company or belongs to other person ( how that other person earned that cash), whose source needs to be proved by the assessee-company, which the assessee-company has failed to do so. Page | 31 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. 15. We note that ld. CIT(A) did not rebut the findings of the assessing officer. The ld. CIT(A) failed to distinguish the findings of the assessing officer on each shareholder, in terms of “source of the source” theory. We also find that ld CIT(A) did not call a demand report from the assessing officer in respect of the technical issues/ grounds raised by the assessee during the appellate proceedings, first time, though it is a legal issue, even then, the ld CIT(A) should have called a remand report from the assessing officer, pertaining to the facts of the legal issue/ legal argument of assessee, because each legal argument of assessee, has some basic facts embedded therein, that is, without basic facts, there is no foundation of the legal issue, therefore, facts relating to legal issue, should have been examined by the assessing officer. However, the ld CIT(A) has failed to do so. Besides, ld CIT(A) also did not call the documents and evidences from the assessee, in respect of those shareholders, where there is a clear finding of the assessing officer that assessee-company has not submitted certain documents and evidences, in respect of some shareholders and even then, the ld CIT(A) deleted the addition, which is not acceptable. Thus, we find that assessee- company has not submitted any new evidences or documents during the appellate proceedings, before the ld CIT(A), except the documents and evidences which were submitted before the assessing officer. Hence, “source of the source” yet to be proved by the assessee- company, for each shareholder. Therefore, we are of the view that entire lis should be remitted back to the file of the ld CIT(A) with the directions to the assessee-company to furnish sufficient documents and evidences to prove the “source of the source” and in turn the ld CIT(A) should call a proper remand report from the assessing officer, on such new documents, evidences, and adjudicate the issue in Page | 32 ITA.347 & 348/RJT/2023/AYs.2016-17 – 2017-18 Sez Vitrified Pvt. Ltd. accordance with law. For statistical purposes, both the appeals filed by the revenue are allowed. 16. In the result, both the appeals of the Revenue are allowed for statistical purposes. Order is pronounced in the open court on 09/12/2024 Sd/- Sd/- (DINESH MOHAN SINHA) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Rajkot Ǒदनांक/ Date: 09/12/2024 True Copy Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. Pr. CIT 5. DR/AR, ITAT, Rajkot 6. Guard File By order Assistant Registrar/Sr. PS/PS ITAT, Rajkot "