M/S.STANDARD FIREWORKS P LTD , SIVAKASI V. ACIT,CENTRAL CIRCLE-2, MADURAI

ITA 279/CHNY/2022

AI Insights

The case involves M/s Standard Fireworks Pvt. Limited, which appealed against the order of the Commissioner of Income Tax (Appeals)-19, Chennai, concerning the assessment year 2017-18. The primary issues were the additions made by the Assessing Officer under sections 68 and 69A of the Income Tax Act, 1961, related to unexplained share capital contributions and cash deposits during the demonetization period. The Tribunal examined the evidences and arguments presented by both parties, including the remand report and various judicial pronouncements, and concluded that the additions were not justified.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 113035 (ITAT-CHENNAI)
• Duration Of Justice: 15 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 02-11-2022
• Assessment Year: misc
• Appeal Filed On: 28-06-2007
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Unexplained investment; Principle of natural justice
• Section: 68; 143(3); 142(1); 69A; 22

Judgement Text

1 आयकर अपीलीय अिधकरण ‘बी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI माननीय +ी वी. द ु गा1 राव, ाियक सद3 एवं माननीय +ी मनोज कु मार अ8वाल ,लेखा सद3 के सम:। BEFORE HON’BLE SHRI V. DURGA RAO, JUDICIAL MEMBER AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं./ ITA No.279/Chny/2022 (िनधा1रणवष1 / Assessment Year: 2017-18) M/s Standard Fireworks Pvt. Limited No.13, Thiruthangal Road Sivakasi, Tamil Nadu बनाम/ V s. ACIT Central Circle-2, Madurai थायीलेखासं./जीआइआरसं./P AN /GI R No. AAC C S -1 4 8 0 - M (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Shri S. Sridhar (Advocate) – Ld. AR थ कीओरसे/Respondent by : Shri S. Senthilkumaran (CIT) – Ld. DR सुनवाईकीतारीख/Date of Hearing : 03-11-2022 घोषणाकीतारीख /Date of Pronouncement : 21-12-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2017-18 arises out of the order of learned Commissioner of Income Tax (Appeals)-19, Chennai- [CIT(A)] dated 30-03-2022 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 31-12-2019. The grounds taken by the assessee read as under: 1. The order of the GIT (Appeals) - 19, Chennai dated 30.03.2022 in DIN & order No. ITBA/APL/M/250/2021-22/1042081608(l) for the above assessment year is contrary to law, facts, and in the circumstances of the case. 2 2. The CIT (Appeals) erred in sustaining the addition of Rs.2,29,32,000/-being the cash deposits during the demonetization period into the bank account as unexplained money u/s 69A of the Act without assigning proper reasons and justification. 3. The CIT (Appeals) failed to appreciate that the findings from para 9.2 to para 9.7 of the impugned order were wrong, incorrect, invalid, erroneous, unjustified and not sustainable both on facts and in law. 4. The CIT (Appeals) failed to appreciate that the exhaustive replies filed in the assessment as well as in the appellate proceedings with evidences were wrongly rejected in the assessment order as well as in the remand report, thereby vitiating the related findings in the impugned order. 5. The CIT (Appeals) failed to appreciate that having not rejected the books of accounts, the action in mechanically brining to tax the entire cash deposits as unexplained money within the scope of section 69A read with section 115 BBE of the Act was wrong, erroneous, unjustified, incorrect, invalid and not sustainable both on facts and in law. 6. The CIT (Appeals) failed to appreciate that the provisions of section 69A of the Act had no application to the facts of the case and ought to have appreciated that non consideration of the evidences in the form of cash sales/receipts (Receipt number wise) correlating the deposits made during the demonetization period along with the identity of the customers would vitiate the related findings in the impugned order. 7. The CIT (Appeals) erred in sustaining the addition of Rs.46,65,00,000/- being the share capital contribution for rights issue as unexplained investment u/s 69 of the Act without assigning proper reasons and justification. 8. The CIT(Appeals) failed to appreciate that the findings from para 10.2 of the impugned order on various facets were wrong, erroneous, unjustified, incorrect, invalid and not sustainable both on facts and in law. 9. The CIT(Appeals) failed to appreciate that non consideration of the evidence in the form of Cheque No./DD No./RTGS details, bank statements/books of accounts establishing the share contributions received would vitiate the related findings in the assessment order, in the remand order and in the impugned order. 10. The ClT(Appeals) failed to appreciate that having furnished additional evidence to substantiate the claim of share capital contributions received under Rule 46A of the Income Tax Rules, 1962 and further having entertained the said additional evidences, the decision to follow the remand report mechanically which was reproduction of the assessment order should be reckoned as not sustainable in law. 11. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing of the impugned order and any order passed in violation of the principles natural justice would be nullity in law. 12. The Appellant craves leave to file additional grounds/arguments at the time of hearing. 3 As is evident, two issues fall for our adjudication i.e., (i) Addition of Share Capital Contribution u/s 69; & (ii) Addition of Cash deposited by the assessee. 2. The Ld. AR placed on record copy of remand report and assailed the confirmation of additions by Ld. CIT(A) in the impugned order. To support the same, our attention has been drawn to various documents as placed in the paper book. Reliance has been placed on various judicial pronouncements, the copies of which have been placed on record. The Ld. CIT-DR controverted the arguments of Ld. AR and submitted that the assessee failed to prove the source of share capital contribution. The addition of cash deposit has been justified by relying on the findings given by lower authorities. Having heard rival submissions and after due consideration of material on record, our adjudication would be as given in succeeding paragraphs. 3. The assessee being resident corporate assessee has been incorporated in the year 1977. The assessee is stated to be primarily engaged in manufacturing, storing and selling of fireworks. The company is headquartered at Sivakasi and its 16 branches are spread over various cities. The major branches include places like Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad, Mumbai etc. The company does not have any agency / franchise business model. Assessment Proceedings 4. During assessment proceedings, a notice u/s 142(1) was issued calling for explanation on certain points. The assessee responded to the same and filed certain details. On the basis of the 4 same, Ld. AO proceeded to frame an assessment on the assessee and in the process, made certain additions which are the subject matter of appeal before us. 5. Addition of Share Capital Contribution u/s 69 5.1 It transpired that the assessee issued equity shares under right issue and received share capital along with premium aggregating to Rs.46.65 Crores from existing shareholders. The right was offered at the rate of 27 equity shares on right basis for every 100 equity shares held by the existing shareholders. In total, 583200 new shares were issued which had face value of Rs.100/- per share and the same were issued at a premium of Rs.700/- per share. Accordingly, the assessee was directed to prove the identity of the shareholders, their respective creditworthiness and genuineness of the transactions. 5.2 The assessee, vide reply dated 28.12.2019, furnished complete details along with bank details from where the contribution was received. The list of allottees along with their addresses was also furnished. The extract from assessee’s own bank statement evidencing receipt of money was also furnished. 5.3 However, Ld. AO held that the assessee did not produce the bank statement of the persons who had remitted the amount of share capital and therefore, creditworthiness of the persons could not be established by the assessee. Accordingly, the sum of Rs.46.65 Crores was added as unexplained investment u/s 69 of the Act which would be taxable at special rates as provided u/s 115BBE of the Act. 5 6. Addition of cash Deposit The assessee deposited cash of Rs.229.32 Lacs during demonetization period. The deposits were claimed to be out of cash balance available with the assessee. However, the assessee did not furnish cash book and accordingly, the said sum was added u/s 69A which would be taxable at special rates as provided u/s 115BBE of the Act. 7. Remand Proceedings 7.1 Since the assessee furnished various explanation and documents during appellate proceedings, the same were subjected to remand proceedings. After considering the same, Ld. AO furnished remand report on 23.02.2022, a copy of which is on record. 7.2 In support of Share Capital, the assessee furnished details of allotment of shares, copy of ITRs of investor for AYs 2016-17 & 2017-18 along with computation of income and bank statements of persons to whom shares were allotted. It transpired that the share capital was sourced by the shareholders out of 5 accounts which could be classified as under: - No. Group No. of Contributors Value of Shares 1. M/s Meenasankar Enterprises 6 1061.81 Lacs 2. Sh.A.Tenzing (TMB) A/c 4 1304.03 Lacs 3. Sh.A. Tenzing (ICICI Bank) A/c 1 705.03 Lacs 4. OD a/c of various entities 4 1458.97 Lacs 5. Other Shareholders 7 135.75 Lacs Total 22 4665.60 Lacs The findings for each of the groups were rendered in the remand report as under: - (i) M/s Meenashankar Enterprises Group 6 The details of share allotment to this group were as follows: - No. Name of Allottee No. of Shares Allotted Value of Shares (Rs.) Returned Income for AY 2016-17 Returned Income for AY 2017-18 1. A. Aruna 16476 131.80 Lacs 99.99 Lacs 92.37 Lacs 2. Annamalai S. 16508 132.06 Lacs 50.46 Lacs 83.37 Lacs 3. M/s Boopathy Investment P. Ltd. 27767 222.13 Lacs 8.22 Lacs 30.60 Lacs 4. M/s Niranjanshaknar Enterprises P. Ltd. 27734 221.87 Lacs 10.71 Lacs 27.58 Lacs 5. M/s Pradeep Sankar Enterprises P. Ltd. 27767 222.13 Lacs 9.67 Lacs 27.38 Lacs 6. Maheswaran S 16475 131.80 Lacs 51.85 Lacs 58.10 Lacs Total 132727 1061.81 Lacs In support of creditworthiness, the assessee furnished copies of Income Tax Return of all the 6 allottees for AYs 2016-17 and 2017- 18. The source of share capital was stated to be demand draft issued from the bank account of M/s Meenasankar Enterprises. The credits in that account were an amount of Rs.1125 Lacs which was stated to be received from various entities like Pioneer Jellice India Pvt. Ltd, Ashok Matches & Timbers, A Niranjan sankar and Pioneer financial services etc. Shri A. Niranjan sankar, in turn, had received loan from Bajaj FinServ. Thus, the assessee, provided trail of sources of the source of investment so received by it. However, the assessee’s explanation for this group was rejected by Ld. AO on the ground that the assessee could not establish source of investment and creditworthiness of the share allottees. As per return of income, the allottees did not have sufficient source to make such huge investments. No explanation was given for nature of sum received from M/s Meenasankar Enterprises which was 7 ultimately used for investment in the assessee. No agreement was shown between the share allottees, Meenasankar Enterprises and four entities from whom the credits were received. The purpose of loan availed by Shri Niranjan sankar from Bajaj FinServ and details of interest paid, source for settlement of loan etc. was not furnished. Though the sum invested was traced through banking channel, however, the nature of transaction, genuineness of transaction and creditworthiness of allottees could not be substantiated and accordingly, the share capital received form these entities was to be added as unexplained cash credit u/s 68. (ii) Sh. A. Tenzing (TMB) Account The details of share allotment to this group were as follows: - No. Name of Allottees No. of Shares Allotted Value of Shares (Rs.) Returned Income for AY 2016-17 Returned Income for AY 2017-18 1. A. Tenzing 39739 317.91 Lacs 410.55 Lacs 1432.98 Lacs 2. D.Dilip 17018 136.14 Lacs 12.28 Lacs 15.11 Lacs 3. D.Dinesh 17018 136.14 Lacs ---- --- 4. R.Rajarathnam 89229 713.83 Lacs 83.92 Lacs 73.37 Lacs Total 163004 1304.03 Lacs The said payment was sourced in the bank account out of premature closure of FDRs held by Shri A. Tenzing. The Ld. AO held that the assessee did not furnish any details with regard to source for said credit in his account ignoring the submissions that Shri. A. Tenzing received sum of Rs.100 Crores as part of family settlement from Shri Meenashankar Enterprises during financial year 2015-16. 8 The assessee, in support, had furnished copies of Income Tax Returns of all the persons of this group for AYs 2016-17 & 2017-18 along with their bank statements. However, Ld. AO similarly alleged that the nature of source of investment and creditworthiness of the allottees could not be established by the assessee. The investors did not have sufficient source to make the investment. The funds so transferred were not supported by any agreement. Therefore, the sum so received was to be treated as unexplained cash credit u/s 68. (iii) Sh. A. Tenzing (ICICI Bank) Account This group has only one allottee i.e., M/s Arunsankar Enterprises Ltd. The funds were transferred from ICICI Bank Account of Sh. A. Tenzing. This assessee was allotted shares for Rs.705.03 Lacs. The assessee submitted copies of Income Tax returns of share allottee for AYs 2016-17 and 2017-18 wherein income of Rs.92.99 Lacs and Rs.171.76 Lacs was reflected. The credits in ICICI Bank account of Sh. A. Tenzing were sourced out of closure proceeds of FDRs held with the Bank. However, taking the same view, Ld. AO held that the amount so invested was to be treated as unexplained cash credit u/s 68. (iv) Amt. transferred from OD Accounts of various entities The details of share allotment to this group were as follows: - No. Name of Allottee No. of Shares Allotted Value of Shares (Rs.) Returned Income for AY 2016-17 Returned Income for AY 2017-18 1. R. Padma 78899 631.19 Lacs 81.93 Lacs 99.49 Lacs 2. Senthiya Abirami 34491 275.92 Lacs ---- --- 3. Rajiv Mukilan 34491 275.92 Lacs 44.06 Lacs 43.79 Lacs 9 4. SivakamiSundari 34490 275.92 Lacs 33.94 Lacs 29.99 Lacs Total 182371 1458.97 Lacs The assessee furnished details of first source and well as second source of the funds along with copies of Income Tax returns and Bank statements of share allottees. However, taking the same view, Ld. AO alleged that the sum was to be treated as unexplained cash credit u/s 68. (v) Other Allottees The details of share allotment to this group were as follows: - No. Name of Allottee No. of Shares Allotted Value of Shares (Rs.) 1. D. Dhamayanthi 8262 66.09 Lacs 2. C.Tiruselvi 3240 25.92 Lacs 3. C. Dhansingh 1943 15.54 Lacs 4. R. Thilagavathy 1814 14.51 Lacs 5. A.T.Arun 1619 12.95 Lacs 6. Yennarkay R.Chiranjeevirathinam 81 0.64 Lacs 7. P.Jaishankar 10 0.08 Lacs Total 16969 135.75 Lacs Though the assessee furnished similar documents to substantiate its stand, however, taking the same view, Ld. AO opined that the same was to be treated as unexplained cash credit u/s 68. 7.3 On the issue of cash deposit, the assessee furnished cash book for the period from 01.10.2016 to 31.12.2016 in respect of 7 depots and submitted that the cash was deposited out of cash balance available as on 09.11.2016. It was noted that cash book for Mumbai Depot had opening cash balance of Rs.228.88 Lacs and cash of Rs.227.07 Lacs was deposited by the assessee at Mumbai between 10.11.2016 to 22.11.2016. Therefore, the cash deposits as 10 per cash book submitted by the assessee were in agreement with the above-mentioned bank statement. The date-wise cash receipt for the period 01.10.2016 to 31.12.2016 was also analyzed on the basis of which it was noted that cash receipts from 01.10.2016 to 30.10.2016 was Rs.28.74 Lacs but cash receipts during the period from 31.10.2016 to 08.11.2016 was Rs.299.55 Lacs which was an abnormal trend. There was sudden increase in cash flow. The assessee did not furnish supportive evidences to substantiate its claim for receiving the said cash during the period as mentioned in the cash book such as ledger copy of the parties, supporting bills or vouchers for receipts of cash, cash deposit counterfoils etc. Hence, the assessee could not prove the genuineness of the transaction recorded in the cash book. Accordingly, Ld. AO justified the impugned additions. 8. Appellate proceedings The remand report was forwarded to assessee on 24.02.2022 to submit the rejoinder. However, the assessee had chosen not to file the same. Accordingly, Ld. CIT(A) held that the assessee could not furnish copy of cash book to substantiate its claim that the cash was deposited out of cash balance available in the business entities. Therefore, the addition of cash deposit was confirmed. Considering the findings given in the remand report, the addition made by Ld. AO on account of share capital was also confirmed. Aggrieved, the assessee is in further appeal before us. Our findings and Adjudication 9. Upon due consideration of material facts, it could be seen that the assessee was incorporated in the year 1977. During the year, 11 the assessee offered right shares to existing shareholder and received share capital and share premium from them. It could be seen that the right shares are offered to existing shareholders only and therefore, the identity of the shareholders as well as genuineness of the transactions could not be doubted. The assessee has filed all the statutory forms evidencing share allotment to the shareholders. It could also be seen that the assessee furnished complete details along with bank details from where the contribution was received. The list of allottees along with their Income Tax Permanent Account numbers (PAN) and addresses was also furnished. The extract from assessee’s own bank statement evidencing receipt of money through banking channels was also furnished. The shares were allotted to as many as 22 persons as follows: - No. Nome of the Allottee No. of Shares Allotted Value of Shares (Rs) 1. YennarknyRajarathinam 89229 71383200 2. M/s ArunsankarEnterprises P Ltd 88129 70503200 3. R. Padma 78899 63119200 4. A. Tenzing 39739 31791200 5. R. SenthivaAbirami 34491 27592800 6. R. Rajiv Mukilan 34491 27592800 7. R. SivakamiSundari 34490 27592000 8. M/s Boopathy Investment P Ltd. 27767 22213600 9. M/s Pradeep SankarEntreprises P Ltd 27767 22213600 10. M/s NiranjanSankar Enterprises P Ltd. 27734 22187200 11. D. Dinesh 17018 13614400 12. D. Dilip 17018 13614400 13. S. Annamalai 16508 13206400 14. A. Aruna 16476 13180800 15. S. Maheswaran 16475 13180000 16. D. Dhamayanthi 8262 6609600 17. T. Tiruselvi 3240 2592000 18. C. Dhanasingh 1943 1554400 19. R. Thilagavathy 1814 1451200 20. A. T. Arun 1619 1295200 12 21. Yennarkay R. Chiranjeevirathinam 81 64800 22. P. Jaisankar 10 8000 583200 466560000 10. The proceeds of the shares have been sourced by the subscribers from various bank accounts which have been classified into 5 groups. During the course of remand proceedings, the assessee has furnished addresses, PAN as well as copies of Income Tax Returns of all the allottees for AYs 2016-17 and 2017- 18 along with their respective bank statements. The details of immediate source as well as two preceding sources (in most of the cases) has been provided / explained by the assessee. The copies of bank statements from where the funds have been transferred have been placed on record. For each of the subscriber, the assessee placed on record chart showing the source of investment for the contributor along with their Income Tax Returns for AYs 2016-17 & 2017-18, computation of income, respective financial statements, relevant ledgers and application forms etc. The same has also been placed on page nos.2 to 690 of the paper-book. The perusal of all these documents would lead us to inevitable conclusion that the assessee had, beyond doubt, established the creditworthiness of all the investor entities. It could be seen that all the entities had sufficient net-worth to make the investment in the assessee company. All these entities were filing their Income Tax Returns since past several years and the investments were duly supported by financial documents. The funds were transferred by share allottees from their associated concerns, the source as well as source thereof was duly established by the assessee. The 13 allegation of Ld. AO is not supported by any fact-based finding. No material has been brought on record by Ld. AO to conclude the share money so received by the assessee was its own money in the garb of share application money. 11. On the basis of all these documentary evidences, it could be concluded that the assessee had duly discharged the onus of proving the identity of the investor entities, their respective creditworthiness and the genuineness of the transactions. Therefore, the onus had shifted on Ld. AO to dislodge the assessee’s documentary evidences and bring on record cogent material to establish that the assessee generated unaccounted money and routed the same through banking channels in the garb of share-application money. Unless such an investigation is shown to have been carried out, the additions would not be sustainable in law since it is trite law that no addition could be made on the basis of mere suspicion, conjectures and surmises. 12. We find that as per the provisions of Section 68 of the Income Tax Act, 1961, where any sum is found credited in the assessee’s books and assessee offers no explanation about the nature and source thereof or the explanation furnished is found to be unsatisfactory, the sum so credited may be charged to Income-Tax as the income of the assessee of that previous year. A proviso has been inserted to the said section by Finance Act, 2012 w.e.f. 01/04/2013 to provide that where the assessee is a company and the sum so credited consists of share application money, share capital, share premium etc., the explanation furnished by the assessee shall be deemed to be not satisfactory unless the person 14 in whose name such credit is recorded also offers an explanation about nature and source of sum so credited and such explanation is found to be satisfactory. In the instant case, the assessee has not only established the immediate source but also two preceding sources in most of the cases. Therefore, on the facts and circumstances, we hold that the impugned additions as made u/s 68 and confirmed in the impugned order is not sustainable in law. By deleting the same, we allow corresponding grounds raised by the assessee. 13. So far as the addition of cash deposit is concerned, we find that the addition was made by Ld. AO on the ground that the assessee did not furnish the cash book. However, during remand proceedings, the assessee furnished the cash book of Mumbai Depot. Upon perusal of the same, Ld. AO rendered a finding that Mumbai Depot had opening cash balance of Rs.228.88 Lacs which was a source of cash deposit. Another finding was that the cash deposits as per cash book submitted by the assessee were in agreement with the above-mentioned bank statement. The only allegation was the fact that there was abnormal trend of cash inflow. The same stood explained by the fact that that the assessee was dealing in seasonal item i.e., crackers which would certainly have such abnormal trend during peak season. Be that as the case may be, the cash deposit is duly substantiated by assessee’s cash book as furnished by the assessee during remand proceedings and the Ld. AO also accepted this position. Therefore, there is no valid reason to sustain this addition. By deleting the same, we allow the corresponding grounds raised by the assessee. 15 14. In the result, the appeal stand allowed. Order pronounced on 21 st December, 2022. Sd/- (V. DURGA RAO) ाियक सद3 /JUDICIAL MEMBER Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद3 /ACCOUNTANT MEMBER चे*ई/ Chennai; िदनांक/ Dated : 21-12-2022 EDN/- आदेशकीUितिलिपअ8ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant2. थ /Respondent 3. आयकरआयु3 (अपील)/CIT(A)4. आयकरआयु3/CIT 5. िवभागीय ितिनिध/DR6. गाड8फाईल/GF