M/s.Dhanachakra Lease & Hire Purchase Co. P. Ltd, Piravom V. The ITO, Kochi

ITA 42/COCH/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7682 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2016-2017
• Appeal Filed On: 04-04-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHANTAM BOSE
• Keywords: Unexplained cash credit; Gift; Revision of order; Wrong claim; Assessment record
• Section: 68; 263; 143(3); 142(1); 153

Judgement Text

ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi IN THE INCOME TAX APPELLATE TRIBUNAL BENCH: COCHIN BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA No.42/Coch/2021 Assessment Year: 2016-17 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd. Unichar Building Pallikavala Piravam Kochi 686 664 PAN NO : AABCD1332Q Vs. ITO Corp. Ward 1(1) Kochi APPELLANT RESPONDENT Appellant by : Shri Mathew Joseph, A.R. Respondent by : Shri Shantam Bose, D.R. Date of Hearing : 13.09.2022 Date of Pronouncement : 13.09.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against order of Principal CIT passed u/s 263 of the Income-tax Act,1961 ['the Act' for short] dated 1.2.2021. The assessee has raised following grounds of appeal:- 1. “The learnt Pr. CIT went wrong in treating the assessment order passed as erroneous for the reason of not making inquiries about the source for the increase of share capital by Rs 55 lakhs during the year. • 2. The learnt Pr. CIT went wrong in treating the assessment order passed as erroneous even after examining the explanation furnished in the ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 2 of 9 course of revisionary proceeding to the effect that out of the increase of Rs 55 lakhs, sum of Rs 44,18,000represnts loan received in earlier years which was converted as share capital during the year. 3. The learnt Pr. CIT went wrong in treating the assessment order passed as erroneous even after examining the loan confirmation from 29 share holders furnished in the course of revisionary proceeding in respect of amount of Rs 14,72,000 received during the year towards share capital.” 2. Facts of the case are that the Assessee-company, M/s Dhanachakra Leasing and Hire Purchase Co (P) Ltd., is a non banking financial company (NBFC). It filed its return of income for the AY 2016-17 on 11.10.2016 admitting total income of Rs.1,94,320/-. The case was selected for scrutiny assessment for verification of increase in the share capital and to verify whether the same was from genuine and disclosed sources. The scrutiny assessment was completed u/s 143(3) of the Income-tax Act,1961 ['the Act' for short] dated 29.11.2018, accepting the returned income at Rs.1,94,320/- (MAT income Rs.1,61,227). 2. From perusal of records, it is noticed by the Ld. Principal CIT that the Assessment Order u/s 143(3) of the Act dated 29.11.2018, passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of revenue for the reasons mentioned below: “The Assessee Company, M/s. Dhanachakara Leasing and Hire Purchase Co (P) Ltd., filed its return of income for the AY 2016-17 on 11.10.2016 with total income of Rs.1,94,320/-. The case was selected for scrutiny assessment for verification of increase in the share capital and to verify whether the same was from genuine and disclosed sources. The assessment was completed u/s ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 3 of 9 143(3) of the Act dated 29.11.2018, accepting the returned income at Rs.1,94,320/- (MAT income Rs.1,61,227/-). The following issues were noticed in the said assessment order by the Ld. PCIT:- In respect of share capital collected during the year, the assessee furnished only the names of 29 creditors and amount subscribed. No other details like address of the share holders, PAN, mode of payment, ITR filed etc. was submitted by the assessee to prove the source of credit. Assessee has only stated that “a sum of Rs.11 lakhs received from 29 shareholders during the year. Most of them are assessees and others have agricultural income and gift from their spouses" However, no evidence was provided regarding the receipt of agricultural income by these persons and/or confirmation of the gifts by the donors. As regards unsecured loans/advances of Ps.44,18,000/- converted into share capital, assessee has stated that these advances were received from the share holders from FY 2005-06 to 2015-16. However, the receipts of loans are evidenced in the balance sheet of the assessee only from AY 2013-14 to AY 2015-16. The assessee has not produced any documents submitted to ROC, including the returns filed before or after the share issue. The conversion of loan/deposit into the equity snare capital is subject to section 62(3) of the Companies Act 2013. As per this section, it is mandatory to pass a special resolution by the Board at the time of acceptance of loan, that the company has taken loans on the terms that the loan will be converted into share capital. No such mandatory compliance is found satisfied in this case. In view of the above, it could be said that the increase in share capital by Rs.55,00,000/- during the relevant PY is nothing but introduction of assessees own undisclosed funds/income to the books of accounts of the assessee company. The same needs to be treated as unexplained credit u/s 68 of the IT Act. However, the AO has omitted to enquire into the details, Thus it is clear that the AO has mistakenly and erroneously omitted to consider the above facts while completing the assessment, thereby causing prejudice to the interest of revenue," ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 4 of 9 3. Accordingly, Ld. Principal CIT observed that the assessee has increased its share capital during the year. According to Ld. Principal CIT, it has tried to explain the background of the amounts involved in the subscription of its share capital. He further observed that it has furnished a number of confirmation letters from the alleged subscribers to the shares, purportedly to explain the source of those persons for investing their money. Its contention that earlier year advances of various amounts stand converted as share capital during the impugned assessment year has not been checked by the AO during the course of assessment proceedings. Its further contention that all the subscribers to the share capital are either income tax assessees or purely agriculturists is also subject to verification. However, it could be seen that the AO has failed to enquire into these important facts involved in the case. It is to be noted that the AO was specifically asked to scrutinize the introduction of large capital in the case of this assessee and to verify whether such share capital is genuine and from disclosed sources. However, the AO has omitted to cause sufficient and necessary enquiries to ascertain the genuineness or otherwise of the share application money said to have been received by the assessee. 3.1 Ld. Principal CIT further observed that the AO in the impugned assessment order has incorrectly assumed the facts of the case and has incorrectly applied the law as applicable to the issue at hand. He has failed to conduct necessary enquiries to ascertain the true position of facts in this case. He has passed an erroneous order which is prejudicial to the interests of the revenue. 3.2 The Ld. Principal CIT further observed that the above omission by the AO in the assessment order is erroneous in so far as it is prejudicial to the interest of revenue. Therefore, Ld. Principal CIT ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 5 of 9 concluded that the assessment order on the above issues to be set aside to the AO for de-novo examination and to pas a speaking order in accordance with law as per time limit specified u/s 153 of the Act, after affording due opportunity to the assessee. Against this assessee is in appeal before us. 4. In the present case, the assessee has raised capital of Rs. 55 lakhs introduced during the financial year 2015-16 relevant to assessment year 2016-17. Out of this amount of Rs.55 lakhs, Rs.10.82 lakhs was raised from 29 shareholders bearing from Rs.35,000/- to Rs.93,000/-. The balance amount of Rs.44.18 lakhs was unsecured deposits from shareholders collected during the financial year 2005-06 to 2014-15 transferred to capital account during the financial year 2015-16 relevant to assessment year 2016- 17. According to the Ld. Principal CIT, the AO has not examined this issue in proper perspective and directed the AO to re-examine the issue de-novo. Against this assessee is in appeal before us. 5. We have heard the rival submissions and perused the materials available on record. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner is well within his powers to treat an order as erroneous on the ground that the Assessing Officer should have made further inquiries before accepting the wrong claims made by the assessee. The Assessing Officer cannot remain passive in the face of a claim, which calls for further enquiry to know the genuineness ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 6 of 9 of it. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. The Assessing Officer should protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return. The order passed by the Assessing Officer becomes erroneous when an enquiry has not been made before accepting the genuineness of the claim which resulted in loss of revenue. 5.1. In the present case, the AO has passed assessment order u/s 143(3) on 29.11.2018. He issued notice u/s 142(1) of the Act on 6.7.2018 calling for details of introduction of capital and it’s sources. The assessee submitted the details to the AO on 17.7.2018. Again vide letter dated 3.9.2018 and 12.11.2018, the A.O. has issued letters seeking the sources of investment by shareholders in assessee’s company. The details were furnished to the AO vide letter dated 26.11.2018 and 29.11.2018. The AO has verified the same details and came to a conclusion that the share capital of Rs.55 lakhs has been introduced in two parts. In the financial year 2015-16 relevant to assessment year 2016-17, an amount of Rs.10.82 lakhs has been raised from 29 shareholders ranging from Rs.35,000/- to Rs.93,000/-. The balance amount of Rs.44.18 lakhs has been ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 7 of 9 received by the assessee in earlier financial years i.e. from 2005-06 to 2014-15 and later in the assessment year under consideration in AY 2016-17 (F.Y. 2015-16) has been converted into share capital account. However, on examining the assessment records by the Ld. Principal CIT, he was of the opinion that AO failed to verify the details of sources of share capital and this failure on the part of the AO to make necessary enquiry in this matter is resulted in loss of revenue. In our opinion, this apprehension of Ld. Principal CIT is devoid of merits. At the stage of assessment, the AO is required to carry on the enquiry in relation to investment in share capital and he has to satisfy the following ingredients:- a) Identity of investors. b) Capacity of the investors to make investment in share capital c) Genuineness of transactions. 5.2 The Ld. Principal CIT was of the opinion that the AO must have carried out these enquiries and he has not pointed out how he came to conclusion that AO has not made enquiries on this aspect. When the AO called for details on various dates, the assessee has furnished the same and the AO verified the same and taken a conscious decision that this investment in share capital has been duly explained by assessee and opted not to make any additions on this count. More so, in the assessment year under consideration, only an amount of Rs.10.82 lakhs has been introduced as share capital. The balance amount of Rs.44.18 lakhs has not been introduced in this assessment year and it has been introduced from the financial years 2005-06 to 2014-15. As per section 68 of the Act, only the credit introduced in the assessment year under consideration could be verified u/s 68 of the Act. The balance amount appeared in books of accounts earlier to this assessment year i.e. 2016-17 cannot fall under the purview of section 68 of the Act. On this count also, Ld. ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 8 of 9 Principal CIT is not justified in giving direction to the AO to re- examine the issue in relation to introduction of share capital of Rs.44.18 lakhs. Further, an amount of Rs.10.82 lakhs introduced in this assessment year under consideration is from 29 shareholders and it is ranged from Rs.35,000/- to Rs.93,000/- and these 29 shareholders cannot be said to be penniless to introduce a small amount of Rs.35,000/- to Rs.93,000/-. On this count also, we are of the opinion that the Ld. Principal CIT is not justified in exercising the power u/s 263 of the Act to hold that the Ld. AO has not carried out the enquiry satisfactorily. In view of this discussion, we are of the opinion that invoking jurisdiction u/s 263 of the Act by Ld. Principal CIT is not warranted on the facts and circumstances of the present case. Accordingly, we quash the order passed by the Ld. Principal CIT u/s 263 of the Act. 6. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on 13 th Sept, 2022 Sd/- (Beena Pillai) Judicial Member Sd/- (Chandra Poojari) Accountant Member Bangalore, Dated 13 th Sept, 2022. VG/SPS ITA No.42/Coch/2021 M/s. Dhanachakra Lease & Hire Purchase Co. Pvt. Ltd., Kochi Page 9 of 9 Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore.