The Dy. Commr. Of Income Tax, Cir.-1(1), RAJKOT-GUJARAT V. M/s Real Procon Pvt. Ltd., RAJKOT-GUJARAT

ITA 498/RJT/2015

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 3256 (ITAT-RAJKOT)
• Duration Of Justice: 6 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 12-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained cash credit; Share purchase agreement; Fair market value; Valuation report; Accommodation entries
• Section: 68; 143(3); 133A; 133(6); 208

Judgement Text

Page 1 of 11 आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, RAJKOT BENCH, RAJKOT (CONDUCTED THROUGH E-COURT AT AHMEDABAD) BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER अपील सं./ITA No.498/Rjt/2015 िनधाᭅरण वषᭅ/Asstt. Year: 2012-2013 D.C.I.T., Circle-1(1), Rajkot. Vs. M/s Real Procon Pvt. Ltd., Saneshwar Complex, Opp. Balalji Hall, 150 ft. Ring Road, Rajkot. PAN: AAECR8684A (Applicant) (Respondent) Revenue by : Shri S.S. Rathi, Sr.D.R Assessee by : Shri Kalpesh Doshi, A.R सुनवाई कᳱ तारीख/Date of Hearing : 22/03/2022 घोषणा कᳱ तारीख /Date of Pronouncement:27/04/2022 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-1, Rajkot, dated 17/07/201 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2012-13. ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 2 of 11 2. The issue raised by the revenue is that the learned CIT-A erred in deleting the addition made by the AO for Rs. 2,25,00,000/- under the provisions of section 68 of the Act on account of share capital issued at the premium, treating the same as unexplained cash credit under section 68 of the Act. 3. The necessary facts in brief are that the assessee in the present case is a private limited company and engaged in the business of construction of residential cum commercial complex. The assessee in the year under consideration has issued shares to the promoter directors as well as to the outsiders. The shares were issued to the promoter directors at ₹30 per share comprising of ₹10 face value and ₹20 towards the premium. The necessary details of the shares issue to the promoter directors stand as under: S. No. Name of shareholder No of share Face value (Rs.) Premium (Rs.) 1. Manshukhbhai Ukabhai Soratia 2,00,000 20,00,000/- 40,00,000/- 2. Vishal Masukhbhai Soratia 1,00,000 10,00,000/- 20,00,000/- Total 3,00,000 30,00,000/- 60,00,000/- 3.1 The assessee, likewise has also issued shares to 10 outside companies in the year under consideration at ₹500 per share comprising of face value of ₹10 and premium at ₹ 490.00 only. The necessary details of the shares issued to the outside companies are contained on pages 4 to 5 of the assessment order in tabular form. 3.2 The assessee to justify the amount of share premium filed the valuation report from the qualified chartered accountant namely Busa and Associates, Chartered Accountants. As per the assessee, the valuation of the share of the assessee company was decided by the chartered accountant at Rs. 497 per-share. It was also submitted by the assessee that it has undertaken a project for commercial as well as residential purposes at the outskirts of the Rajkot on the land acquired from GIDC. That area of the land was notified as industrial area by the Government of Gujarat which has resulted the hike in the price of the land area ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 3 of 11 which eventually enhanced the project undertaken by it (the assessee). As such the project undertaken by the assessee became of very lucrative property. The assessee in order to develop its project has approached to the bank namely Rajkot Nagrik Shakari Bank Ltd for the finance which was accorded by the bank subject to the condition that the assessee shall enhance its share capital to the tune of Rs. 3 crores. The assessee, in order to comply the norms of the bank, has approached to the private investors who agreed to invest in the project of the assessee after carrying out due diligence/ verification of the marketability of the project. Furthermore, the shares were issued to the outside companies at a high premium than the premium at which shares were issued to the director promoters in order to have major shareholding in the company with the director promoters. 3.3 The viability of the project can also not be doubted as there was the survey proceedings under section 133A of the Act on account of the project undertaken by the assessee and the assessee in the survey proceedings has agreed for an addition of Rs. 2 crores which is sufficient enough to establish the fact that project of the assessee was viable. 3.4 The assessee in order to establish the identity, creditworthiness of the parties and genuineness of the transactions have also furnished the copy of PAN, Bank statements, ITR Acknowledgments etc. The assessee further contended that all the aforesaid parties have duly complied with the notices issued to them under the provisions of section 133(6) of the Act. Likewise, out of the total investor companies, the directors of 2 companies were called for, who appeared before the AO wherein it was accepted by them to have made the investments in the assessee company. 3.5 However, the AO was not satisfied with the submission of the assessee for the reason that the project of the assessee was located at the outskirts of Rajkot which is far off by 25 km from the city. In that area, being industrial area, mostly the labour class of people are staying therein and therefore the contention of the assessee that its project is a lucrative is not of any merit. ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 4 of 11 3.6 During the course of assessment proceedings, there were statements recorded of the directors of the assessee company as well as of the directors of investor companies. The directors of both the company clearly expressed in their respective statements that they were not known to each other which is very unusual. It is for the reason that it is very unlikely that the unknown parties will make such a huge investment in the assessee company at a premium despite the fact known to them that they will not have any controlling stake in the assessee company on the acquisition of shares at high premium. Thus, considering the surrounding evidences, it appears that the investment made by the companies in the assessee company is not genuine being the new entrant in the real estate market. Based on the above, the AO treated the amount of share capital of Rs. 4,50,000/- and its premium of Rs. 2,20,50,000/- issued to the above mentioned 10 outside companies as unexplained cash credit and added to the total income of the assessee. The AO further assumed that the assessee must have incurred commission expenses for getting the bogus shares capital and premium which needs to be disallowed. Accordingly the AO estimated the commission expenses @ 3 % of gross transaction which comes at Rs. 6,75,00,000/- and added to the total income of the assessee. 4. Aggrieved assessee preferred an appeal to the learned CIT-A who deleted the addition made by the AO by observing as under: 4.4 I have perused the assessment order and the written submission filed by the Id. AR in this regard. 4.5 It is seen from the assessment order that, nowhere the AO has held as to where and how the appellant had failed to fulfill the basic ingredients leading to violation of provisions of section 68 of the I T Act. The AO observed that the appellant had raised new share capital 6f Rs. 4,50,000/- with premium of Rs. 2,20,50,000/- from various companies haying its registered office at Ahmedabad by allotting 45000 equity shares. It is undisputed fact that the shareholders made payment of Rs. 2,25,00,000/- through banking channel. The AO further alleged that the appellant company had obtained Rs.2,25,00,000/- in the guise of share capital which was in fact obtained by the appellant company by making compensatory payment of an equal amount of money in cash with payment @ 3% apart paid to middleman for arranging accommodation entries. Although no evidence of such accommodation was brought on record. On the other hand the appellant furnished the following documents to prove genuineness of transactions; ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 5 of 11 • PAN Card of investor companies • Certificate of Incorporation of investor companies • Memorandum & Articles of Association of investor companies • Bank Statement reflecting transaction of payment towards share application money. • Share Certificate of investor companies 4.6 The appellant also clarified chargd of premium of Rs. 490/- per share, which is dependent on goodwill, experience of management, technical strength, future projections of business etc. The appellant also submits that, the addition u/s. 68 can be made in respect of share application money received if it is so proved that there is a nexus between their recipient company and the information available with the A.O. that such share application money is only an entry provided by the entry operators. 4.7 When documents like the Memorandum and Articles of Association of the investor companies etc. are produced before the AO, then it is not known on what ground the AO concludes that share capital is bogus. The documentary evidences available with the AO reveal clearly that the investing companies are not 'ghost'. For the AO to come to this definite conclusion, all the above mentioned documentary evidences needs to be disproved, which has not been done. The contentions of the AO did not raise any doubts and suspicions on the introduction of share capital. On the other hand, the appellant has established the identity of shareholders. The jurisdictions I Hon'ble High Court of Gujarat has held in the case of closely held company viz, Hindustan Inks and Resins Ltd. (60 DTK 18) that, once the identity of subscriber is proved, no addition can be made in the hands of the recipient company, j This decision of Hon'ble Gujarat High Court is binding. As the appellant has been able to prove with supporting documentary evidence, the existence of shareholder, which has not been disproved by the AO, the decision of the 1 AO to treat the share capital as bogus cash credit within the meaning of section 68, is mere perception, presumption and surmises. 4.8 In the light of above findings, I find that the appellant has sufficiently discharged the onus of share capital received by it. Therefore, the case of the appellant is squarely covered by the decision of Hon'ble Supreme Court in case of Lovely Exports P. Ltd, 4.9 Besides the undersigned had in the case of Captain Polyplast Ltd. in appeal No. CIT(A)/Jam/220/ll-12 vide order dated 26.06.2014 deleted the identical addition made. Thus the issue under consideration is also covered by various decisions. 4.10 In view of the above, it is held that, no addition on account of share capital within the meaning of section 68, remains in the hands of appellant. However, the AO is free to intimate the'AO of the subscribing companies, if he deems fit so. 4.11 The addition made of Rs. 2,25,00,000/- is therefore directed to be deleted. In the result, the appellant's appeal is allowed on this ground 5. When it has been held that the appellant had fulfilled the onus cast upon it to prove the share capital received by it, the question of making addition of Rs.6,75,000/- being the commission paid to the middleman to accommodate the movement of fund does not arise. This is particularly so because, there is absolutely no evidence to hold this fact. This ground of appeal is allowed. 5. Being aggrieved by the order of the learned CIT-A, the revenue is in appeal before us ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 6 of 11 6. The learned DR before us reiterated the findings contained in the order of the AO. 7. On the other hand, the learned AR before us filed a paper book running from pages 1 to 268 and submitted that premium for issuing the shares was decided based on the certificate obtained from the qualified chartered accountant. The shares were issued in order to comply the requirement of the banks so that the assessee would avail the finance facility from the bank. The market value of the project of the assessee was very high which can be established from the fact that the assessee has offered an income of Rs. 2 crores in pursuance to the survey proceedings conducted under section 133A of the Act. Likewise, the assessee was expecting a return of 200% to 300% from its project. Furthermore, the worth of assets shown by the assessee in the financial statement of Rs. 20.28 crores, though it is the 2 nd year of operation. The learned AR vehemently supported the order of the learned CIT-A. 8. We have heard the rival contentions of both parties and perused the materials available on record. In the instant case the assessee has issued shares at a premium of Rs. 490/- per-share to certain outside private companies. As per the AO the project undertaken by the assessee was not very lucrative and therefore The AO doubted on the genuineness of the premium and share capital issued to the outside companies. Therefore the addition was made by him. First of all, we note that there is no restriction under the Act for the company to issue the shares at premium. It is the decision of the Board of Directors of the company to issue the shares at premium and likewise it is the decision of the subscribers to acquire the shares at a premium. Both the companies and the subscriber of the shares sell and acquire the shares at a premium according to their wisdom. As such, the Revenue is not expected to interfere in the amount of premium issued by the company until and unless there are certain evidences suggesting that the share premium was used as a device to bring the unaccounted capital in the company viz a viz the assessee ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 7 of 11 failed to establish the identity, creditworthiness of the parties and genuineness of the transactions. 8.1 We are conscious to the fact that there was an amendment under the provisions of section 68 of the Act wherein a proviso was inserted but the same is not applicable for the year under consideration. It was brought under the statute with effect from 1 st April 2013 and the Hon’ble Bombay High Court in the case of CIT vs. Gagandeep Infrastructure Pvt Ltd reported in 80 taxmann.com 272 where it was held that such amendment is prospective and applicable from A.Y. 2013-14 onward. The year before us relates to the assessment year 2012-13 which is not subject to the amendment in the proviso of section 68 of the Act. 8.2 Likewise, there was an amendment under the provisions of section 56(2)(viib) of the Act which states that if the shares have been issued by the closely held company at a price more than the fair market value, then such excess amount shall be treated as income of the assessee from other sources. However, such amendment was made effective with effect from 01-04-2013 from the assessment year 2013-14 which is not applicable in the year under consideration. 8.3 In the light of the above stated discussion we have to test this share capital received by the assessee in the year under consideration on the parameters provided under the provisions of section 68 of the Act i.e. identity and creditworthiness of the parties and genuineness of the transactions. 8.4 Before we proceed to test the impugned amount of share capital within the parameters of section 68 of the Act, we note that the share premium was decided by the assessee based on the valuation report which is placed on pages 268 of the paper book. The same has not been doubted. Likewise, the assessee has submitted that the value of its projects has increased manifolds for the reason that the area where project is situated has been identified as industrial area by the Government. Furthermore, the assessee has also admitted additional income of Rs. 2 crores ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 8 of 11 during the survey proceedings which was duly offered to tax. Thus, considering all these facts and circumstances, we are of the view that the project of the assessee was lucrative and viable and therefore we reject the finding of the AO. 8.5 The Hon'ble Mumbai ITAT in one of the cases Green Infra Ltd. v. ITO [2013] 38 taxmann.com 253/145 ITD 240 (Mum. - Trib.) examined the question about the application of section 68 of the Act when the company issued shares of Rs 10/- at a premium of Rs 490/- per share. Upon examination, the shareholders were found genuine, existing and verified investment made by them. The Hon'ble ITAT observed that no doubt a non-est company or a zero balance company asking for a share premium of Rs 490/- per share defies all commercial prudence but at the same time the fact cannot be ignored that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The Revenue authorities cannot question the charging of such huge premium without any bar from any legislated law of the land. Now we proceed to verify the share capital with premium received by the assessee in the year under consideration. 8.6 The provision of Section 68 of the Act fastens the liability on the assessee to provide the identity of the lenders, establish the genuineness of the transactions and creditworthiness of the parties. These liabilities on the assessee were imposed to justify the cash credit entries under Section 68 of the Act by the Hon’ble Calcutta High Court in the case of CIT Vs. Precision Finance (P) Ltd. reported in 208 ITR 465 wherein it was held as under: “It was for the assessee to prove the identity of the creditors, their creditworthiness and the genuineness of the transactions. On the facts of this case, the Tribunal did not take into account all these ingredients which had to be satisfied by the assessee. Mere furnishing of the particulars was not enough. “ 8.7 Now first we proceed to understand the identity of the party. The identity of the party refers existence of such party which can be proven based on evidences. As such the identity of a party can be established by furnishing the name, address and PAN detail, bank details, ITR etc. ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 9 of 11 8.8 The next stage comes to verify the genuineness of the transaction. Genuineness of transaction refers what has been asserted is true and authentic. A genuine transaction must be proved to be genuine in all respect not merely on a piece of a paper. The documentary evidences should not a mask to cover the actual transaction or designed in way to present the transaction as true but same is not. Genuineness of transaction can be proved by submitting confirmation of the party along details of mode of transaction but merely showing transaction carried out through banking channel is not sufficient. As such the same should also be proven by circumstantial surrounding evidences as held by the Hon’ble Supreme Court in case of Durga Prasad More reported in 82 ITR 540 and in case of Smt. Sumati Dayal reported in 214 ITR 801. 8.9 The last stage comes to verify the creditworthiness of the parties. The term creditworthiness as per Black Law Dictionary refers as: "creditworthy, adj. (1924) (Of a borrower) financially sound enough that a lender will extend credit in the belief default is unlikely; fiscally healthy-creditworthiness.” 8.10 Similarly in The New Lexicon Webster's Dictionary, the word "creditworthy" has been defined as under:- "creditworthy, adj. of one who is a good risk as a borrower." 8.11 It the duty of the assessee to establish that creditor party has capacity to advance such loan and having requisite fund in its books of account and banks. The capacity to advance loan can be established by the showing sufficient income, capital and reserve or other fund in the hands of creditor. It is required by the AO to find out the financial strength of the creditor who advanced loan with judicious approach and in accordance with material available on record but not in arbitrary and mechanical manner. 8.12 In the light of the above discussion, we proceed to adjudicate the issue on hand. We find that the assessee during the assessment proceeding has submitted copy of PAN and ITR to prove identity of the creditor company. Likewise to prove ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 10 of 11 genuineness of transaction and credit worthiness, the assessee has furnished ledger copy along with ITR and bank statement demonstrating transaction carried out through banking channel. In addition it was also submitted that all the investor company confirmed and duly complied with the query raised by the AO under the provision of section 133(6) of the Act. Further, the directors of two Investor Companies personally attended the office of the AO for inquiry and confirmed the genuineness of the transaction of share capital and premium. However, the submissions of the assessee were disbelieved by the AO merely on the basis that assessee is newly formed company and having no-marketable project and that too at a small scale. Likewise, the director of the assessee company and key person of the investor companies are not known to each other and their business profile was not strong enough for making investment at such a high premium. In our considered view the action of the AO is not justifiable for the reason that the assessee has discharged the onus cast upon it under section 68 of the Act by furnishing necessary details to prove identity, genuineness of transaction and creditworthiness of the parties. However, the AO without pointing out any defect in the documentary evidences submitted by the assessee and investor companies in compliance to notice under section 133(6) treated the impugned transaction of share capital and premium as unexplained merely on basis of some surmise and conjecture. The AO has nowhere brought any material on record suggesting any defect in the evidences available before him. Similarly, there was no allegation that there were cash exchanged between assessee and investor companies. In the absence of any conclusive finding it is difficult to reach to the conclusion that the amount of share capital and premium received from outside companies are nothing but unaccounted money of the assessee taken in books in guise of share capital & premium. The action of the AO is nothing but surmises and conjecture. It is trite law that suspicion how strong it is cannot be made basis for making any adverse inference against the assessee. Further it also important to highlight that under the provision of 68 of the Act the assessee is only expected to explain the source of credit in its books of account, the assessee cannot be expected to explain the sources of source in the year under consideration. In this regard we find support and guidance from the ITA no.498/Rjt/2015 Asstt. Year 2012-13 Page 11 of 11 judgment of Hon’ble Gujarat High Court in the case of CIT vs. Paragati Co. Op. Bank Ltd reported in 278 ITR 170. The relevant extract of the observation of Hon’ble Court reads as under: This Court is in respectful agreement with the aforesaid principles. In the case of Dy. CIT v. Rohini Builders [2002] 256 ITR 360 1 (Guj.), this Court has, while dismissing Departmental tax appeal, upheld the approach of the Tribunal based on the judgment of Patna High Court that an assessee can be asked to prove source of credit in books but cannot be asked to prove source of source. 8.13 In view of the above we are of the view that the assessee has fully discharged its onus cast under section 68 of the Act and proved the genuineness of the credit of the share capital and premium in its books of account. Once the transaction of share capital and premium thereon held to be genuine, there is no question of any commission expenses for getting alleged bogus entry on account of such transaction. Therefore we do not find any reason to interfere in the finding of the learned CIT-(A). Hence the ground of appeals of the Revenue is hereby dismissed. 9. In the result, appeal of the Revenue is dismissed. Order pronounced in the Court on 27/04/2022 at Ahmedabad. Sd/- Sd/- (MAHAVIR PRASAD) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 27/04/2022 Manish