M/S ARROWSPACE TRADECOM PVT. LTD.,KOLKATA V. ITO, WARD-10(2), KOLKATA

ITA 344/KOL/2024

AI Insights

M/s. Arrowspace Tradecom Pvt. Ltd. appealed against the assessment order for the year 2016-17, which added Rs. 4,57,06,000 as unexplained investment. The Income Tax Officer (ITO) had noted discrepancies in share application money and lack of business activity to justify the high share premium. The Commissioner of Income Tax (Appeals) upheld this decision after the appellant failed to appear in multiple hearings. The tribunal, referencing similar cases, agreed that the appellant did not satisfactorily prove the genuineness of the transactions or the creditworthiness of the investors, leading to the dismissal of the appeal.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 469539 (ITAT-KOLKATA)
• Duration Of Justice: 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2024
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-09-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 20-02-2024
• Other Referred Cases: Grafton Merchant Pvt. Ltd. vs. DCIT, Nexcare Agency Pvt. Ltd. vs. ITO, PCIT vs. BST Infratech Ltd., PCIT vs. NRA Iron & Steel (P.) Ltd., BalGopal Merchants (P.) Ltd. vs. PCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Set aside; Opportunity of being heard; Unexplained cash credit; Principle of natural justice; Source of fund; Revision of order; Bogus
• Section: 263; 271(1)(c); 68; 234B

Judgement Text

"आयकर अपीलीय अधिकरण कोलकाता 'बी' पीठ, कोलकाता में IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘B’ BENCH, KOLKATA श्री संजय गगग, न्याधयक सदस्य एवं श्री संजय अवस्थी, लेखा सदस्य क े समक्ष Before SRI SANJAY GARG, JUDICIAL MEMBER & SRI SANJAY AWASTHI, ACCOUNTANT MEMBER I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd……………………………………Appellant [PAN: AAKCA 4013 C] Vs. ITO, Ward-10(2), Kolkata......................................................Respondent Appearances: Assessee represented by: None. Department represented by: P.P. Barman, Addl. CIT, Sr. DR. Date of concluding the hearing : September 24th, 2024 Date of pronouncing the order : October 16th, 2024 ORDER Per Sanjay Awasthi, Accountant Member: In this case, there is a delay of several months in filing of this appeal for which the appellant has filed a letter along with the grounds of appeal requesting for consideration of delay. The reason mentioned for the delay is that the accountant left the company and did not inform the management about the order passed by the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as ld. 'CIT(A)']. It has also been stated that the delay was not deliberate and the appellant would not gain in any way by the said delay. I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 2 of 8 1.1. Considering the contents of this application, the delay is condoned and this appeal is admitted for adjudication. The grounds of appeal are as under: “1. That the Impugned assessment order dated 14-10-2016 passed by the Ld. AO is liable to be quashed, since it has been passed in haste without allowing reasonable opportunity of being heard which is in violation of the principles of natural justice. 2. That the Ld. AO passed high pitched assessment order on 14-10-2016 as unexplained cash credit merely on mismatch of details without providing another opportunity to Substantiate these transactions. 3. During the submission of details regarding sale and purchase of investments, there was some technical glitches in accounting software and data were corrupted. However, in a short span of time, accountant had prepared and submitted detail and without cross checking submitted the data. Due to that, there were difference in no. of shares and price per share. However, assessee have now updated and correct data and can produce correct details before the honorable member. 4. For that the Ld. AO erred in assessing Rs. 4,57,06,000/- as unexplained investment without issuing show cause notice. For that under the facts and circumstances, the addition made is liable to be deleted. 5. That the Ld. AO erred in arbitrarily charging interest of Rs. 49,82,538/- and Rs. 1729/- under section 234B and Section 234D of the Income Tax Act, 1961 respectively through calculation Sheet and demand notice without passing a specific order in this regard. 6. That the Ld. AO was wrong in initiating penalty proceedings u/s 271(1)(c) of the Income Tax Act 1961. 7. The Order passed by Ld. AO is unjust, unfair, illegal and invalid in law. 8. That the appellant craves to add or alter or delete any grounds of appeal on or before the date of hearing.” 1.2. From the records, it is seen that this case has been fixed as many as 4 times for hearing, but none have appeared on any of the dates, or any communication received. Accordingly, this case is taken up for adjudication on the basis of facts and documents already on record. The ld. DR assisted us in perusal of the documents. 2. The Assessing Officer (hereinafter referred to as ld. 'AO') noticed that there was a shareholder fund of Rs. 5,75,26,603/- which included a share premium of Rs. 5,69,12,580/-. The ld. AO further noticed that there was no I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 3 of 8 worthwhile business activity to justify a significant share premium on the shares of this company. Investigations revealed that some of the share applicants were not traceable on the given addresses and summons issued to the Principal Officers of share applicants were not responded to. Therefore, the ld. AO proceeded to make an addition of Rs. 4,57,06,000/- in lieu of share application money received from 5 companies (Arrowspace Tracon Pvt. Ltd., Girjashankar Dealers Pvt. Ltd., Arrowspace Trexim Pvt. Ltd., Amritdhara Vintrade Pvt. Ltd. and Graceful Commercial Pvt. Ltd.) Needless to say, the ld. AO accepted the remaining amounts as explained. 2.1. Before the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as ld. 'CIT(A)'], the appellant was not successful in pleading his case as five opportunities given for hearing were not availed off, leading to confirmation of ld. AO's order. 3. The ld. DR assisted us in going through the assessment order and first appellate order. He also argued that the share applicants in question were shell companies having no worthwhile business. It is seen that the facts of this case are similar to another case in Grafton Merchant Pvt. Ltd. vs. DCIT in ITA No. 230/KOL/2023 order dated 21.08.2024 dealt with by a Coordinate Bench of Kolkata Tribunal. Some portions from the case deserve to be extracted: “3.1. The factual matrix of this case reveals that not only is the appellant having a poor track record of income but even majority of share applicants are also corporate entities having meagre profits. In such a situation, the ld. AO’s action have to be held as justified in as much as the creditworthiness of the share applicants and the genuineness of the transaction needed to be proved through better evidence than merely filing the documents as have been mentioned time and time again by the appellant. In principle the action of ld. AO is justified and upheld. 3.2. For arriving at this conclusion against the Appellant, we draw considerable strength from the findings of the Coordinate Bench of the ITAT, Kolkata in M/s. Nexcare Agency Pvt. Ltd. vs. ITO in ITA No. 35/KOL/2023 order dated 26.07.2024 where, like in this case a corporate entity of poor profitability attracted substantial premiums on the face value of individual shares. Some portions deserve to be extracted for reference: I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 4 of 8 “4. The Ld. D/R relied on the order of ld. CIT(A) and the ld. AO and stated that abnormally high share premium in closely held companies, with no clear-cut profitability to justify such high premiums, would need to prove the identity, creditworthiness and genuineness of the entities advancing such sums of monies. 5. On a careful consideration of the totality of facts and circumstances, as also the averments of the assessee and ld. D/R it is clear that once proceedings u/s 263 of the Act were initiated then the assessee was put on notice regarding his duty to prove the transaction which involved very substantial amounts as share premium. It is not understood how a closely held company which has minimal commercial activity as is evidenced by the profit and loss account filed with the paper book as under: 5.1. The profit and loss account filed by the assessee paints a grim picture about the qualitative aspect of commercial activity which does not seem to justify a premium of Rs. 490/- on a share with face value of Rs. 10/-. Considering this fact, it would be all the more prudent to examine the genuineness etc. of the 11 concerns which chose to repose considerable faith in the commercial future of the assessee to trust them with huge sums of money. It was on somewhat similar situation when the Hon'ble Jurisdictional High Court upheld the doubtful nature of share premium monies being given to companies having doubtful commercial credentials in the case of PCIT vs. BST Infratech Ltd. reported in [2024] 161 taxmann.com 668 (Calcutta). Hon'ble Calcutta High Court had occasion to observe that in the said case investors had no reason to invest huge amounts in business of that assessee and the entire transaction was done to circumvent the provisions of the Act. It has been held that the action of the assessing officer in treating such share application money u/s 68 of the Act as undisclosed cash credit was justified. The relevant portion from this order deserves to be extracted which is as under: “36. In Swati Bajaj, the court held that based on the foundational facts the department has adopted the concept of \"working backward\" leading to the assessee. The department would be well justified in considering the I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 5 of 8 surrounding circumstances, the normal human conduct of a prudent investor, the probabilities that may spill over and then arrive at a decision. 37. Thus the CIT(A) was right in adopting a logical process of reasoning considering the totality of the facts and circumstances surrounding the allegations made against the assessee taking note of the minimum and proximate facts and circumstances surrounding the events on which charges are founded so as to reach a reasonable conclusion and rightly applied the test that a reasonable/prudent man would apply to arrive at a conclusion. On facts we are convinced to hold that the assessee has not established the capacity of the investors to advance moneys for purchase of above shares at a high premium. The credit worthiness of those investors companies is questionable and the explanation offered by the assessee, at any stretch of imagination cannot be construed to be a satisfactory explanation of the nature of the source. The assessee has miserably failed to establish genuineness of the transaction by cogent and credible evidence and that the investments made in its share capital were genuine. As noted above merely proving the identity of the investors does not discharge the onus on the assessee if the capacity or the credit worthiness has not been established. 38. In the light of the above discussion, we hold that the assessee has failed to discharge legal obligation to prove the genuineness of the transaction and the credit worthiness of the investor which has shown to be so by a \"round tripping\" of funds. For all the above reasons, the revenue succeeds. 39. In the result the appeal is allowed, the order passed by the learned Tribunal is set aside and the order passed by the CIT(A) dated 28.11.2019 is restored and the substantial questions of law are answered in favour of the revenue.” 5.2. We also draw considerable strength from the case of PCIT vs. NRA Iron & Steel (P.) Ltd. reported in [2019] 412 ITR 161 (SC) in which share application money was approved for action u/s 68 of the Act even where the share applicants had filed confirmations and attempted to show that the transactions have taken place through normal banking channels, etc. in this case, the Hon'ble Apex Court has dealt with the issue from legal perspective and sum of the passages deserve to be extracted for reference: “This Court in the land mark case of Kale Khan Mohammad Hanif v. CIT [1963] 50 ITR 1 (SC) and, Roshan Di Hatti v. CIT [1977] 107 ITR 938 (SC) laid down that the onus of proving the source of a sum of money found to have been received by an assessee, is on the assessee. Once the assessee has submitted the documents relating to identity, genuineness of the transaction, and creditworthiness, then the Assessing Officer must conduct an inquiry, and call for more details before invoking section 68. If the assessee is not able to provide a satisfactory explanation of the nature and source, of the investments made, it is open to the revenue to hold that it is I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 6 of 8 the income of the assessee, and there would be no further burden on the revenue to show that the income is from any particular source. [Para 8.2] With respect to the issue of genuineness of transaction, it is for the assessee to prove by cogent and credible evidence, that the investments made in share capital are genuine borrowings, since the facts are exclusively within the assessee's knowledge. Merely, proving the identity of the investors does not discharge the onus of the assessee, if the capacity or credit-worthiness has not been established. [Para 8.3] The Assessing Officer ought to conduct an independent enquiry to verify the genuineness of the credit entries. In the instant case, the Assessing Officer made an independent and detailed enquiry, including survey of the so- called investor companies from Mumbai, Kolkata and Guwahati to verify the credit-worthiness of the parties, the source of funds invested, and the genuineness of the transactions. The field reports revealed that the shareholders were either non-existent, or lacked creditworthiness. [Para 9] The principles which emerge where sums of money are credited as Share Capital/Premium are: i. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the Assessing Officer, so as to discharge the primary onus. ii. The Assessing Officer is duty bound to investigate the creditworthiness of the creditor/ subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name- lenders. iii. If the inquiries and investigations reveal that the identity of the creditors to be dubious or doubtful, or lack credit-worthiness, then the genuineness of the transaction would not be established. In such a case, the assessee would not have discharged the primary onus contemplated by section 68. [Para 11] In the instant case, the Assessing Officer had conducted detailed enquiry which revealed that: i. There was no material on record to prove, or even remotely suggest, that the share application money was received from independent legal entities. The survey revealed that some of the investor companies were non-existent, and had no office at the address mentioned by the assessee. The genuineness of the transaction was found to be completely doubtful. ii. The enquiries revealed that the investor companies had filed returns for a negligible taxable income, which would show that the investors did not I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 7 of 8 have the financial capacity to invest funds ranging between Rs. 90 lakhs to Rs. 95 lakhs in the assessment year 2009-10, for purchase of shares at such a high premium. iii. There was no explanation whatsoever offered as to why the investor companies had applied for shares of the assessee company at a high premium of Rs. 190 per share, even though the face value of the share was Rs. 10 per share. iv. Furthermore, none of the so-called investor companies established the source of funds from which the high share premium was invested. v. The mere mention of the income tax file number of an investor was not sufficient to discharge the onus under section 68. [Para 12] The practice of conversion of un-accounted money through the cloak of Share Capital/Premium must be subjected to careful scrutiny. This would be particularly so in the case of private placement of shares, where a higher onus is required to be placed on the assessee since the information is within the personal knowledge of the assessee. The assessee is under a legal obligation to prove the receipt of share capital/premium to the satisfaction of the Assessing Officer, failure of which, would justify addition of the said amount to the income of the assessee. [Para 14] On the facts of the present case, clearly the assessee company - respondent failed to discharge the onus required under section 68, the Assessing Officer was justified in adding back the amounts to the assessee's income. [Para 15]” 5.3. It is seen that in another case on somewhat similar facts, the Hon'ble Calcutta High Court in the case of BalGopal Merchants (P.) Ltd. vs. PCIT reported in [2024] 162taxmann.com465 (Calcutta) has held that action u/s 68 of the Act was justified. 6. A close reading of the case laws cited (supra) reveals that mere filing of confirmations and the income tax details etc. are not enough to justify payment of in terms of monies as share premium when the financial aspects of the recipient company would not merit such investments under any kind of prudent consideration. In the present case while 4 out of 11 share applicants were not traceable on e-mail addresses and one more did not respond to the summons, it is evident that even those share applicants who did file certain documents, were not sufficient in the eyes of law to discharge the burden cast on the assessee regarding proving the genuineness of the transaction. The profit and loss account statement extracted (supra) would normally paint a grim picture to any prudent investor, however, in this case it seems to have encouraged 11 entities to transfer huge sums of money by way of share premium. 6.1. Considering the case laws cited (supra) the financial health of the I.T.A. No.: 344/KOL/2024 Assessment Year: 2016-17 M/s. Arrowspace Tradecom Pvt. Ltd. Page 8 of 8 assessee and the inadequate discharge of onus, we hold this case to be a fit case for application of Section 68 of the Act and thereby confirm the impugned addition.” 3.1. Considering the similarity of facts and the discussion in the case of Grafton Merchant Pvt. Ltd. (supra), and the relative similarity of facts, it is held that the impugned amount has been rightly added by the ld. AO. 4. In the result, in light of the discussion made above, this appeal is dismissed. Order pronounced in the open Court on 16th October, 2024. Sd/- Sd/- [Sanjay Garg] [Sanjay Awasthi] Judicial Member Accountant Member Dated: 16.10.2024 Bidhan (P.S.) Copy of the order forwarded to: 1. M/s. Arrowspace Tradecom Pvt. Ltd., 275, B.B. Ganguly Street, Kolkata, West Bengal, 700033. 2. ITO, Ward-10(2), Kolkata. 3. CIT(A)-NFAC, Delhi. 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. //True copy // By order Assistant Registrar ITAT, Kolkata Benches Kolkata "