Daya Footwear (P) Ltd., New Delhi vs Department Of Income Tax

Appellant by : Shri T.Vasanthan, Sr. DR Respondent by : Shri K Sampath, Adv.

Date of hearing : 31.03.2015 Date of pronouncement : 16.04.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal filed by Revenue against the order of Ld. CIT(A) dated 20.01.2011. The revenue is aggrieved with the action of Ld. CIT(A) by which he had deleted the addition of Rs.31 lacs made by A.O. u/s 68 of the I. T. Act, 1961.

2. The brief facts of the case as noted from the assessment order are that assessee is engaged in the business of manufacturing of footwear and during the year under consideration, the assessee filed return declaring loss of Rs.4,61,676/-. The case of the assessee was selected for scrutiny. During assessment proceedings, the A.O. observed that share capital of the assessee company had increased from Rs.52 lacs to Rs.83 lacs, therefore, the assessee 2 ITA No.1620/Del/2011

was required to establish the identity, genuineness and creditworthiness of shareholders. The assessee in reply filed details of share applicants along with their confirmations. The A.O. observed that the confirmations were not supported by copies of income tax returns, copies of P & L account and bank statements evidencing the transactions. The A.O. further observed that as per the information received from DIT (Investigation), the amounts received from the persons were in fact accommodation entries, therefore, the assessee was asked as to why the provisions of Section 68 be not applied in this case and the assessee was also directed to file copies of income tax returns, bank statements, P & L account etc. and in response, the assessee filed copies of bank accounts of two share applicants From the perusal of the bank statements, the A.O. observed that before issuing of cheque in the name of assessee company, there was simultaneous deposits in the bank account. The A.O. further noted that copies of ITR provided by assessee related to Assessment Year 2004-05 and the assessee was communicated about this fact. However, assessee did not file the relevant income tax returns and did not submit any explanation, therefore, the A.O. relying upon various case laws, made addition of Rs.31 lacs u/s 68 of the Act.

3. On appeal before Ld. CIT(A), Ld. CIT(A) held that assessee had submitted the necessary details like PAN, copies of resolution, copies of bank statements, form of annual returns etc and, therefore, he allowed the relief by holding as under:

"4. Finding on Ground of Appeal It is seen from the submissions and paper book filed by the appellant that in order to substantiate the claim that the above mentioned six share applicants are existing and the transactions are genuine, the appellant had filed the following documents before the AO:-

a. Copy of share application Form. 3 ITA No.1620/Del/2011

b. Confirmation for share capital contribution from the above

shareholders, giving details of the cheque and Bank through which the share application has been made.

c. PAN details and assessing officers jurisdiction of the shareholders.

d. IT returns copies of the shareholders. e. Copy of resolution passed by Board of share applicant

companies in respect of authorization to invest in shares in the appellant company.

f. Copy of Bank Statement g. Certificate of Incorporation of share holder company & From No. 18 & 32 filed with ROC h. Memorandum and articles of association of the share holder

company as well as their Balance sheet, Profit and loss Account with schedules.

I. Form of annual return in Form 2-B filed with ROC.

Thus from the above details and placing reliance on the latest decision of jurisdictional High Court in the case of Dwarkadhish Investment Pvt. ltd. 2010 Indlaw Del 1969, in which various decisions of High court and that of S C has been considered, it is observed that the appellant has discharged the initial burden placed on it to prove the identity and existence of the share applicants, whose PAN details and Income Tax Returns have also been filed on record. The fact that the share application money from the applicants have been received through banking channel and the fact that the shares have been allotted to these companies on 31.03.06 as evidenced from the Return of Allotments in Form No 2 filed with the Department of Company Affairs further goes to substantiate the identity of the share applicants and genuineness of the transaction in case of these investors. So far as the issue of creditworthiness of the share subscriber company are concerned, the Hon'ble S.C. in case of Lovely Exports P. Ltd. 216 CTR". 195 has held that if the share application money is received by the assessee company from alleged bogus share holders whose names are given to the AO then the department is free to proceed in their individual assessment, but it cannot be regarded as undisclosed income of the assessee company. On this issue another decision of Delhi High Court in case of CIT vs. Value Capital Services (307 ITR

334) cited above by the appellant is also quite relevant wherein the court inter alia observed that there is additional burden on the 4 ITA No.1620/Del/2011

revenue in as much as even if the applicant does not have the means for the investment, it must show that the investment made by the applicant actually emanated from the coffers of the assessee so as to enable it to be treated as undisclosed income of the assessee. Further the following observation of the jurisdictional H.C. in case of CIT vs. Divine Leasing and Finance Ltd. ( 207 CTR 38), which has been quoted with approval in the case of Dwarkadhish Investment (Supra) are also quite relevant viz.

"In this analysis a distillation of the precedents yields the following propositions of law in the context of section 68 of the IT Act. The assessee has to prima facie prove (1) the identity of the creditor/ subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels:

(3) the credit worthiness or financial strength of the creditor/ subscriber (4) if relevant details of the address PAN identity of the creditor/subscriber are furnished to the Department along with the copies of the shareholders Register, Shared Application Forms, Share Transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee. (5) The department would not be justified in drawing an adverse inference only because the creditor subscriber fails or neglects to responds to its notices: (6) the onus would not stand discharged if the creditor /subscriber denies or repudiates the transaction set up by the assessee nor should the AO take such repudiation at face value and construe it without more against the assessee. (7) The AO is duty bound to investigation the credit worthiness or the creditor/ subscriber the genuineness of the transaction and the veracity of the repudiation. "

It is observed from the facts of the case that the AO has made the addition due to the reason that certain information had been received from Director of Income Tax (Investigation) that an amount of Rs. 4 lacs has been received by the appellant from Kuberco Sales P. Ltd and for Rs.4.50 lacs from Sparrow Marketing P. Ltd., are in fact accommodation entries. It has also been referred to by the AO that from a perusal of bank statements evidencing the transactions in case of Rizzer Exim P. Ltd. and Madan Electronics P. Ltd. it is noted that immediately before the debit entry for Rs. 4 Lacs on 16.12.05 there was a deposit of Rs. 3,86,715/- on 15.01.85 'which remained 5 ITA No.1620/Del/2011

unexplained. Similarly in the bank statement of Madan Electronics P. Ltd. there has been deposit of Rs. 4 lacs on 15.12.05 and deposit of Rs.3,85,000/- on 04.02.06 immediately before the making of the share investments. It has .also been noted by the AO that while the assessee has submitted the copy of Income Tax Returns of the parties who have contributed to the share capital but they pertain to A Y 04-05 and therefore the assessee has failed to established the financial standing of the parties during the relevant assessment year and thus creditworthiness of the shareholders has not been established. It has been concluded that as the assessee had failed to establish the genuineness of the transaction (as the deposit of same or almost the same amount before the transaction case doubt over its genuineness) and creditworthiness of the shareholders in the form of their income tax return for relevant A Y, computation of income, balance sheet etc. Therefore the share capital for Rs. 31 Lacs has been treated as unexplained cash credits u/s 68 of the IT Act by the AO.

In view of the fact that the assessee has filed the copy of PAN, Copies of Income Tax Return & cheque details through which the transactions have been effected and other details filed with the Registrar of the Companies regarding allotment of shares to the investors. it cannot be said that the identity of the subscriber is not established. In fact merely because the ITR, P & L A/c & balance sheet for A Y 2006-07 in case of the share applicants have not been furnished by the assessee does not get to disprove the identity of the shareholders in view of the details furnished on record. On this issue reliance is also placed on the decision of the Jurisdictional High Court in case of CIT vs. Winstral Petrochemicals P. Ltd. 41 DTR Del 139, where in concluding para no. 11 the court has held that "the A 0 was not justified in adding the amount of share application money to the income of the assessee, merely because the applicants did not respond to the notices sent to them. If the AO so wanted, he could have found out the current address of those applicants, who, according to the report of the Inspector, were not found functioning at the address given to the AO, by summoning the Directors, etc., of those companies and asking them to furnish the current address of the company. The names and addresses of the Directors, if not available with the assessee, could have been obtained from the office of the ROC or from the Banks on which the cheque were drawn. No such 6 ITA No.1620/Del/2011

attempt, however, was made by the AD. In these circumstances, we find no reason to disturb the finding recorded by the Tribunal.

Further the observation of the jurisdiction H.C. in Dwarkadhish Investment (Supra) made in para 8 thereof are also relevant in the facts of the appellant case. The relevant part of this judgment is as under:-

"In any matter, the onus of proof is not a static one. Though in Section 68 proceedings, the initial burden of proof lies on the assessee yet once he proves the identity of the creditors/share applicants by either furnishing their PAN number or income tax assessment number and shows the genuineness of transaction by showing money in his books either by account payee cheque or by draft or by any other mode then the onus of proof would shift to the Revenue. Just because the creditors/share applicants could not be found at the address given, it would not give the Revenue the right to invoke Section 68. ... Moreover, it is settled law that the assessee need not to prove the"

source of source. "

As regards the fact that money (by way of clearing in the bank A/c) has been deposited in the account of the share holders just before issue of cheque for share application money, it has been held by the jurisdictional High Court in case of CIT vs. Gourdin Herbals India Ltd. in ITA No. 665/2009 dated 17.09.09 that in a case where the share applicant company had received certain cash, which was deposited in their bank account it was for the Income Tax Department to take action against the said companies. Now in the facts of the present case the moneys have been deposited through clearing cheques. The HC has followed the Judgment of SC in case of CIT vs. Lovely Exports P. Ltd. 216 CTR 195 in coming to the above decision. It is observed in the facts of the case that the Assessing Officer has simply referred to certain information received from Investigation Wing wherein two of the subscribers companies to the share capital have been found to be providing accommodation entries. These statements / information which have been collected at the back of the assessee have not been confronted and neither any cross-examination has been provided to the assessee. The AO has also rejected the confirmation & other documents of share applicants without 7 ITA No.1620/Del/2011

examining the share holders whose identity and existence cannot be doubted in view of the documentary evidences filed by the assessee. In this connection the observation of the jurisdictional High Court in case of Dwarkadhish Investment (Supra) are quite relevant where the court has observed that it is the revenue which has all the power and wherewithal to trace any person. Moreover, it is settled law that the assessee need not prove the" source of source".

Reliance is also placed on the decision of Delhi H.C. in case of CIT vs. Ashwani Gupta ( 322 ITR 396) and CIT vs. SMC Share Brokers Ltd. {288 ITR 345) where the addition made by the AO has held as deleted as the AO has passed the assessment order in violation of the principles of nature justice in as much as no cross examination was allowed to the assessee on basis of whose statement the said addition was made.

In view of the above discussion it is held that the appellant's case is squarely covered by the ratio of various decisions of the High Court's & Supreme Court discussed above. From the necessary evidences I details provided to the AO during the proceedings it is seen that the initial onus has been duly discharged by the appellant company. As discussed above, the investigation done by the AO is not sufficient / adequate to controvert the appellant's explanation and to hold that the "impugned share application money is the undisclosed income of the appellant. Respectfully following the decisions of jurisdictional High Court and the Hon'ble Supreme court (supra) particularly the latest judgment of Dwarkadhish Investment CP) Ltd. 20 I 0- TlOL-617-HS-DEL-IT, the addition made for Rs. 31,00,0001- is directed to be deleted. The other grounds of appeal are general and consequential in nature and therefore no adjudication is required."

4. Aggrieved, the revenue is in appeal before us. At the outset, Ld. D.R. submitted that the assessee did not file copies of income tax returns for the relevant period despite the fact that it was communicated to it that the copies of returns filed by assessee related to earlier years. He argued that though Ld. CIT(A) has noted this fact that the copies of returns related to earlier 8 ITA No.1620/Del/2011

years he has simply ignored this fact and he even has not discussed the creditworthiness of shareholders. He also submitted that money in the bank account of share applicants was deposited in their accounts only a day or two before the issuance of cheque. It was further submitted that DIT (Inv.) has held that the share applicants were engaged in the business of providing accommodation entries, therefore, the case law of Nova Promoters 342 ITR 169 is squarely applicable in this case. Ld. D.R. also placed his reliance on the case law of Hon'ble Delhi High Court in the case of CIT Vs Empire Buildtech (P) Ltd. 366 ITR 110. In view of above, Ld. D.R. submitted that only providing certain documents was not sufficient to prove the identity, genuineness and creditworthiness of share applicants.

5. Ld. A.R. on the other hand invited our attention to para 8 of Ld. CIT(A)'s order and submitted that the documents listed at (a) to (i) were provided to A.O. and these documents were sufficient to establish the identity of the share applicants. Ld. A.R. further submitted that only PAN details were sufficient to establish the identity of the share applicants. The genuineness of transactions were proved as the transactions were made through banking channels. It was submitted that initial burden was discharged by assessee and the A.O. had to come back with his objections on the documents before making additions u/s 68. Ld. A.R. relying upon a number of case laws as placed in the paper book running into 52 pages, specifically on the case law of CIT(A) Vs Gangeshwar Metal Pvt. Ltd. 214 Taxman 243 submitted that Hon'ble High Court has discussed the case law of Nova Promoters and has decided the issue in favour of assessee. Ld. A.R. also placed his reliance on the case law of CIT Vs Vinstal Petro Chemicals Pvt. Ltd. 330 ITR 603 Del. Ld. D.R. in his rejoinder submitted 9 ITA No.1620/Del/2011

that no bank statement / copies of I T Returns relating to the year under consideration wee submitted to Assessing Officer.

6. We have heard rival parties and have gone through the material placed on record. We find that the A.O. has made addition relying upon a number of case laws whereas Ld. CIT(A) has allowed relief to the assessee again relying upon a number of case laws. However, the fact of the matter remained that the assessee had accepted the share application money from 6 share applicants whose identity was though proved but the other two essential ingredients such as creditworthiness and genuineness of transactions was not proved as assessee had not filed copies of Income tax returns for the relevant period and Ld. CIT(A) has also not made any comment on the creditworthiness of share applicants. Simply submitting certain documents such as copy of share application forms, documents showing allotment of shares, copies of annual returns, PAN details does not make the transactions genuine specifically in view of the fact that there was information available with the A.O. through Director (Investigation) that some of share applicants were accommodation entry providers. The fact that the funds were received through banking channels cannot itself make the basis to claim that genuineness of transactions was proved. In any case, involving receipt of funds through accommodation entries, the funds are always routed through banking channels. For establishing the genuineness of such share transactions, especially in the case of private limited companies any prudent person would first ascertain as to whether the investee company was worth making investment. In the present case, the assessee is a loss making company and assessee has not been able to establish as to why an ordinary person of even having little prudence will 10 ITA No.1620/Del/2011

invest in such a company. As regards, creditworthiness, Ld. CIT(A) has not made any finding as to what were the earnings of these companies and what were the net owned funds. Ld. CIT(A) stressed compliance only of one ingredient and that is identity of shareholders and the other two essential ingredients such as genuineness of transaction and creditworthiness of shareholders has been ignored. Moreover, there is certain set pattern of entries in the bank accounts of alleged shareholders whereby before issuance of cheques, the share applicants had got deposits almost equivalent amounts in their bank accounts. Moreover, the fact remained that A.O. had the information that the share applicants were engaged in the business of providing accommodation entries and therefore, the ratio of Nova Promoters and Finlease 342 ITR 169 is squarely applicable in this case. Therefore, in the absence of proper explanation of credits, the only option available with the A.O. was to make addition u/s 68 of the Act. The assessee cannot be allowed relief simply holding that assessee had discharged its onus by filing certain documents and the A.O. had failed to take further action. Moreover, we find that when assessee filed documents without copies of bank statements and copies of return this fact was brought to the notice of assessee by A.O. as noted by him on the first page of his order. The assessee was directed to file copies of bank statements P &L accounts, balance sheets and copies of returns vide order sheet entry dated 05.12.2008. When on 24.12.2008, the assessee filed copies of income tax returns, the A.O. brought to the notice of assessee that the returns relate to earlier year but assessee did not file the relevant returns. Similarly regarding query of A.O. that assessee had received accommodation entries; no explanation was filed by assessee. In view of the above, the argument of Ld. A.R. that A.O. had not pointed out 11 ITA No.1620/Del/2011

defects in the documents so filed, is not correct. Therefore, in the absence of proper explanation for cash credits, the A.O. was bound to make additions u/s 68. Ld. CIT(A) should have continued from where A.O. had left and instead of doing so he allowed the relief simply by holding that assessee had completed its part of onus, which in our opinion is not the proper discharge of onus as onus had again shifted to assessee when A.O. brought to the notice of assessee about the defects in documents. In the hierarchy of income tax proceedings, the A.O. is placed at the bottom of the jurisdiction and CIT(A) lies above A.O. and ITAT lies above CIT(A). The A.O. is bound to conduct proper inquiry and arrive at proper finding based upon facts and circumstances of each case and in the case of failure of A.O. to conduct such inquiry, the obligation moves towards Ld. CIT(A). In the present case, Ld. CIT(A) has allowed relief relying upon the ratio of certain case laws and has not conducted any inquiry which he should have conducted to compensate the non action of the A.O. if any. Hon'ble Delhi High Court in the case of CITVs Jansampark Advertising and Marketing Pvt. Ltd. vide its judgement delivered on 11.03.2015 under similar circumstances, elaborated the duties of A.O. and CIT(A) and ITAT in the following manner.

"ii) Thus, when the AO sets about seeking explanation for the unaccounted credit entries in the books of accounts of the assessee in terms of Section 68, it is legitimately expected that the exercise would be taken to the logical end, in all fairness taking into account the material submitted by the assessee in support of his assertion that the person making the payment is real, and not non-existent, and that such other person was actually the source of the money forming the subject mailer of the transaction as indeed that the transaction is real and genuine, same as it is represented to be. Having embarked upon such exercise, the AO is not expected to short-shrift the inquiry or ignore the material submitted by the assessee.

12 ITA No.1620/Del/2011 (iv) The provision of appeal, before the CIT (Appeals) and then before the ITAT, is made more as a check on the abuse of power and authority by the AO. Whilst it is true that it is the obligation of the AO to conduct proper scrutiny of the material, given the fact that the two appellate authorities above are also forums for fact-finding, in the event of AO failing to discharge his functions properly, the obligation to conduct proper inquiry on facts would naturally shift to the door of the said appellate authority.

(v) The AO here may have failed to discharge his obligation to conduct a proper inquiry to take the matter to logical conclusion. But CIT (Appeals), having noticed want of proper inquiry, could not have closed the chapter simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of ITAT, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the Revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under Section 148 issued by the AO, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a "further inquiry" in exercise of the power under Section 250(4). This approach not having been adopted, the impugned order of ITAT, and consequently that of CIT (Appeals), cannot be approved or upheld."

7. We find that the Hon'ble Delhi High Court has clearly held that where A.O. has failed to discharge his obligation to conduct proper inquiry to make additions the Ld. CIT(A) could not have closed the chapter by simply allowing the appeal and deleting the addition relying upon certain case laws and ignoring the facts that no documents for establishing creditworthiness of alleged shareholders were filed and income tax returns also related to earlier years. In view of above facts and circumstances, we set aside the issue to the office of Ld. CIT(A) who should pass a well reasoned and speaking 13 ITA No.1620/Del/2011

order based upon the facts of the case after affording reasonable opportunity of being heard to the assessee.

8. In view of above, appeal filed by revenue is allowed for statistical purposes.

9. Order pronounced in the open court on 16th April, 2015.

Sd./- Sd./- (DIVA SINGH) (T.S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER th Date: 16 April, 2015 Sp Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 8/4 Sr. PS/PS 2 Draft placed before author 9/4,10, Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS 16/4 Sr. PS/PS 6 Kept for pronouncement 16/4 Sr. PS/PS 7 File sent to Bench Clerk 16/4 Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order