G.S. Controls (P) Ltd. , New Delhi vs Department Of Income Tax

1 ITA 1560/Del/2010

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "C" NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI KUL BHARAT : JUDICIAL MEMBER

ITA no. 1560/Del/2010 A.Y. 2006-07 DCIT, Circle 12(1), Vs. G.S. Controls (P) Ltd., New Delhi. F-1/7, Krishna Nagar, New Delhi. PAN: AAACG 0368 G

( Appellant ) ( Respondent )

Appellant by : Shri P. Das Kanunjna Sr. DR Respondent by : Shri Ved Jain Adv. Smt. Rano Jain CA Shri Venktesh Chaurasia CA

Date of hearing : 03-03-2015 Date of order : 13-03-2015.

ORDER

PER S.V. MEHROTRA, A.M:-

This appeal, preferred by the department, is directed against the order dated 22-01-2010, passed by the CIT(Appeals)-XV, New Delhi in appeal no. 587/08-09, relating to A.Y. 2006-07.

2. Brief facts of the case are that assessee company was incorporated to carry on the business of manufacturing, processing etc. The assessee had field its return of income declaring income at Rs. 29,48,340/-. The assessee had declared short term profit on shares amounting to Rs. 30,05,599/-, which 2 ITA 1560/Del/2010

had been claimed as short term capital gain. The AO treated this as business income and further made an addition of Rs. 80 lacs on account of unexplained share application money.

3. Ld. CIT(A) partly allowed the assessee's appeal. Being aggrieved with the order of ld. CIT(A), the department is in appeal before us and has taken following grounds of appeal:

"1. On the facts and circumstances of the case and in law, the order of the CIT(A) is wrong, perverse, illegal and against the provisions of law which is liable to be set aside.

2. On the facts and circumstances, whether Ld. CIT(A) was justified on facts of the case and in law in deleting the addition of Rs. 80,00,000/- made on account of unexplained share application money ignoring the fact that the assessee has failed to discharge its onus of providing identity, credit worthiness and transaction made by the assessee of the said amount.

3. On the facts and circumstances, whether Ld. CIT(A) was justified on facts of the case and in law in treating the profit of Rs. 30,05,599/- derived from share trading as short term capital gain whereby the AO has rightly treated the same as the business income of the assessee.

4. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing."

Ground no. 1 is general in nature and requires no adjudication.

4. Brief facts apropos ground no. 2 are that in course of assessment proceedings AO noticed that assessee had introduced share application money amounting to Rs. 2,40,00,000/-, including share premium of Rs. 2,16,00,000/- from as many as 26 concerns. The assessee had furnished a list 3 ITA 1560/Del/2010

of such concerns along with copy of share application forms. The AO required the assessee to produce the directors of the following companies, inter alia, observing that they were known entry providers, along with ID proof of those who had allegedly invested the amount.

Name of the Company Amount 1. Particular Management Finlease (I) Pvt. Ltd. Rs. 30,00,000 2. Sri Niwas Leasing & Finance Ltd. Rs. 30,00,000 3. Ganga Infin (P) Ltd. Rs. 10,00,000 4. Swetu Stone (P) Ltd. Rs. 10,00,000 Rs. 80,00,000

5. The assessee in its reply pointed out that all the details along with PAN of the companies had already been furnished. The AO, however, observed that assessee had not produced the directors of the company and, therefore, taking note of the fact that the alleged companies were known entry providers observed that genuineness of the transactions had not been proved and the assessee had failed to discharge its onus in this regard. He relied on the decision of Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT (1995) 214 ITR 801 (SC) and CIT Vs. T. Mohan Kala 291 ITR 278 (SC), wherein it has been held that strong circumstantial evidence is good enough to indicate that assessee had not discharged its onus of identity, creditworthiness and transaction. He, therefore, made an addition of Rs. 80,00,000/- u/s 68.

6. Before ld. CIT(A) the assessee had pointed out that it had produced the following details with regard to every transaction relating to the receipt of share capital/ application money.

i. The copy of ledger account of share application in the books of assessee.

4 ITA 1560/Del/2010

ii. The copy of bank statement along with the copy of cheques through which the money was received.

iii. Copy of ledger account of share capital i.e. in which the money was transferred after allotment.

iv. Copy of Balance Sheet and Profit & Loss a/c depicting the same.

v. Copy of Annual Return filed with Registrar of companies which included list of share holders i.e. old as well as new.

vi. Copy of Form No.2 i.e. Return of allotment of shares along with the list of new shareholders which was filed and registered with registrar of companies.

The appellant has also obtained the following documents from the concerned parties to prove their identity and genuineness of the transaction which was submitted before the Id. AO via post.

a) Acknowledgement of Return of Income. b) Balance sheet & Profit and Loss A/c c) Affidavit from the Directors d) Confirmation e) PAN Details

7. The assessee had further submitted that since assessee had filed all the details it was for the AO to conduct some inquiry to support his claim with regard to a transaction being ingenuine, being names/ addresses/ PAN details/ tax returns of creditors had been produced before him. If the assessee was not able to produce any of the creditor, the AO was required to issue notice u/s 131 of the Act and call the concerned parties for examination. The assessee relied on various decisions noted in the submissions made before ld. CIT(A) and submitted that AO cannot draw adverse inference in cases where he has not issued notice u/s 131 or had not made any inquiry. As regards creditworthiness, it was submitted that the fact that all the parties were carrying on business was not in doubt; all were maintaining regular 5 ITA 1560/Del/2010

books of a/c as well as bank account. The money had come to the assessee's account from regular bank account of both the companies. All these transactions were part of the regular business activities of all companies.

8. Ld. CIT(A) deleted the addition, inter alia, observing as under:

"The AO has no where proved that documents in support of the identity of the parties have not been placed on record and they were forged documents. The AO also has not brought any evidence on record regarding the facts that the share applicants were not creditworthy or genuine, despite the fact that their PAN and copies of I.T. returns were submitted by the appellant. In view of the discussion made above the addition of Rs. 80 lakh is deleted. However, the AO is free to take appropriate action as may be permissible under the law in the case of various share holders alleged to be entry providers."

9. Aggrieved, the Revenue is in appeal before us.

10. Ld. DR referred to para 5 of AO's order and pointed out that since the share application money was received from known entry providers, therefore, AO inferred that genuineness of the transactions had not been proved. He submitted that ld. CIT(A)'s finding is entirely on different footing.

11. Ld. counsel for the assessee submitted that assessee had submitted all the details and evidences to establish the identity and creditworthiness of the share applicants and genuineness of transaction. AO had not commented upon these evidences or gave any adverse finding about the documents submitted by assessee. AO did not carry out any investigation after the assessee had submitted details about the share applicants. He submitted that 6 ITA 1560/Del/2010

it is not also the case that the share holder company were not available or notice/ summons issued had come back. He relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Victor Electrodes Ltd. 329 ITR 271 to submit that merely because assessee company failed to produce the directors of the share holder companies, cannot be a ground for making the addition in respect of share capital. He, inter alia, relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Fair Invest Ltd. 2012(12) TMI 170-Delhi High court. Ld. counsel submitted that the issue is squarely covered by the decision of Hon'ble Delhi High Court in the case of CIT Vs. Goel Sons Golden Estate Pvt. Ltd. (ITA no. 212/2012 - dated 11-4- 2012), wherein it has been, inter alia, held that where AO fails to conduct necessary inquiries, verification and deal with the matter in depth after the affidavit/ confirmation along with bank accounts were filed, then the assessment order cannot be sustained.

12. Ld. counsel further submitted that the decision in the case of CIT Vs. Nova Promoters and 342 ITR 169 (Del.) is not applicable to the facts of the case as in para 39 of the said judgment the Hon'ble Delhi High Court has observed as under:

"39. The case of Orissa Corporation (1986) 159 ITR exemplifies the category of cases where no action is taken by the Assessing Officer to verify or conduct an enquiry into the particulars about the creditors furnished by the assessee, including their income-tax file numbers. In the same category fall cases decided by this court in Dolphin Canpack (2006) 283 ITR 190, CIT v Makhni and Tyagi P. Ltd. (2004) 267 ITR 433, CIT v Antartica Investment P. Ltd. (2003) 262 ITR 493 and CIT v Achal Investment Ltd. (2004) 268 ITR 211. To put it simply, in these cases the decision was based on the fundamental rule of 7 ITA 1560/Del/2010

law that evidence or material adduced by the assessee cannot be thrown out without any enquiry. The ratio does not extend beyond that. The boundaries of the ratio cannot be, and should not be, widened to include therein cases where there exists material to implicate the assessee in a collusive arrangement with persons who are self- confessed "accommodation entry providers".

13. Ld. counsel further pointed out that similar view has been taken in the case of CIT Vs. Fair Invest Ltd. ITA no. 232/2012 dated 22-11-2012 by Hon'ble Delhi High Court and also in following cases:

- Caneron Concrete Industry P Ltd. Vs. ACIT (ITA no. 4114/Del/11 - dated 3-5-2013);

- CIT Vs. Goel Sons Golden Estate P Ltd. (ITA no. 212/2012 dated 11- 4-2012 (Del.);

- CIT Vs. Gangeshwari Metal Pvt. Ltd. (ITA no. 597/2012 dated 21-1- 2013);

- ACIT Vs. Panchanan International P Ltd. (ITA no. 50/D/2011 dated 23-11-2012);

- CIT Vs. Expo Global Industrial Ltd. (ITA no. 1257/2011 dated 20-7- 2012).

14. We have considered the rival submission and perused the entire material available on record. The AO had made addition of Rs. 80 lacs out of the total share application money amounting to Rs. 2,40,00,000/-. Thus, rest of the amount had been accepted by AO. From the assessment order it is evident that AO has merely relied on general information regarding the impugned 4 companies in respect of which addition was made as they were known entry providers. The AO has pointed out that details were provided by these companies but since the directors of these companies were not produced, he made the addition. No inquiries were conducted by AO to find out the genuineness of the transactions and creditworthiness of the 8 ITA 1560/Del/2010

companies who had applied for the share application money in the assessee company. We find considerable merit in the argument of ld. counsel for the assessee that merely because the directors were not produced the addition could not be made in view of the decision of Hon'ble Delhi High Court in the case of Victor Electrodes Ltd. (supra) and also in the case of Nova Promoters (supra) also Hon'ble Delhi High Court had clearly distinguished between the cases where AO had carried out detailed inquiry and then arrived at a finding regarding accommodation entries and those cases where AO did not carry out any inquiry and merely made addition on general basis. The inquiry for arriving at a proper conclusion is a sine qua non and that cannot be dispensed with by making general observations. We find that the decision in the case of Goel Sons Golden Estate P. Ltd. is squarely applicable to the facts of the present case, wherein in paras 2 & 3 it has been observed as under:

"2. Learned counsel for the appellant submits that the order passed by the Tribunal is perverse and in fact one S.H. Mallick had given a statement, which is re-produced in the assessment order saying that he had provided accommodation entries and the said statement conclusively proves that share money of' 30,00,000/- allegedly received by the respondent-assessee from 5 companies are sham and bogus transactions .

3. We have examined the said contention and find that the assessee during the course of assessment proceedings has filed confirmation letters from the companies, their PAN number, copy of bank statements, affidavits and balance sheet. Thereafter the Assessing Officer had asked the assessee to produce the said Directors/ parties. Assessee expressed its inability to produce them. The Assessing Officer did not consequent thereto conduct any inquiry and closed the proceedings. This is a case where the Assessing Officer has failed to conduct necessary inquiry, verification and deal with the matter in depth specially after the affidavit/ confirmation 9 ITA 1560/Del/2010

along with the bank statements etc. were filed. In case the Assessing Officer had conducted the said enquiries and investigation probably the challenge made by the Revenue would be justified. In the absence of these inquiries and non- verification of the details at the time of assessment proceedings, the factual findings recorded by the Assessing Officer were incomplete and sparse. The impugned order passed cannot be treated and regarded as perverse. The appeal is dismissed as no substantial question of law arises."

15. In view of above, this ground is dismissed.

16. Ground no. 3: Brief facts apropos ground no. 3 are that assessee had declared short term profit on shares amounting to Rs. 30,05,599/-, which had been claimed as short term capital gain. The AO taking note of the fact that the business of the assessee was basically trading in shares, required the assessee to explain that when the only activity carried out by the assessee was purchase and sale of shares, why the income earned therefrom should not be considered as business income instead of income from capital gains. The AO has observed that assessee did not file any reply and, therefore, concluded that short term capital gain was to be assessed as business income.

17. Ld. CIT(A) did not accept the AO's plea for the following reasons:

(a) The assessee company had distinct portfolio of shares under the

category of investments.

(b) It is the prerogative on the part of the company as to whether the

company would earn income under the head "capital gains" or

"business income" on sale of shares.

10 ITA 1560/Del/2010

(c) During the last few years the assessee company had followed the

same practice of holding certain shares under the head investment and

some shares as stock in trade.

(d) Assessee had earned capital gains on delivery based transactions.

(e) Dividend had also been received on some of the shares.

(f) The assessee had not claimed STT as business expenditure.

(g) Copy of resolution of Board of directors regarding making investment

in IPO had also been submitted.

18. He relied on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Gopal Purohit ITA no. 1121 of 2009.

19. Ld. DR submitted that assessee did not file any reply before the AO.

20. Ld. counsel for the assessee referred to pages 23 to 25 of the PB wherein the assessee's reply before AO is contained. He submitted that after considering the assessee's reply ld. CIT(A) allowed the assessee's claim. He referred to page 13 of the PB wherein the P&L A/c is contained and pointed out that in the computation of income, assessee had shown short term profit on shares of Rs. 30,05,598.98.

21. We have considered the rival submissions and have perused the record of the case. The AO has categorically observed that assessee had not given any reply. However, at page 23 of the PB, the assessee refers to the reply filed by it before the AO. We find that before ld. CIT(A) the assessee had advanced detailed submissions, but there is no reference to the reply filed before AO dated 15-7-2008. Ld. CIT(A) has also not recorded any finding on this aspect. Therefore, we restore this issue to the file of AO to decide the 11 ITA 1560/Del/2010

issue de novo after considering the assessee's submissions. Ground is allowed for statistical purposes.

22. In the result department's appeal stands partly allowed for statistical

purposes.

Order pronounced in open court on 13-03-2015.

Sd/- Sd/- (KUL BHARAT ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 13-03-2015. MP: Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR