Neelkhanth, New Delhi vs Department Of Income Tax

Revenue has filed the present appeal against the impugned order dated 27/2/2009 for the Assessment Year 2005-06 on the following grounds:-

1. The Ld. CIT(A) erred in law in deleting the addition of Rs. 20,00,000/-

made u/s 68 with respect to the money claimed to have been received as share application money without appreciating the facts and the 2 ITA NO. 1932/DEL/09

circumstances of the case which proved that the transactions were nothing but accommodation entries, in the right perspective.

2. The Ld. CIT(A) further erred in law in deleting the addition of Rs.22,450/- made as unexplained expenditure with respect to commission for arranging the share application accommodation entries, without appreciating the facts and circumstances of the case in the right perspective.

3. The Ld. CIT (A) also erred in law in deleting the addition of Rs.5,00,000/- made u/s 68 of the Act without appreciating the circumstances and the fact that neither the assessee nor the share applicant furnished any evidence in support of credit worthiness of the share applicant and the genuineness of the transaction.

4. The appellant craves to be allowed to add, delete or amend any other grounds of appeal.

2. The assessee filed its return of income and declaring an income of Rs.62.400 on 31/10/2005 which was processed by the Assessing Officer u/s 143(1) of the Income Tax Act 1961 (hereinafter called the Act) on 31/3/2007. The Assessing Officer select the case of assessee for scrutiny and issue notice u/s 143 (2) of the Act on 4/10/2006, in response to the same authorities represent assessee appeared and filed requisite details. The assessee company is non-banking finance company engage in the activities of Finance and investment. During the year it has earned income by way of interest, rent and capital gains. During the year under consideration, assessee company increased its share capital by Rs. 2,97,50,000/-. From the perusal of details furnished by the assessee company the Assessing Officer noticed that the said share application was allegedly received from following three parties.

"During the year under consideration the assessee company increased its share capital by Rs. 2,97,50,000/-. From the perusal of details furnished by the assessee company, it was noticed that the said share, application was allegedly received from, among others, the following persons/parties:

Sl No. Name Amount Cheque No Drawn on Received and Date Bank (Rs.) 1 M/s Onyz Exim & 5,00,000 737511 ABN Amro Sales Ltd, 2842, dated Bank, 3 ITA NO. 1932/DEL/09

Classic Apartments, 28/10/2004 Connaught Street Moti Mahal, Place, New Darya Ganj Delhi Delhi 2 M/s Shriniwas 10,00000 431170 State Bank of Leasing & Finance dated Bikaner & Ltd., 63, Shankar 6/10/2004 Jaipur, New Market, Cannought and 431198 Rohtak Place, New Delhi dated Road, New 8/10/2004 Delhi (for Rs. 5,00,000/- each) 3 M/s Rapid Impex 5,00,000 783670 ABN Amro Pvt Ltd., H. 16/332, dated Bank Bapa Nagar, Karol 28/10/2004 Cannaught Bagh, Delhi Place, New Delhi

3. As per information received from the Investigating Wing of the Department found that these 3 parties have no creditworthiness nor do they have any worthwhile sources of income. They are corporate entities in the name only as they are not engaged in any actual business activities. It has been found by the wing that they are only engaged in the activity of raising accommodation entries to the others. The bank accounts existing in the name of these persons are being used as conduits for the purpose of raising accommodation entries. A person/party who provides such entry is known as entry operator and the present party taking such entry is called beneficiary. According to the Assessing Officer a person interested in introducing its undisclosed money into his/her/its business approaches the entry operator and hands over the cash along with commission and take cheques/DD/PO. The cash is deposited by the entry operator in a bank account either in his own name or in the name of relatives/friends or other person hired him for the purpose of opening bank account. The other person, in whose name the account is opened, only signs the blank cheque book and hands over the same to the main entry operator. The entry operator, in turn, issues cheque/DD/PO's in the name of beneficiary either from the 4 ITA NO. 1932/DEL/09

account in which the cash is deposited or after multi layering and further obscuring the trial by rotating its through other account or account which are used only as conduits and in which the funds are transferred through colouring into or more stages. Thus, the beneficiaries unaccounted money sails through several accounts before round trapping back to it, only disguise in the form of share application money unsecure rent, gift etc. Interestingly most of the concerned/individual have obtain PAN from the Department and are filing return as well. But what it shown in return as not accrual states of affairs. The Assessing Officer further observed that where money was routed through the entry operator in the garb of capital application money. These shares are ultimately bought back in a year or two, by some family member of the Directors at huge discount, some time at one tenth or eleven even less of the issue price.

4. The above said three companies from whose in the share application money amounting to Rs. 20 lakhs has alleged being received belonging to S. H. Mallick Group and Mahesh Garg Group of entry operator. The Assessing Officer asked the assessee to produce the Principal Officer/Directors of the said companies along with their books of accounts, copies of all bank accounts etc and the case was fixed for by 22/10/2007. The AR of the assessee expressed his inability to produce them. The AO issued summons u/s 131 of the Act to the Principal Officer/Directors of the said investor companies requiring them to appear along with their books of accounts, evidence is supported of sources of investment in the assessee company etc and matter was fixed for hearing for 13/10/2007. Summon address to M/s Shri Niwas Leasing and Finance Ltd. were received with postal remarks to the effect that "the shop is closed as soon as a long time back". Since the said person had not been produce by the AR nor do they appear in response to the summons. The Assessing Officer handed over the copies of statements of following persons to Ld. AR on 13/10/2007.

5 ITA NO. 1932/DEL/09 a) Statement dated 10/09/200322/9/2003 and 28/1/2003 of Shri Mahesh Garg S/o f R. S. Garg, Resident of G -8/94, Sector 15, Rohini, Delhi.

b) Statement dated 9/9/2003 of Shri Vinod Garg, s/o R. S. Garg, R/O G-8 94, Sector 15, Rohini, Delhi.

c) Statement dated 10/10/2003 of Shri Rajiv Kumar Agrawal S/o R. S. Agrawal, R/o 1444, Gali No. 5, Nawal Park, Alipur Delhi.

d) Statement dated 23/6/2004 to S.H Mallick son of N. H. Mallick R/o 2842, Classic Apartments, Darya Ganj, Delhi

5. The assessee has also filed reply to the show cause notice along with confirmations, copies of ITRs and copies of bank statement of said share applicants and discharged its onus by filing these documentary evidence. After examining the documentary evidences filed by the assessee, the Assessing Officer had held that the source/availability of funds do not stand substantiated in any way by the assessee. The assessee has also not establish that why by the payment was not rooted through normal banking channels. Lastly, the Assessing Officer has held that as per the documentary evidences filed by the assessee, assessee has not establish its case to prove creditworthiness/ identity etc. and the alleged transaction remain substantiated. Therefore an amount Rs.20,00,000 he added as unexplained share capital 68 of the Act secondly Rs. 50,000/- as commission paid on the same and Rs. 5,00,000 u/s 68 of I. T Act on account of Share Capital Money received from Sh. V. K. Angami and complete assessment u/s 43(3) of the Act on 28/12/2007.

6. Aggrieved by the assessment order dated 28/12/2007 assessee filed an appeal before the Ld. First Appellate Authority who vide impugned order dated 27/2/2009 deleted the additions indispute by partly allowing the appeal filed by the assessee.

6 ITA NO. 1932/DEL/09 Now the Revenue is aggrieved against the impugned order dated 27/2/2009 filed the present appeal.

7. At the time of hearing Ld. DR relied upon the order passed upon the Assessing Officer and contention raised by the Revenue in the grounds of appeal. He requested that the impugned order passed by the Ld. First Appellate Authority may be cancelled and the order of the Assessing Officer may be upheld by allowing the appeal filed by the revenue.

8. Ld. Counsel for the assessee relied upon the order passed by the First Appellate Authority. He has also filed a paper book containing page 174 pages in which he has attached various documentary evidence supporting the claim of assessee and he requested that appeal filed by the revenue may be dismissed.

9. We have heard both the parties perused the record available with us specially orders passed by the revenue authority along with the documentary evidence filed by the assessee. We are of the view that the Assessing Officer during the course the assessment proceedings has made the following observation in the assessment order on the issue in dispute.

"During the year under consideration, the assessee company increased its share capital by Rs. 2,97.50,000/-. From the perusal of details furnished by the assessee company, if was noticed that the said share application was allegedly received from, among others, the following persons/parties:

S.No. Name Amount Cheque No. Drawn on Bank received and Date (Rs.) 1 Mis Onyx Exim & Sales Ltd. 5,00,000 737511 dated ABN Amro 2842, Classic Apartments 28.10.2004 Bank, Street Moti Mahal, Darya Ganj Connaught Delhi Place, New Delhi 2 Mis Shriniwas Leasing & 10,00000 431170 dated State Bank of Finance Ltd., 63, Shankar 06.10.2004 and Bikaner & Jaipur, New Rohtak Market, Connaught Place, 431198 dated Road, New Delhi. New Delhi. 08.10.2004 (for 3 Mis Rapid Impex Pvt Ltd., H Rs. 5,00,000/- each) 7 ITA NO. 1932/DEL/09

Before proceeding further, it is worth mentioning that the aforementioned persons/entities have been subject of certain inquiries and investigation by the Investigation Wing wherein it has been found that they have no creditworthiness nor do they have any worthwhile sources of income. They are corporate entities in name only as they are not engaged in any actual business activities. It has been found by the Wing that they are only engaged in the activity of arranging accommodation entries to the others. The bank accounts existing in the names of these persons are being used as conduits for the purpose of arranging accommodation entries. A person/party who provides such entry is known a Entry Operator and the person/party taking such entry is called Beneficiary.

An entry operator operates a number of accounts in the same bank/branch or in different branches in the names of companies, firms, proprietary concerns and individuals. For the operation of these bank accounts filing income tax returns etc. persons are hired. Except for two or three persons who are required to regularly visit bank and to do other spade work like collection of cash etc., most of the other person involved are on part time basis. The part time employees are called as and when required to sign documents, cheque books etc.

A person interested in introducing its undisclosed money into his/her/its business approaches the entry operator and hands over the cash, along with commission and takes cheques/DD/PO. The cash is deposited by the entry operator in a bank account either in his own name or in the name of relative/friends or other person hired him for the purposes of opening bank account. The other person, in whose name the account is opened, only signs the blank cheque-book and hands over the same to the main entry operator. The entry operator, in turn, issues cheques/DD/Pos in the name of the beneficiary either from the account in which the cash is deposited or after multi-layering and further obscuring the trail by rotating it through other account or accounts, which are used only as conduits and in which the funds are transferred through clearing in two or more stages.

Thus, the beneficiary's unaccounted money sails through several accounts before round-tripping back to it, only disguised in the form of share application money, unsecured loan, gift etc. Interestingly, most of the concerns/individual have obtained PAN from the department and are filing returns as well. But what is shown in the return are not actual state of affairs.

It has been further observed that where money was routed through the entry operator in the garb of share capital/share application money these shares are ultimately bought back, in a year or two, by some family member of the Directors at huge discount, sometime at one tenth or even less of the issue price.

The bank statements and the account opening forms of the above "companies" were obtained from their respective banks. The particulars of the bank accounts and the Directors (authorized signatories to operate the accounts) are as under:

S.No. Name Bank & Branch Account No. Authorized Signatories

1 M/s Onyx Exim AMN Amro Bank 1020083 Sh. S.H. Mallick & Sales Ltd. Connaught Place, 2 M/s Shriniwas State Bank of Bikaner 024657 Sh. Vinod Garg & Leasing & Finance Ltd. & Jaipur, New Rohtak Sh. Rajeev Aggarwal New Delhi 3 M/s Rapid Impex ABN Amro Bank, 1024592 Sh. Shiv Lal & Pvt. Ltd. Connaught Place, Sh. Satyendra Kumar 8 ITA NO. 1932/DEL/09

New Delhi. Singh

The above "companies"/persons from whom the share application money amounting to Rs.20,00,000/- has allegedly been received belong to the S.H. Mallick Group and Mahesh Garg group of entry operators. The "companies"/persons mentioned at (1) and (3) above belong to the S. H. Mallick Group and the "company"/persons at (2) above belong to the Mahesh Garg group. These persons along with their other associates have been given sworn statements u/s 131 before the Addl. Director of Income Tax (Investigation),Unit-1, New Delhi. In the said statements they have admitted that the said "companies "and other such concerns owned/controlled by them are not carrying on any actual business activities. They have categorically admitted that they are engaged in the activity of providing accommodation entries. The deposits reflected in the bank accounts existing in the names of these "companies actually belong to the persons approaching them fro taking accommodation entries. These bank accounts existing in their names have been used only as conduits for the purpose of "arranging accommodation entries for others in the barb of share capital etc. As described above.

In view of these facts, the AR was asked on 10/10/2007 to arrange to produce the Principal Officers/Directors of the said "companies"(hereinafter referred to as "investor companies") along with their books of accounts, copies of all the bank statements etc. The case was fixed for 22.10.2007. The AR appeared on 22.10.2007 and 05.12.2007 but without anybody on behalf of the said "investor companies ".

The AR, however, expressed his inability to produce them. On 05.12.2007, on the request of the AR, summons U/S 131 of the Act were issued to the Principal Officers Director of the said "investor companies"

( at the following addresses mentioned in the "confirmations" provided by the assessee), requiring them to appear along with their books of accounts, evidence in support of the sources of investment in the assessee company etc.

Sl. No. Name Address 1 M/s Onyx Exim & Sales Ltd. 2824, Classic Apartment, Street Moti Mahal, Darya Ganj, Delhi 2 M/s Shriniwas Leasing & Finance Ltd. 63, Shankar Market, CAnnaught Place, New Delhi 3 M/s Rapid Impex Pvt Ltd. H-16/332, Bapa Nagar, Karol Bagh, Delhi

The matter was fixed for 13/11/2007. The summons addressed to M.s Shriniwas Leasing & Finance Ltd. Were received back unserved with postal remarks to the effect that "the ship is closed since a long time back:]". The summons sent to the other two parties went uncomplied with un. Since the said persons had not been produced by the AR nor had they appeared in response to the summons, the AR on 13/11/2007 was provided copies of the aforesaid statements of the following persons.

a) Statement dated 10/09/200322/9/2003 and 28/1/2003 of Shri Mahesh Garg S/o f R. S. Garg, Resident of G -8/94, Sector 15, Rohini, Delhi.

b) Statement dated 9/9/2003 of Shri Vinod Garg, s/o R. S. Garg, R/O G-8 94, Sector 15, Rohini, Delhi.

c) Statement dated 10/10/2003 of Shri Rajiv Kumar Agrawal S/o R. S. Agrawal, R/o 1444, Gali No. 5, Nawal Park, Alipur Delhi.

9 ITA NO. 1932/DEL/09 d) Statement dated 23/6/2004 to S.H Mallick son of N. H. Mallick R/o 2842, Classic Apartments, Darya Ganj, Delhi

The AR was required to explain as to why adverse inference may not be drawn from the above statements and the fact that the parties are either not available or were evading compliance with the summons sent to them requiring them to produce their books of accounts and other evidence in support of the sources of investment in the assessee company.

In reply to the show-cause, The AR furnished his reply vide written submission dated 04.12.2007. Since the assessee company had expressed its inability to produce the said parties, fresh summons/notice were sent to the Principal Officers/Directors of the said investor companies ". fixing the case for 11.12.2007. The summons again met the same fact, with the one addressed to M/S Shriniwas Leasing & Finance Ltd having been received back unserved and nobody attending in response the ones addressed to the other two parties. However, on J 4.12.2007 letters from the M/s Rapid Impex Pvt. Ltd. and M/ss- Onyx Exim & Sales Ltd. said "investor companies" were received confirming the investment in the share capital of the company. Interestingly. though the summons addressed to M Shri' Niwas Leasing & Finance Ltd. had been received back unserved. a "confirmation" was received from this art as well.

Coming back to the reply of the AR on the show-cause. the substance of the

reply is as under:

a) The assessee company has filed confirmations. copies of the ITRs and Copies of the Bank Statements of the said share applicants. The said share applicants are companies incorporated under the Companies Act. The assessee company has discharged its onus by filing above document evidencing their identity.

a) The statements given by the above persons are vague and general in nature

and these persons have not specifically mentioned the name of the assessee company.

The assessee's contentions in support 0f the genuineness of the transactions and the documents purporting to be confirmation etc of the above share applicants

have been considered. but have not been found to be sufficient in view of the above documents filed by it in support of the identities of the share applicants. This rather simplistic contention of the assessee has no legal basis. The Hon'ble High Court of Delhi in the case CIT V. M/s Himalaya International Ltd. (rendered on 30/7/2007 in ITA 1509 of 2006) has clearly held that the onus is on the assessee to establish the identity & creditworthiness of the subscribers of shares as well as the genuineness of the transaction.

10 ITA NO. 1932/DEL/09 Before evaluating the credibility of the purported evidence sought to be relied on by the assessee against the overwhelming circumstantial evidence (as detailed below)exposing the real nature of the transactions, the import and ingredients of section 68 may be briefly discussed. It has been judicially established that the primary onus is on the assesssee to prove the identity & creditworthiness of the party and the genuineness of transactions in respect of cash credits in its books of account. The identity and creditworthiness , in the context of the provisions of section 68, cannot be seen as two separate elements but as two sides of the same coin. The PAN or other assessment particulars are, at best, only peripheral documents as while allotting PAN or processing the returns, the actual affairs are seldom verified. The creditworthiness essentially means some financial standing in one's own right backed by one's inherent capacity to earn income or the capacity of some profit making apparatus available to one. The genuineness of the transaction means that it was actuated by prudent commercial considerations on both sides and there was nothing in the circumstances before during and after the transaction that strongly suggest that it was just a make believe affair or was heavily loaded in the favour of one of the parties.

It is now proposed to consider the purported evidence sought to be relied upon by the assessee in the light of the facts and circumstances of the case.

(1) As discussed above, simply furnishing the PAN or assessment particulars is not enough. The so - called evidence in the form of return of income etc. does not facilitate cross verification. Summons sent to these persons have not been complied with. Instead, Ietrters have been received from them by post on 14.12.200 purporting to be confirmations" of investments. These so-called confirmations are just self-

serving documents. The acknowledgement of return etc., by themselves are not sufficient to prove the true identity of a person or to do disclose a true address. This is not a case where some legal proceedings are shown to have been made in the hands of the said persona at these addresses and they are shown to have attended the proceedings. Therefore, the alleged documents filed by the assessee are not sufficient for establishing the identity and creditworthiness of the investors." The identity should be seen in perspective that the person has got to have some standing in a particular line of activity. Identity is defined in the new shorter oxford dictionary as "The condition or fact of a person or thing being that specified unique person or thing" The person has to have some sign of identification other than merely on paper. These signs could be the infrastructure of business, place of work staff members, books of accounts, substantive evidence of the business carried by the persons in the form of tools and apparatus of business, inputs of the business, process involved etc. Or anything which can prove that some actual activity is going on. Inspector was deputed to make lock inquiries at the given addresses. AS per the report of the Inspector, no entities by the said names were found to be existing at the given addresses. Clearly, the addresses are being used only as a post-box. Having PAN or assessment particular is merely a response to the applications and returns filed. These types of identity are merely on paper. The authority allotting PAN or processing the return of income seldom verify the actual identity of the person. These tools are being employed intentionally for the purpose of proving existence, however actual identity of the business and its genuineness do not automatically get proved by these passive documents when in fact no actual and active business is being carried out.

The persons have neither been produced nor has any substantive evidence produced in support of their actual affairs, their true identity and their creditworthiness that could only be examined, given the facts of the case, if they are produced along with necessary evidence of the nature and details of their activities on the ground, the sources of deposits and their books of account. For accepting the identity and the availability of funds in their hands in their own capacity, it is necessary to have at least some idea, if not 11 ITA NO. 1932/DEL/09

complete details, of the actual "business" in which they are said to be engaged. It would be relevant to discuss the elements of the so-called balance sheets as on 31/3/2005 of two of these entities (copies of which have been enclosed with the so-called confirmations) vis-a-vis the nature and volume of transactions reflected in their bank accounts:

(a) M/s Rapid 1mpex Pvt Ltd. The Income side of the P & L account shows an income of Rs. 1,95, 781/-) "interest ". The expenditure side shows, inter alia, "Personnel Expenses" of Rs. 96.793 -, "Administrative Expenses" of Rs. 71`,244/-- and "Depreciation" of Rs11,588. As against this, the total of the deposit sidein the said Bank Account alone is to the tune of Rs. 91,41,820/-.

There is a uniform pattern to Iran 'actions in that invariably the issue of cheques (mostly in exact round figures of Rs. 1 lac, 1. 5 lac, 2 lac, 2.5 lac, 3 lac, 5 lac etc.) is immediately preceded by (within a day or two) the deposits of equivalent amounts in the account through cheque transfer entries. The Balance Sheet as on 31.03.2005 shows "Investments" of Rs. 43,50,000/- (as against 39,00,000/-

as on 31.03.2004) but there is no schedule showing the composition of investments.

(b) M/s Onyx Exim & Sales Ltd.: The total "turnover" of the entity during F. Y. 2004-05 is Rs. 1,21,499/- (comprising of "Interest on Loan" of Rs. 18,219/- and "Other Income" of Rs. 1,03,28 0 -. The expenditure side shows, inter alia, "Personnel Expenses" of Rs. 5 8,362 -. "Administrative & Other Expenses" of

Rs.50, 053/- and "Depreciation of Rs. 25,711. As against this, the total of the deposit side in the said Bank account alone (during the year) is to the tune of Rs. 69,73,409/-. There is a uniform pattern to transactions in that invariably the issue of cheques (mostly in exact round figures of Rs. 1 lac, 1.5 lac, 2 lac, 2.5 lac, 3 lac, 5 lac etc.) is immediately preceded by (within a day or two) the deposits of equivalent amounts in the account through cheque/transfer entries.

The Balance Sheet as on 31.03.2005 shows 'Investments" of Rs. 24,75,000/- (as against 25,00,000/- as on 31.03.04 but there i no schedule showing the composition of investments.

In fact, there are specific reasons for not maintaining/producing books of accounts and annexure showing composition of investments in such cases. For one, the amounts given as share application money are lost forever (as they are on time entries). Another reason for not filing the schedule of investment is that while the amount shown in the balance sheet may be less, the actual amounts may be more. For example, if one crore has been actually routed through the bank accounts the amount shown in the balance sheet may be just twenty or thirty lakhs.

(2) The assessee company is private limited company. In the case of such companies, there is close and proximate relationship between the promoters/directors and the shareholders. The closely-held companies are permitted to accept the subscriptions of share capital or deposits only from the friends or relatives of the promoters/director s and such companies are not allowed to accept subscriptions or deposits from the general public. The shares are, therefore, subscribed by a small number of persons who are known to the promoters are related to them by family members. As such, there should have been no difficulty on the part of the assessee to produce the so-called investors, had the whole apparatus not been merely a conduit to plough back the unaccounted money of the assessee-company in the garb of share application money.

12 ITA NO. 1932/DEL/09 Indeed, in the case of share capital received by a Private Limited Company. the transactions partake the character of cash credits. Therefore, the assessee's burden to establish the genuineness of funds flown in the guise of share capital subscription and the creditworthiness of the investor is at par with the cash credits. Even if it is presumed for the sake of argument, that the assessee company has no contact or relationship with them, if is necessary t0 examine as to how the "investors" came to know of the requirements of funds by the assessee-company in the absence of {( public issue or any advertisement by the assessee-company. ,For accepting the identity and the availability of funds in their hands in their own capacity, it is necessary to have at Ieast some idea. if not complete details, of the actual "business" In which they are said to be engaged.

(3) Mere payment by account- payee cheque is not sacrosanct nor can it make a non-genuine transaction genuine. The nature and volume of transactions reflected in the bank statement transactions has already been discussed briefly above. Therefore, unless the creditworthiness of theses persons and the transactions represented by the entries in the bank are correlated with the "business activity" or their sources or income, the above pattern and the frequency of deposits and withdrawals at short intervals only corroborates the fact that the account has been used only for the purpose of providing accommodation entries. The evidence afforded by the above facts is only fortified by the aforesaid statements of Sh. Mukesh Gupta,S h. S.H Mallick and their other associates The argument that the money has come through banking channel and hence the same is genuine is farce in itself. The nature of deposits

in its accounts cannot be explained except by the truth that these amounts represent the money of the beneficiary routed through it. The beneficiary has to have the money in its account through normal banking channel. This is the sole reason for arranging the entire transaction.

In the light of the above, the onus lay heavily on the assessee to establish the genuineness of the transactions and the true identity & creditworthiness of the alleged share applicants. Considering the totality of the circumstances, it is obvious that the "transactions" were only a camouflage. The total amount of Rs. 20,00,000/- stated to have been received from the said investor companies" represents the assesssee's own unaccounted money which has sought to be introduced into its business in the garb of share application money. Thus, keeping in view the totality of the facts, the amount of Rs. 20,00,000/- is added back to the income of the assessese company u/s 68 of the IT Act."

..........

As per the details filed, the assessee has also received a sum of Rs. 5,00,000/- from Sh. V. K. Angami, R/o 21/2, Mile, Dimapur, Assam. The assessee has filed a copy of the same application form of Sh. Angami which reveals that the entire amount of Rs. 5,00,000/- has been received in cash. Notice u/s 133(6) was sent to Sh. Angami on 6/9/2007, calling for the following:

a) Confirmed copy of account of the assessee in his books of accounts for the year under consideration

b) Source of investment in share capital of the assessee company with copies of the bank statement

c) His PAN and I. T. Particulars with copy of acknowledgement for I.T. Return for the A. Y 2005-06

There was no response to this letter. Vide order sheet entry dated 11/12/2007, the AR was informed that the notice u/s 133(6) to Sh. Angami remained un-complied with. Vide order sheet entry dated 17/12/2007, the AR was asked to show cause as to whey the amount received from Sh. Angami be not 13 ITA NO. 1932/DEL/09

treated as unexplained as the genuineness of the transaction, and the identity & creditworthiness of the share applicant remained unverified. On 27/12/2007, the AR furnished a confirmation of Sh. Angami, along with his identity document. It has also been stated that Sh. Angami belongs to a Schedule Tribe of Nagaland and, therefore, his income is exempt and he has no PAN.

Perusal of the details confirmation of Sh. VK. Angami filed reveals that the source, availability, financial capacity do not stand substantiated in any way. The pressing need for this payment having been made in cash by Sh. Angami is highly suspect as there is no reason why the same was not routed through normal banking channel. This assumes greater significance as it is highly improbable that Sh. Angami or any other person on his behalf actually carried this amount all the way from Mizoram to Delhi. As per the documents filed, the entire creditworthiness is being ought to be established merely on the basis of mere self-serving assertions which are not supported by any documentary evidence in support of his financial status and the immediate source of the said amount. The alleged hare applicant has chosen to remain silent about the source of this amount 0f Rs. -5,00,000/- which had specifically been asked for vide notice uls 133(6) d t 06.09.2007 . In view of the above, the creditworthiness of the alleged share applicant and the genuineness of the transaction remain unsubstantiated. Therefore, This amount of Rs. 5,00,000/- is treated as unexplained and added to the income of the assessee u/s 68 of the Act.

10. On the appeal filed by the assessee, Ld. First Appellate Authority in the impugned order had adjudicated the issue in dispute the findings of the Ld. CIT(A) is as under:-

Decision: I have gone through the facts and circumstances of the case, observation of the

A.O. as contained in the Assessment Order, submissions of the AR of the appellant and

judicial pronouncements on this issue.

During the year under consideration, the appellant company had increased its Share Capital by Rs. 2,97,50,000/- from various parties. The Assessing Officer, in the

Assessment Order has added the Share Application Money received from 4 parties, namely M/s Onyx Exim & Sales Ltd. (Rs. 5,00,000/-), M/s Sriniwas Leasing & Finance Ltd. (Rs.10, 00\, 000/-), M/s Rapid Impex Pvt. Ltd. (Rs. 5,00,000/-) and Shri V K. Angami (Rs. 5,00,000/-) as unexplained cash credit in the hands of the appellant company. The addition in respect of first three cases was made on the basis of information received from the Investigation Wing of the Department and on the statement of Shri Mahesh Garg, S/o R.S. Garg, Sh. Vinod Garg, S/o R.S. Garg Sh. Rajeev Kumar Aggarwal, S/o R.S. Aggarwal, and Sh. S.H. Mallick, S/o .NH. Mallick given before the officers of the Investigation Wing, whereas the addition in respect of V. K. Angami was made as the said payment was received in cash and was not supported by any immediate source of the said cash.

The Assessing Officer has asked the appellant during the course of assessment proceedings to produce the Directors of the companies from whom share application money was received, for examination. The 14 ITA NO. 1932/DEL/09

appellant company to substantiate that the amount of share application money received from the said parties was genuine, provided various supporting evidence, to prove the identity and creditworthiness of the party in the form of confirmation from the said parties Copy of certificate of Incorporation of the said companies, Copy of PAN Card, Copy 0f Resolutions, Copy of Audited Balance sheet as on 31.3.2005, Copy of I.TR. Acknowledgement Copy of Share Application Form,

Copy of Bank Statements of the subscriber and documentary evidence in respect of Mr. Angami, showing his financial and social tat well as his identity. The AO disregarded these evidences and emphasized that identity and creditworthiness of the Investors was not proved. He accordingly held that the amount of Rs.25,00,000/- received by the appellant as share application money from the aid four parties cannot be treated as genuine and is only an accommodation entry.

On going through the facts of the case and keeping in view the various pronouncements of the courts, it is clear that that the appellant had discharged the initial onus of establishing the existence, identity and creditworthiness of the investor company.

Hon'ble Delhi High Court in the case of CIT vs. Pradeep Gupta 207 CTR 115, which has also been relied upon by the Delhi ITA T in the recent judgement in the case of Babita Gupta ITA No. 2897/06, wherein it is held that in thefacts of the case before us it may be seen that from the very beginning Ld A.O. had shifted entire burden upon the assessee and no material was brought by him to prove his allegation that the impugned amount represented assessee company' undisclosed income. Therefore, on this ground alone the entire addition deserves to b deleted and may kindly be held so.

In the Assessment Order also the AO has not given any details about the enquiry conducted by him on the basis of which it was held that the said parties were involved in the business of providing accommodation entry. The Hon'ble Delhi High Court in the case J.T. (India) Exports and another VS. UOI and another (2003) 262 ITR 269 (Del-FB) has held that the Assessing Officer must pass a speaking order giving reasons for the conclusions arrived at, and opportunity of being heard must be provided to the assessee before passing any adverse order. It has been further held that in the notice issued by the

A.O. specific requirement should be indicated and reasonable, opportunity must be granted. It was held by the Hori'ble Delhi High Court that in absence of a notice of the kind and such reasonable opportunity, the order passed against the person in absentia and becomes wholly vitiated.

The AO in his Assessment Order has not brought any material on records, which can prove that this money was appellants own undisclosed income. He has simply relied upon the information received from the Investigation Wing of the Department without making any effort to verifying the facts stated therein. It has also been held by the various courts that AO must bring on record some positive material or evidence to indicate that the share holders were benamidars, fictitious persons or that any part of the share capital money represented the companies own income from undisclosed sources. The appellant has cited various case lax s in the its submissions wherein it has been held that the Share Capital issued cannot be treated as undisclosed income of the appellant and cannot be added U/S 68 of the Income Tax Act. The facts of the cases cited by the appellant are identical with that of the instant case. Further, the reliance is also placed on following decisions of various courts :-

15 ITA NO. 1932/DEL/09 1. Divine Leasing & Finance Ltd. 299 ITR, Delhi.

2. General Exports & Credits Pvt. LId. 880/2006 (SC)

3. Lovely Exports Pvt. Ltd. (2008) 299 ITR 268 (SC)

4. A-One Housing Complex Ltd. V. ITO Ward 1(1),110 ITD 361 (Delhi)

5. CIT Vs. Value Capital Service Pvt. Ltd 307- ITR 334 (Delhi).

6. CIT Vs. Orissa Corporation Pvt. Ltd. 159 ITR7 8 (S C).

7. CIT vs Sophia Finance Ltd. (1994)ITR 98 (Del)

In the latest judgement of the Ape x Court in the case of CIT \Vs Lovely Export 299 ITR 268 (SC) which has confirmed the order 0f the Delhi High Court. It has been held that once the identify of the share holder have been established. even if there is a case of bogus share capital, it cannot be added in the hands of the company unless any adverse evidence is not on record. In the instant case. the appellant has provided confirmations from the said parties as weII as various evidences to establish the genuineness of the transaction.

The Balance Sheets of the said companies and other documentary evidence filed by the appellant, shows the financial strength of the said parties. Moreover, it is settled law in view of the decision in the case of S . Hastimal 49 ITR 273(Mad) and Daulatram Rawatmull (1973) 871TR 349(SC), that source of the source cannot be enquired from an assessee which unfortunately seems to be the case in the instant case.

In a recent judgment dated 30/1/2009 Hon'ble Delhi High Court in the case of CIT VS. Gangour Investment Ltd. (ITA NO. 34/2007) has held that Revenue can make addition u/s 68 of the Act only if the assessee is unable to explain the credits appearing in its books of accounts. In the said case the appellant has duly explained the said credit entries in the form of various documentary evidence filed. The said documentary evidence contained details, which set out not only the identity of the subscribers, but also gave information, with respect to their address, as well as, PAN numbers, Assessment particulars etc. Based on these facts, the Hon'ble Delhi Court dismissed the appeal of revenue.

In yet another decision as to the correctness of treating share application money on par with cash credit, the Honble Delhi High Court in CIT vs. Value Capital Services P. Ltd. (2008) 307 ITR 334 (Delhi) found after referring to the two of the decisions of the Delhi High Court on the subject that in respect of share capital amounts, they cannot be assessed in the hands of the company, unless the Department is able to show that the amount received towards hare capital actually emanated from the coffers of the assessee company.

After going through various facts of the case and judicial pronouncement on this issue, cited supra it is seen that the appellant's case is covered by the above judgments.

16 ITA NO. 1932/DEL/09 After going through the facts of the case and the judicial pronouncements on this issue. I am of the opinion that the appellant has discharged the initial onus of establishing the bonafide of the transactions and the AO was not justified in ignoring various evidences provided to him by the appellant. It is seen that the Assessing Officer had not any investigation / enquiry, during the course of assessment proceedings. The Assessment Order has been framed by the Assessing Officer only on the basis of the information received from the Investigation Wing of the Department, without making any further investigation. Nothing adverse ha been brought on record by the AO to establish that the Share Application Money received b the appellant, represented its own undisclosed income.

Further, if there was doubt about the source of investment of the said companies, then additions should have been made in the case of the said companies and not in the hands of the appellant company.

It is also seen that Assessing Officer h n given the appellant any opportunity to cross examine the persons I/entry operator, on the basis of whom, adverse inference was taken in the case of the appellant. Rather it is observed that the A .0. had shifted entire burden upon the appellant and did not made any further investigation on the issue. The A.O. has not brought any material on record or prove his allegation that the impugned amount represented assessee company- undisclosed income and has completed the assessment on the basis of information received from the Investigation Directorate.

In the light of the above discussion. I am inclined to agree with the arguments and evidences provided by the appellant to substantiate that the transaction regarding Share application Money received by it were genuine transactions and the same were not accommodation entries. I also do not find any evidence collected by the A.O. which could prove otherwise. Accordingly. The A. 0 was not justified in treating the amount of share application money received by the appellant a its undisclosed income.

In view of the aforesaid discussion. I delete the addition of Rs. 25,00,000/-made

by the A.O. u/s 68 of the 1. T. Act, 1961.

11. Keeping in view of the findings given so Assessing Officer as well as the Ld. First Appellate Authority and the documentary finding by the assessee before us. We are of the considered view that Ld. First Appellate Authority has deleted the addition in dispute on the basis of various documentary evidence filed by the assessee before the Assessing Officer as well as before him. Hon'ble Supreme Court of India in the case of CIT VS. Export Lovely 299 ITR 261 (SC) which has confirmed the order of Hon'ble Delhi High Court has held that once the identity of the share holder have been established, even if there is a case of bogus share capital, 17 ITA NO. 1932/DEL/09

it cannot be added in the hands of company unless any adverse evidence is not on record. Ld. First Appellate Authority has examined the documentary evidence filed by the Assessing Officer as well as before him and held that the assessee has provided confirmations from all the parties as well as various evidences to establish the genuineness of the transaction assessee has also relied upon the judgment of Nemi Chand Kothari Vs. CIT 264 ITR 254(Gauhati) wherein it has held that it is a certain law that the of the assessee is to prove the genuineness of transaction as well as the creditworthiness of the creditor must remain confined to the transactions which have taken place between the assessee and the creditor. It is not the business of assessee to find out the source of money of creditors. Similar observation has also been given in the case of Hon'ble Supreme Court of India in the case of Hastimal 49 ITR 273 (Madr) and Daulatram Rawatmal (1973) 87 ITR 349 (SC). Ld. First Appellate Authority has cited various decisions rendered by the Hon'ble Supreme Court of India as well as the Hon'ble Jurisdiction High Court in the impugned order and finally has held that the assessee has substantiated the transaction regarding share application money received by it was genuine transaction and the same were not accommodation entries he did not find any evidence collected by the AO which could prove otherwise and deleted the additions in dispute. As regard to deletion of commission by the Ld. First Appellate Authority. We are of the view that when the addition of Rs. 20 lakhs has already been deleted by the Ld. First Appllate Authority then the question of commission on the same does not rise. Therefore, we uphold the impugned order on the issue involving Ground No. 2 raise by the Revenue and dismiss the same.

12. Keeping in view all the facts and circumstances , we are of the considered view that the Ld. First Appellate Authority has passed the impugned order under the law and according to the facts of the present case and has rightly deleted the addition in dispute. We find no infirmity in the impugned order and upheld the impugned order by dismissing the appeal filed by the revenue.

18 ITA NO. 1932/DEL/09 13. In the result, appeal filed by the Revenue is dismissed.

The order is pronounced in the open court on 1st April 2015.

Sd/- Sd/- (N. K. SAINI) (H. S. SIDHU) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 01 /04/2015

*R. Naheed*

Copy forwarded to:

1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR

ITAT NEW DELHI 19 ITA NO. 1932/DEL/09

Sl. NO. Description Date 1. Date of Dictation by the Author 26.03.2015 2. Draft placed before the Dictating Member 3. Draft placed before the Second Member 4. Draft approved by the Second Member 5. Date of approved order comes to the Sr. PS 6. Date of pronouncement of order 7. Date of file sent to the Bench Clerk 8. Date on which file goes to the Head Clerk 9. Date of dispatch of order