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TMI Blog2007 (8) TMI 715X X X X Extracts X X X X X X X X Extracts X X X X ..... urn declaring income of ₹ 4,51,60,553. The return filed on 28-11-2003 was processed under section 143(1) on 12-3-2004. Thereafter the case was selected for scrutiny and notices under section 143(2) were issued to the assessee in response to which the assessee filed details. 6. On examination of the material, the Assessing Officer found that the assessee had received share application money and share premium totaling ₹ 9.22 crores from Milli Marketing during the year under consideration. 7. A search and seizure operation had taken place in the case of Shri P.K. Ruia at his business premises and at his residence. It was alleged that Mr. P.K. Ruia has floated number of companies holding shares and were being used to provide entries to different beneficiaries after receiving cash from them. In the process, commission was charged for services rendered to them. It was also alleged that Mr. Ruia was providing fictitious loans or share application money and earned huge amount as commission without paying the rightful taxes. 8. The Assessing Officer examined the modus operandi vis-a-vis money laundering through dummy companies by Mr. Ruia by creating corporate veil. In paras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed cotton fabric sold during financial years 2001-02 and 2002-03. (3)Regarding the purchase of knitted cotton fabric, Mill Marketing (P.) Ltd. has informed that this has1 been purchased from Collin Traders Ltd., 9, Ezra Street, Kolkata and Clive Traders Ltd., 1, Sarojini Naidu Sarani, Kolkata. (4)After examining different returns of income relating to Milli Marketing (P.) Ltd., he noted that this company incurred losses in assessment year in assessment years 1998-99 to 2003-04. (5)It was also found from the Minute Book of Milli Marketing (P.) Ltd. that on 31-3-2000 the company received share premium amounting to ₹ 29,39,30,000 from the various companies. (6)He also noted that all the companies including Milli Marketing and Vivek Leafin Ltd. were companies floated by Shri P.K. Ruia with dummy directors. 11. The Assessing Officer on the basis of above facts drew following inferences :- (a)It is strange that company like Milli Marketing (P.) Ltd. having no real income for the last 5-6 years can command share premium of ₹ 190 per share. (b)During the financial years 2001-02 and 2002-03 Milli Marketing (P.) Ltd. claimed to have purchased 982084 kgs. Of knitted cotton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment proceedings, the assessee was asked to show cause as to why share application money should not be added as its undisclosed income under section 68. Vide reply dated 27-3-2006 the assessee made following averments :- u Pawan Kumar Ruia is neither a Director nor Officer nor Executive or share holder in Monnet I spat Ltd. The search under section 132 had nothing to do with Monnet Ispat Ltd. u Assessee Company's business has no correlation with the so called business of Sh. Pawan Kumar Ruia. The assessee has never received any such accommodation entries. u No search was conducted with Mili Marketing (P.) Ltd. u The assessee has been able to prove the identity, creditworthiness and genuineness of the cash credit. u Confirmation from Mili Marketing (P.) Ltd. and Vivek Leafin (P.) Ltd. has been produced. u Mili Marketing had enough funds with it in the form of reserves/surplus to give share application money to the assessee. u IT details of Mili Marketing (P.) Ltd. and Vivek Leafin (P.) Ltd. were also produced. u Entire payments were received by account payee cheques through normal banking channels. The Assessing Officer rejected the above referred contentions of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed in books of account and audited balance sheet of the assessee-company. It is also added that reliance placed by Assessing Officer solely on basis of report of search parties at Kolkata, without any concrete material was bad in law. (g)"It is further submitted that nowhere the connection between the appellant company and the alleged search operation at the premises of Mr. Pawan Kumar Ruia stands established. Further, nowhere in the assessment order has it been established that any cash has been deposited in the bank account of M/s. Mill Marketing Pvt. Ltd. before issuing any cheque to the appellant company. In view of facts stated above the addition of ₹ 9.22 crores has been made by the Ld. Assessing Officer on mere surmises conjectures and on wholly unreasonable and speculative premises and without any premises you are requested to delete the entire addition." The assessee also submitted the following arguments through its statements before the learned Commissioner of Income-tax (Appeals):- (a)"No statement of the key person Mr. P.K. Ruia is on record which can support the contention of the Assessing Officer that these are paper companies and did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence before the Assessing Officer to prove the identity of the creditor, its creditworthiness and the genuineness of the transaction. It was submitted by him that the assessee had produced before the Assessing Officer the bank statement of Milli Marketing and also the bank statement of person from whom the Milli Marketing got money. It was further submitted by him that the director of Milli Marketing appeared before the Assessing Officer and produced all relevant documents to confirm the transaction of share application money. It was pointed out by him that Milli Marketing paid a sum of ₹ 9.22 crores in the relevant assessment year out of which shares for the value of ₹ 87 lakhs were allotted to Milli Marketing and balance amount of ₹ 8.35 crores was refunded in the subsequent year i.e., assessment year 1994-95. It was also pointed out that on share application money, no interest was charged. The learned counsel also explained that the assessee company was public limited company which was listed in the Stock Exchange and its shares were allotted on preferential basis to Milli Marketing which was a private limited company. 17. For assailing the findings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o submitted by the learned counsel for the assessee that the process of allotment of shares was completed as per the guidelines of SEBI and there is no dispute about the same. 19. Regarding applicability of section 68 of the Income-tax Act, the submission of the learned counsel for the assessee was that addition could not be justified under section 68 of the Income-tax Act in the instant case. In support of his arguments on this point he placed reliance on the decision in the case of CIT v. Stellar Investment Ltd. [1991] 192 ITR 287 ftn1Monnet Ispat & Energy Ltd. v. Dy. CIT Circle_5_1 N. Delhi.htm (Delhi); CIT v. Stellar Investment Ltd. [2001] 251 ITR 263 ftn2Monnet Ispat & Energy Ltd. v. Dy. CIT Circle_5_1 N. Delhi.htm (SC); CIT v. Sophia Finance Ltd. [1994] 205 ITR 98 ftn3Monnet Ispat & Energy Ltd. v. Dy. CIT Circle_5_1 N. Delhi.htm (Delhi); & CIT v. Divine Leasing & Finance Ltd. [2007] 15 Taxman 440 (Delhi). 20. The learned DR on the other hand, placed reliance on the orders of the revenue authorities. It was submitted that the share application money was received by the assessee from promoters group company and two companies were inter-related. According to her, the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the case laws on which the reliance has been placed by the learned representatives and the rival submissions. On going through the material produced on record we find sufficient force in the submissions of the learned counsel for the assessee that the assessee has discharged the burden which lay upon it. 23.1 The documentary evidence filed in the paper book sufficiently proves the version of the assessee that it had received the amount from the share applicant, which was deposited in its books of account. In this regard we may make reference to the balance-sheet of the assessee as on 31-3-2003, as per which under the head "Shareholders' Funds", share application money (pending allotment) ₹ 2,30,50,000 has been reflected. Similarly, under the head "Reserves & Surplus", under the sub-head "Capital Reserve", amount received on account of share application money (pending allotment) has been duly disclosed at ₹ 6,91,50,000. In the balance-sheet of the share applicant i.e., Mili Marketing Pvt. Ltd. also the amount has been reflected. The assessee has filed the details of share application paid, shown in the account of Mili Marketing Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from you. Thanking you, Yours faithfully, Sd/ (V.K. Jain) Chartered Accountant. 23.3 Not only this, auditors report in the case of Mili Marketing (P.) Ltd. has also been filed by the assessee. The assessee also supplied information to the Assessing Officer vide letter dated 24-2-2006 regarding creditworthiness of the share applicant. As per this information the source of receipt of money for making investment in share application etc. was received from Vivek Leafen Pvt. Ltd. and Liberty Traders Pvt. Ltd. In the letter it is stated that confirmations from these parties are also being furnished. 23.4 The assessee has also filed the accounts of Vivek Leafen Pvt. Ltd. to prove that the amount came to Mili Marketing Pvt. Ltd. from Vivek Leafen Pvt. Ltd. through the banking channel on account of supply of goods etc. Entries of these transactions are recorded in the bank a/c of Vivek Leafen Pvt. Ltd. and Standard Chartered Grindleys Bank. The statement of a/c evidently shows the entries. These documents are available at pages 127 to 148. 23.5 On the basis of the above and other documentary material, it is found that Mili Marketing Pvt. Ltd. received the money which was invested i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 131 of the Income-tax Act 1961 in connection with the Income-tax case of Monnet Ispat Ltd. for assessment year 2003-04. Dear Sir, This is with reference to summons under section 131 of the Income-tax Act, 1961 in connection with the proceedings under the Income-tax Act of M/sonnet Ispat Ltd. for assessment year 2003-04. As required by your honour vide your letter No. DCIT/Cir. 5(1)/2005-06/764 dated 21-2-2006 we are enclosing herewith the following details/documents for your valued consideration:- Copy of acknowledgement of return of income along with computation of income for assessment year 2003-04 and 2004-05. The address of the registered office of M/s. Mili Marketing Pvt. Ltd. as on date is as under:- H-108 Connaught Circus New Delhi-110001 The name and address of Director since 1-4-2002 till the present period is enclosed. The address of Sh. S.N. Singh (Ex-Director) as per records of the company is as under:- Sh. Satyanarayan Singh 18/3/1 Rajen Seth Lane P.O. Belurmeth Howrah-711 202 The shareholder's register and Minute book of the company will be produced tomorrow. We hope the above will be found in order and in full compliance to your summons issued us 131. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the company. A distillation of the precedents yields the following propositions of law in the context of section 68. 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 creditworthiness or financial strength of the creditor/subscriber; (4) if relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders register, share 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 respond 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 Assessing Officer take such repudiation at face value and construe it, without more, against t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en of the assessee to find out whether the source or sources from which the creditors had agreed to advance the amount were genuine or not. If a creditor has any undisclosed sources, a particular amount of money in the bank, there is a limitation under the law on the part of the assessee to obtain such amount of money or part thereof from the creditor, by way of cheque in the form of loan and in such a case if the creditors fail to satisfy as to how he had actually received the said amount and happened to keep in the bank, the said amount cannot be treated as income of the assessee from undisclosed sources." 23.13 The tests laid down in the above authorities are also fully satisfied in the case of the present assessee because the assessee ha discharged the burden for proving the identity, creditworthiness and genuineness of the transaction. 23.14 The assessee is a public limited company. The amount received amounting to ₹ 2,30,50,000 and share application money received of ₹ 6,91,50,000 was duly reflected in the balance-sheet of the assessee for the financial year ending on 31-3-2003. The share application money was received by a/c payee cheques. Out of total sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to receipt of share application money was bogus and was part of modus operandi of Mr. P.K. Ruia. It may be observed here that no incriminating material relating to the issue involved in this appeal was found during the course of search, nor any connection with Mr. Lohia is established so far as the share application transaction is concerned. As pointed out above, in the light of the decisions referred to above, the burden of the assessee was not to explain the entire background but was confined to establish the identity of the creditor, its creditworthiness and the genuineness of the transaction. It did not extend beyond it. The assessee has fully discharged such burden. The extraneous material on which the departmental authorities have placed reliance for doubting the genuineness of transactions in this case, is not relevant for the purpose of deciding the issue. We are, therefore, unable to subscribe to the finding of the departmental authorities. 23.18 In view of the above, we allow ground No. 2(a) to 2(i) in favour of the assessee. 24 Ground No. 3 This ground is as under : "The Ld. CIT(A) has erred in confirming the action of the Ld. Assessing Officer, in reducing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other income should not be excluded from computation of deduction under section 80-IA. After considering the assessee's reply, he excluded interest income, lease rent and hire charges for computation of deduction under section 80-IA. In doing so has given various reasons including that there was no direct nexus between the profits and gains and the activity qualifying for deduction for application of the word 'derived from'. He has also relied on various authorities including the decisions in the cases of CIT v. Sterling Foods [1999] 237 ITR 579 ftn8Monnet Ispat & Energy Ltd. v. Dy. CIT Circle_5_1 N. Delhi.htm (SC); and Pandian Chemicals Ltd. v. CIT [2003] 129 Taxman 539 (SC). In appeal, the learned CIT (Appeals) has upheld the findings of Assessing Officer. In our opinion, the entire relevant material has not boon properly and thoroughly examined to show as to whether the income in respect of the above items is having nexus with the business of the industrial undertaking or not. In our opinion, entire relevant facts e to be examined to establish the nexus between the business activity of the assessee and earning of such income. On this issue, the order of the learned CIT (Appeals) ..... 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