TMI Blog2007 (8) TMI 715X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 4 5 of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the course of assessment 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that advances given to these parties stand duly disclosed 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 Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee had filed documentary 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lli Marketing would go to prove the parallel transactions. It was also 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deleted 23. We have carefully considered the entire material on record including 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Photo copy of bank statements of the aforesaid party reflecting payment of cheques to the assessee company in respect of the aforesaid share application money are also enclosed. I hope the above will be found in order. In case any other details/documents are still required, the same shall be submitted on hearing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 131. Thanking you, Yours faithfully, For Mili Marketing Pvt. Ltd. Sd/ Director. 23.6 In the letter dated 9-3-2006, available at page 105, complete details of registered office of Mili Marketing Pvt. Ltd. have been given. This letter is as under: 9-3-2006 The Dy. Comm. of Income-tax Cir 5(1), New Delhi Re: Summons under section 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 pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the same. A delicate balance must be maintained while waling the tightrope of sections 68 and 69. the burden of proof can seldom be discharged to the hilt by the assessee; if the Assessing Officer harbours doubts of the legitimacy of any subscription he is empowered, nay duty bound, to carry out thorough investigations. But if the Assessing Officer fails to unearth any wrong or illegal dealings, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises. 23.12 The Hon ble Gauhati High Court has also made following observations in the case of Nemi Chand Kothari case (supra): A person may have funds from any source and as assessee as such information received may take a loan from such person. It is not the burden 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, creditwo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res allotted to M/s. Milli Marketing Pvt. Ltd. were subject to locking period as per clause 13.3 of guidelines of preferential issue. In view of the above referred material also the genuineness of the transaction is fully proved. 23.17 On going through the order of the Assessing Officer and that of the learned CIT (Appeals) it is found that much emphasis has been given by these departmental authorities to the background material. The Assessing Officer has attempted to infer that the whole transaction relating 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deduction under section 80-IA on such interest income. 27. The learned DR on the other hand has placed reliance on the decision of authorities below. 28. We have fully considered the facts and circumstances relating to this matter. The assessee has claimed deduction under section 80-IA at ₹ 1,67,57,998 from manufacturing operations. The Assessing Officer has noted the details of other income in para 19 and has issued a show cause notice to the assessee to show cause as to why 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 lea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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