TMI Blog2024 (4) TMI 989X X X X Extracts X X X X X X X X Extracts X X X X ..... r itself as it is obvious. Thus, the principle of Preponderance of Probabilities applies with full force to the case on hand which leads to the irresistible conclusion that the finding rendered by the CIT(A) is legal and valid. The assessee in their submission contended that their business activity has increased considerably and for the purpose of expansion funds were required and therefore the assessee raised funds from various means, increment in share capital from associates being one of them. The fact clearly demonstrates that the source of the funds which have flown into the account of the assessee have substantially come from one company namely Gainwell Textrade Private Limited and the said company had contributed to the other companies and the funds transferred to those companies were transferred to the assessee company invariably on the same day leaving a bank balance which was almost negligible and the bank statements reveal that the prior to the inflow of the funds into those investing companies, the bank balance was negligible and after the transfer it was also negligible. The assessee had contended before the tribunal that the amount was credited through proper banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STICE HIRANMAY BHATTACHARYYA Appearance :- For the Appellant : Mr. Om Narayan Rai, Sr. Adv. Mr. Soumen Bhattacharjee, Adv. For the Respondent : Mr. J.P. Khaitan, Sr. Adv. Ms. Swapna Das, Adv. Mr. Siddharth Das, Adv. JUDGMENT (T.S. SIVAGNANAM, CJ.) 1. This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the Act) is directed against the order dated 30.11.2022 passed by the Income Tax Appellate Tribunal A Bench, Kolkata (Tribunal) in ITA NO. 2655/Kol/2019 for the Assessment Year 2012-13. The revenue has raised following substantial questions of law for consideration: A) Whether the Learned Tribunal has committed substantial error in law by deleting the addition of Rs. 14,63,00,000/- that had been made on account of unexplained cash credit under Section 68 of the Income Tax Act, 1961. B) Whether the Learned Tribunal has committed substantial error in law in not considering the judicial Principles laid down in the matter of Pr. CIT 5, Kolkata Vs Swati Bajaj reported in 2022 SCC Online 1572 (Cal). C) Whether the order of the Learned Tribunal is perverse inasmuch as the same has been passed without considering the facts of the case in its proper perspective. D) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2011-12 and 2012-13. The assessee was directed to be present at the time of recording their statement and for the purpose of cross-examination. It appears that the investor companies submitted a few documents but none of the directors appeared before the Assessing Officer. After considering all the materials the Assessing Officer held that the assessee company entered into a share transaction with the investor to introduce the unaccounted income in form of share application/allotment; they did not have any regular business transaction or regular acquaintance with the investors; the investors had no reason to invest such huge amount in the business of the assessee and the entire transaction was done to circumvent the provision of the Act. Under such circumstances the entire share application/ allotment money was added back under Section 68 of the Act as undisclosed cash credit. The assessee was informed that penalty proceedings under Section 271(1)(c) is being initiated separately. Aggrieved by such order, the assessee preferred appeal before the Commission of Income Tax (Appeal)-11 Kolkata, [CIT(A)], contending that in the course of assessment proceeding the details/ documents in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18404302 Gainwell Textrade Pvt. Ltd. 2011-12 18967000 169693573 181900000 4229670 1892660 10430 3147 2012-13 18967000 169738097 187400000 1194676 Nil 153704 2134 Lucky Tradelink Pvt. Ltd. 2011-12 1308000 52983439 54700000 570564 Nil 61030 9405 2012-13 2308000 52963797 35000000 8612 Nil 80087 (-) 19642 Pawapuri Mercantile Pvt. Ltd. 2011-12 41577600 134707391.57 175265760 273368 Nil Nil (-) 76460 2012-13 42777600 139646541.57 181265760 123709 455969 5849 139150 HIL Eng. Pvt. Ltd. 2011-12 18063500 188393639.25 400000 114982 353837.65 Nil 39224.90 2012-13 18063500 188469637.60 400000 168916 493946 Nil 75998.35 Mubarak Cosmetic Pvt. Ltd. 2011-12 106407600 53937420.90 148991250 11412349 1003982 Nil 363404.30 2012-13 109267600 65868034.90 163291250 11809307 1113508 Nil 491348 6. After setting out the above details the CIT(A) examined the bank accounts of the five companies as mentioned above and has recorded the findings that the account receives a certain amount from one entity and immediately remits to another entity. The entire bank account statement shows that the bank account is being used only for one activity i.e. receiving and transferring funds and all through the year in the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so invested in shares at a very high premium in other companies who also have not earned any income worth noticing from business operation. Their balance sheet shows that even though they do not earn anything, they invite huge investments in their accounts and this money is then used to make further investments at a high premium in other companies, and they also extend unsecured loans to other companies, therefore money obtained from the route of share premium is re-routed for supplying sources of receipt of money to other companies. The circuit of investments remains within a group of companies and in this manner through a circular routing of funds, the capital of each of the companies is enhanced and this inflated capital is then used for providing loans etc. to desired entities. 8. The CIT(A) further points out that the bank accounts of the above companies show that huge sums are receive from one concern through cheques or through RTGS and are immediately diverted to another company of the group. The bank balances remain negligible before and after such transfers. Further each of these companies invests in each other at very high premium even though there is no business being co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either before or after transaction. The modus adopted was discussed by observing that once an amount through cheque or RTGS was received from one entity, it would immediately be diverted to another entity and the resultant cash balance was only a paltry sum of few thousands of rupees. Therefore, the CIT(A) came to the conclusion that the transactions were not genuine. Further it was pointed out that the thin cash balance left in the bank accounts pre and post the rotational transactions also established that the shareholders did not have creditworthiness to invest in shares at high premium in the assessee company. Further the assessee had not followed any of the guidelines issued by the Reserve Bank of India or the Institute of Chartered Accountants of India for ascertaining the value at which premium as high as Rs. 40/- on a share of face value of Rs. 10/- could be charged. The CIT(A) held that there is no logic or rationale behind the decision of the assessee. In paragraph 31 of the order of CIT(A), the decision of the Delhi tribunal dated 23.08.2018 in the case of M/s. Pee Are Securities Limited Versus Deputy Commissioner of Income Tax, Circle 14(1) was referred to. The paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the five share applicants were also noted. After extracting the submissions made by the authorised representative of the assessee in paragraph five of the impugned order the tribunal holds that the assessee has proved the identity of the share subscribers. That the share applicants are group companies of the assessee companies, they are the body corporate registered with the Registrar of Companies and they were available in the given address. The tribunal states that the share applicants have furnished copy of PAN and are registered with ROC having CIM and all the data is available with the income tax department and ROC. The share applicants are assessed to income tax regularly, the share application money was received through banking channels, the shareholders had sufficient funds for the purpose of investment and the investments are reflected in their bank accounts and the shareholders have confirmed the transactions. Further the tribunal held that the assessee is a steel industry and the future prospects of the assessee is great, that they were in needs of funds as they were expanding its operations and at the given point of time there was increase in fixed assets and the turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e third and the most important ingredient namely genuineness of the transaction has to be established and unless and until all the three factors are conjointly established, the revenue was fully justified in invoking Section 68 of the Act. 16. In Commissioner of Income Tax Versus N.R. Portfolio Private Limited (2014) 42 Taxmann.com 339 (Del) the substantial question of law which was framed for consideration is whether the tribunal was right in deleting the additions under Section 68 of the Act and whether the decision of the tribunal is perverse. 17. With regard to the role of the assessing officer, the Hon ble Court held that the assessing officer is both an investigator and an adjudicator; when a fact is alleged and stated before the assessing officer by an assessee, he must and should examine and verify, when in doubt or when the assertion is debatable. Normally a factual assertion made should be accepted by the assessing officer unless for justification and reasons the assessing officer feels that he needs/requires a deeper and detailed verification of the facts alleged. The assessee in such circumstances should cooperate and furnish papers, details and particulars, this may en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce of source or origin of origin and also possible difficulty which an assessee may be faced with when asked to establish unimpeachable creditworthiness of the share subscribers. But this aspect has to be decided on factual matrix of each case and strict or stringent test may not be applied to arms length angel investors or normal public issues. Doctrine of source of source or origin of origin cannot be applied universally, without reference to the factual matrix and facts of each case. The said test in case of normal business transactions may be light and not vigorous. The said doctrine is applied when there is evidence to show that assessee may not be aware, could not have knowledge or was unconcerned as to the source of money paid or belonging to the third party. This may be due to the nature and character of the commercial/business transaction relationship between the parties, statutory postulates etc. However, when there is surrounding evidence and material manifesting and revealing involvement of the assessee in the transaction and that it was not entirely an arm s length transaction, resort or reliance to the said doctrine may be counter-productive and contrary to equity an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imarily in knowledge of the assessee and it is difficult for revenue to prove and establish the negative. Certificate of incorporation of company, payment by banking channel, etc. cannot in all cases tantamount to satisfactory discharge of onus. The facts of the present case noticed above speak and are obvious. What is unmistakably visible and apparent, cannot be spurred by formal but unreliable pale evidence ignoring the patent and what is plain and writ large. 22. In Rajmandir Estates Private Limited Versus Principal Commissioner of Income Tax 2016 SCC Online Cal 1237 , one of the substantial questions of law which fell for consideration was whether the finding of the CIT(A) that unaccounted money was or could have been laundered as clean share capital by creating fa ade of paper work, routing the money through several bank accounts and getting the seal of statutory approval by getting the case re-opened under Section 147 suo motu and whether the same is perverse. The facts of the said case was noted wherein 19 out of the 13 applicants secured funds for the purpose of contributing to the share capital of the assessee therein, on account of share application money. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o parties are related or known to each other, or mode by which parties approached each other, whether a transaction is entered into through written documentation to protect investment or whether the investor was a angel investor, the quantum of money invested, the creditworthiness of the receipt, object and purposes for which payment/investment was made etc. The incorporation of a company and payment by banking channel etc. cannot in all cases tantamount to satisfactory discharge of onus. The principles which emerge were sums of money are credited as share capital/premium was summarised as follows:- 13.1. The assessee is under a legal obligation to prove the genuineness of the transaction, the identity of the creditors, and creditworthiness of the investors who should have the financial capacity to make the investment in question, to the satisfaction of the AO, so as to discharge the primary onus. 13.2. The assessing officer is duty-bound to investigate the creditworthiness of the creditor/subscriber, verify the identity of the subscribers, and ascertain whether the transaction is genuine, or these are bogus entries of name-lenders. 13.3. If the enquiries and investigations reveal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t existed before 01.04.1962 and did not introduce any new principle or rule. 27. We also take note of the Finance Bill, 2012 which brought about certain amendments to the Act with effect from the assessment year 2013-2014 wherein under the heading Measures to Prevent Generation and Circulation of Unaccounted Money it was pointed out that the onus of satisfactory explaining such credit remains on the person in whose books such sum is credited. If such person fails to offer an explanation or the explanation is found to be satisfactory then the sum is added to the total income of the person. That certain judicial pronouncements have created doubts about the onus of proof and the requirements of Section 68, particularly in cases where sum is credited as share capital, share premium etc. That courts have drawn a distinction and emphasised that in case of private placement of shares the legal regime should be different from that which is followed in case of a company seeking share capital from the public at large. In the case of closely held companies, investments are made by a known person; therefore, a higher onus is required to be placed on such companies besides the general onus to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k to the factual position in this case, we find that the CIT(A) has analysed the three principles which are required to be fulfilled namely identity, creditworthiness and genuineness of the transaction. It is not in dispute that the investors whose details we have referred in the earlier part of this judgment are all either group companies or having a common set of directors. Further the assessee has not been able to dislodge the factual findings recorded by the CIT(A) that the share application money was received from independent legal entities. By way of illustration if we take the case of Gainwell Textrade Private Limited, they have invested Rs. 8,10,00,000/- in the assessee company. The said company receives a total of Rs. 1,65,00,000/- on 01.06.2011 and 02.06.2011 from eight private limited companies/entities. Out of the said amount, Rs. 1,50,00,000/- was remitted to the assessee s bank account on 02.06.2011 by three cheques of Rs. 50,00,000/- each. The balance remained at Rs. 15,09,039/-. On 02.06.2011, an amount of Rs. 38,00,000/- was remitted to the account by a private limited company and the balance rose to Rs. 53,09,039/- out of this an amount of Rs. 50,00,000/- was remi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly the pattern of transaction and it was held that the only apparent purpose for which the bank accounts have been used is to receive money from one account and transfer it to another. With regard to the investor Pavapuri Mercantile Private Limited the bank statements revealed that the entire sums are remitted by Pawapuri Mercantile Private Limited to the assessee had come from Gainwell Textrade Private Limited. The analysis done by the CIT(A) would reveal the nature and character of the transaction and the CIT(A) cannot be faulted to have held that the transactions are well planned and stage managed to show genuineness behind which a clean and simple round tripping of funds is taking place. The CIT(A) on examination of the facts found that the bank accounts act as highway in the journey of money on a rotation and laundry trial from one entity to another and by this way these bank accounts create a fa ade of documentary evidence for clean money in the form of account payee cheques for any kind of accommodation entries. 31. The CIT(A) did not stop with the above findings but proceeded to analyse the data which was made available in the form of return of income, bank statements etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by rotating funds from one account to another. The assessee has not been able to explain why the investors companies had applied for shares in the assessee s company at a high premium even though the face value of the share was Rs. 10/- per share. The pattern of transaction clearly shows that these investors companies had raised capital by issue of shares at a very high premium and the transaction is repetitive. Therefore, the mere fact that the transactions were though banking channels or that the companies where income tax assessees or registered with Registrar of Companies can in no manner be sufficient to discharge the onus under Section 68 of the Act. The learned tribunal did not examine the factual matrix in the depth and in the manner it ought to have done. Therefore, we would be well justified to hold that the findings rendered by the tribunal are perverse. It was argued by the learned Senior Advocate appearing for the respondent assessee that there is no material to show round tripping of funds; there is no finding that the money which has come to the assessee is ill gotten money and that the CIT(A) did not examine how the money came to the investors and failed to note th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscrepancy with regard to the identity of the investors. The learned tribunal has posed a wrong question which has led to a wrong answer. The question is not whether the identity of the investor has to be established but the question was whether the investor had requisite creditworthiness and whether such creditworthiness was a make belief situation by means of a circular transaction and if the same had been established. The learned tribunal has held that the findings rendered by the CIT(A) that the assets in the form of investments have been created through rotating of money in between the group companies and the assets mainly consists of cash and cash equivalents are not enough to prove that any unaccounted money of the assessee has been introduced in the assessee company warranting addition under Section 68 of the Act. This finding in our opinion upon consideration of the facts is perverse. 35. The CIT(A) has made an elaborate exercise to assess the creditworthiness of the investor companies as well as the genuineness. All the investor companies are group companies and the directors are closely related to the director of the assessee company and the director Mr. Agarwala himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the said company had contributed to the other companies and the funds transferred to those companies were transferred to the assessee company invariably on the same day leaving a bank balance which was almost negligible and the bank statements reveal that the prior to the inflow of the funds into those investing companies, the bank balance was negligible and after the transfer it was also negligible. The assessee had contended before the tribunal that the amount was credited through proper banking channels and the investing companies are body corporate registered with the Registrar of Companies and individually assessed to income tax and therefore the genuineness of the parties is beyond doubt. However, this is not the litmus test to discharge the burden on the assessee to establish creditworthiness of the investing companies as well as the genuineness of the transaction. Thus, we have no hesitation to hold that the explanation offered by the assessee is neither proper, reasonable or acceptable. 37. In Swati Bajaj, the court held that based on the foundational facts the department has adopted the concept of working backward leading to the assessee. The department would be well ..... X X X X Extracts X X X X X X X X Extracts X X X X
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