Onassis Axles Private Limited v. Commissioner Of Income Tax

$~2 * IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on: 13.02.2014 + ITA 31/2013 ONASSIS AXLES PRIVATE LIMITED..... AppellantThrough:Sh. Salil Aggarwal and Sh.Prakash Kumar, Advocates.versus COMMISSIONER OF INCOME TAX ..... Respondent Through: Sh. Balbir Singh, Sr. StandingCounsel with Sh. Abhishek Singh Baghel,Advocate. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE R.V. EASWAR MR. JUSTICE S.RAVINDRA BHAT (OPEN COURT) % C.M. APPL. 933/2013 (for exemption) Allowed, subject to all just exceptions. ITA 31/2013 1.This is an assessee’s appeal, directed against an order of theIncome Tax Appellate Tribunal (ITAT), of 18.05.2012 in I.T.A.No.1637/Del/2011. The assessment year concerned is 2007-08. Thefollowing question of law arises for consideration: “Did the Tribunal fall into error of law in setting asidethe order of the CIT (A) accepting the assessee’scontention that share application amount, to the extent of`80 lakhs, received by it, had been properly explainedand it could not be included under Section 68?” 2.The assessee, during the relevant period (A.Y. 2007-08)claimed that a sum of `1.8 crore had been received by it towardsshares, as application money. The amount in dispute is `80 lakhs. TheAssessing Officer (AO) asked the assessee during the assessment toexplain the amounts received from three applicants viz. M/s. HubServices P. Ltd. (`25,00,000/-); M/s. R.S. Associates P. Ltd.(`30,00,000/-) & M/s. Transaction India P. Ltd. (`25,00,000/-). TheAO asked the learned AR of the assessee to file details regardinggenuineness of the transactions, identity and creditworthiness withregard to share application money received. The assessee in responsethereto filed photo copies of the following documents: (i) ShareApplications containing the details of pay orders; (ii) Undatedconfirmations; (iii) Undated affidavits of the companies from whomshare application money was received; (iv) Undated copy ofResolution; (v) Memorandum and Article of Association; (vi)Acknowledgement of return for Assessment Year 2005-06; (vii) PANCards in respect of Hub Services P. Ltd. and Transaction India P. Ltd. 3.The AO asked the assessee to furnish copies of bank accountsfor the F.Y. 2006-07 of all three share applicants along with theirbalance-sheet, profit and loss account, income-tax returns, tax auditreport and auditor's report for Assessment Year 2007-08. The AO issued summons under Section 131 of the Act to the said three parties,which came back unserved with the postal remarks, “No such person”.The AO communicated this fact to the learned AR of the assessee byan order-sheet entry dated 16.12.2009 and he was asked to file eitherthe latest address of these three companies or to produce the directorsof those companies along with details already asked for by him. Thecase was thereafter adjourned to 21.11.2009 and again adjourned to24.12.2009. The assessee’s representative by a letter dated 24.12.2009stated that all other details relating to share application monies werefiled. All the three share applicants were existing entities and had filedtheir necessary returns with ROC. The assessee filed the necessarycommunication with the ROC for the Assessment Year 2007-08 by allthe three companies. As all the three applicants were existing andassessed to income-tax, it was argued that the share applicants weregenuine. The assessee, however, failed to provide bank statements forF.Y. 2006-07 of the aforesaid three companies. 4.Acting on the basis of the materials furnished by the assessee,the AO found that all the three pay orders were obtained fromMahamedhaUrbanCooperativeBankLtd.,Noida.Heissuedsummons to the said bank, requiring it to send the bank statements ofthe three companies from 01.04.2006 till the date of summons. Fromthe information received from the bank, the AO found that M/s. HubServices P. Ltd. opened bank account No.1002014026499 on 31stMarch, 2007 whereas the pay order was dated 29.09.2006. M/s. R.S.Accessories P. Ltd., also opened account No 1002014026502 on 31st March, 2007 whereas the pay order was dated 29.09.2006. Theassessee’s contention that the pay orders were made from the accountson 29.09.2006 was, therefore, not accepted. M/s. Transaction India P.Ltd. had two accounts bearingNo. 1002014026258 and No.10020140025746. Both these accounts were opened during F.Y. 2006-07. On considering account No. 1002014026258, the AO held that thepay order for `25,03,125/- was issued on 29.09.2006 and on the samedate cash amounting to `25,04,000/- was deposited in the accountraising doubts about the genuineness of transaction. The assessee wasasked to show cause how the amount of `80,00,000/- claimed to havebeen received by it as share application money from the shareapplicants should not be treated as its income under Section 68 of theAct. 5.The AO considered the assessee’s contentions and observed thatthe mere furnishing of particulars was not enough. The creditors werenot only to be identified, but moreover, there should also be someevidence of their creditworthiness. There should also be proof ofgenuineness of transaction. Furnishing of the income-tax file numberwas not sufficient to prove the genuineness of cash credit. Since theassessee had failed to discharge its onus to prove the identity andcreditworthiness of the creditors and genuineness of transaction, theAO came to the conclusion that the assessee had failed to discharge itsonus. As regards affidavits filed of the three parties, the AO observedthat the statements made in affidavits can be treated as unreliable ifthere is other material discrediting the deponents. The affidavit could also be rejected if the assessee failed to produce other supportingevidence when called upon to do so. The AO, therefore, rejected theaffidavits as self-serving evidence. The AO consequently, made theaddition of `80,00,000/-. 6.The assessee, in its appeal before the CIT(A), complained thatthe AO had not doubted the identity of the shareholders from whomshare application money was received. The AO had not pointed outany discrepancy in the income-tax particulars of the shareholders filedby the assessee giving their PAN numbers, complete addresses, as alsocopies of their acknowledgements. The AO also did not point out anydiscrepancy in the facts that all the shareholders were assessed toincome-tax in Delhi. In spite of these facts, he erred in holding thatthe three companies were not genuine share applicants who hadinvested in the share capital of the assessee. The assessee had filedconfirmations from all the three companies. The assessee relied onseveral decisions including the decision of Supreme Court in CIT v.Lovely Exports Pvt. Ltd., 216 CTR 195 (SC). The CIT (A) deleted theaddition relying on the decision of the Supreme court in LovelyExports Pvt. Ltd. (supra) and other decisions on the issue. 7.The Tribunal, in its impugned order set aside the appellateCommissioner’s findings, holding that: “10. We have heard both the parties and gone throughthe material available on record. During the course ofhearingtheassesseefiledphotocopiesofshare 7.The Tribunal, in its impugned order set aside the appellateCommissioner’s findings, holding that: “10. We have heard both the parties and gone throughthe material available on record. During the course ofhearingtheassesseefiledphotocopiesofshare applications containing Pay Order numbers, Photocopies of undated confirmations, photocopies of undatedaffidavits of the companies from whom share applicationmoney claimed to have been received, photo copy ofundated resolution, photo copy of Memorandum &Article of Association and copies of acknowledgement ofreturns for Assessment Year 2005-06 in the cases of allthe three parties. The assessee by filing these evidenceshas claimed that initial onus has been discharged. Sincethe identity of the share applicants has been established,the contention of the assessee is that no addition can bemade in the hands of the assessee. The AO had conductedenquiry from Mahamedha Urban Cooperative Bank Ltd.,Noida. We have gone through the information obtainedfrom the bank. It is seen that the bank account in the caseofM/s.HubServicesP.Ltd.havingAccountNo.1002014026499 was opened on 31st March, 2007.The assessee receivedshare application money ofRs.25,00,000/-byPayorderNo.011784dated29.09.2006. Therefore, when A/c No.1002014026499 wasopened on 31st March, 2007, the Pay Order could not bemade from the bank account of M/s. Hub Services P. Ltd.with Mahameda Urban Cooperative Bank Ltd., Noida.Similarly the Bank account of M/s. R.S. Accessories P.Ltd. bearing No.1002014026502 was also opened on 31stMarch, 2007, whereas the amount of Rs.30,00,000/- wasreceived by Pay Order No.011785 dated 29th September,2006. This Pay Order cannot be made from the accountof M/s. R.S. Accessories P. Ltd. as on the date of PayOrder the said account was not in existence. As regardspay order of Rs.25,00,000/- in the name of TransactionIndia P. Ltd., it was issued on 29.09.2006. As per theinformationreceivedfromtheBankA/cNos.2002014026258 & 10020140025746 were opened duringthe F.Y. 2006-07. The pay order was made from the A/cNo.1002014026258 on 29.09.2006. On this date theamount of Rs.25,04,000/- was deposited out of which payorder of Rs.25,03,125/- was made. From these facts it is evident that in first two cases the pay orders have notbeen made from the Bank Account of the said parties. Inthe case of third party i.e. M/s. Transaction India P. Ltd.the pay order was made after depositing cash in the bank.Thus it is not a case where the AO had not made anyenquiry in the matter. The assessing officer brought thisfact to the notice of the assessee and asked him toproduce either the directors of the share applicants orgive their new addresses as summons sent on theaddresses given in the information supplied by it werereceived back as un-served. The assessee, however, didnot comply with the said requirement of the assessingofficer. evident that in first two cases the pay orders have notbeen made from the Bank Account of the said parties. Inthe case of third party i.e. M/s. Transaction India P. Ltd.the pay order was made after depositing cash in the bank.Thus it is not a case where the AO had not made anyenquiry in the matter. The assessing officer brought thisfact to the notice of the assessee and asked him toproduce either the directors of the share applicants orgive their new addresses as summons sent on theaddresses given in the information supplied by it werereceived back as un-served. The assessee, however, didnot comply with the said requirement of the assessingofficer. 11.Another important and interesting feature of payorders is that the pay orders have been made in sameseries on same date from the same Bank i.e. Pay OrderNo.011783 dated 29.09.2006 in the name of M/s.Transaction India P. Ltd.; Pay Order No.011784 dated29.09.2006 in the name of M/s. Hub Services P. Ltd. andPay Order No.011785 dated 29.09.2006 in the name ofM/s. R.S. Accessories P. Ltd. M/s. Hub Services P. Ltd. islocated at 204, Himalaya Complex, A-65, Laxmi Nagar,New Delhi. The offices of M/s. R.S. Accessories P. Ltd.and M/s. Transaction India P. Ltd. are located at 5/7B,Pusa Road, New Delhi. It is not mere co-incidence thatall the three parties located at two different places inDelhi went to the same Bank on the same day at the sametime and got the Pay Orders for requisite amounts in thesame series. It will not be possible in the ordinary courseof business that all the three persons would go to Noidafor purchase of pay orders from the same bank at thesame time and with the same running serial numbers.M/s. Hub Services P. Ltd. is located at Laxmi Nagar, NewDelhi. There is no dearth of banks in Laxmi Nagar orPusa Road Delhi. It has to be understood as to whyanyone would go for purchase of pay orders from a banklocated at long distance in Noida. When the AO confronted the assessee vide order-sheet entry dated24.12.2009 by issuing show cause notice as to why theamount of Rs.80,00,000/- claimed to have been receivedby the assessee as share application money from threecompanies, should not be treated as income of theassessee u/s 68 of the Act, the assessee vide letter dated29.12.2009 filed reply reiterating that the identity of allthe three applicants was established, their PAN numberand confirmations were filed. It was also contended thatthey were existing income-tax assessees and were filingreturns with ROC. 12.It is also interesting to note that the assessee filedphoto copies of undated photo copies of affidavits of theshare applicants, undated copy of Resolution, andundated confirmations. On one hand the assessee filesconfirmations and affidavits and on the other hand theparties are not found at the addresses when the assessingofficer issues summons to them. The logical conclusion isthat the assessee do not wants to produce them beforeassessing officer for best reasons known to him. Thus it isa case where conduct of the assessee and humanprobabilities has to be taken into account while decidingthe issue. The logical conclusion flowing out of abovefacts is that undated confirmations and affidavits musthave been obtained by the assessee when pay orders werereceived from these entities. Therefore, the contention ofthe assessee that share application money was genuinelyreceived by the assessee is not proved.” 8.The assessee contends that the Tribunal fell into error in holdingthat the addition made was on account of accommodation entries. Itwas urged that neither the AO nor the CIT (Appeals) had drawn thecorrect inferences. It was submitted that the AO was adverselyinfluenced by the fact that the bank account particulars given when theassessment was framed could not be complete. The Commissioner, it 8.The assessee contends that the Tribunal fell into error in holdingthat the addition made was on account of accommodation entries. Itwas urged that neither the AO nor the CIT (Appeals) had drawn thecorrect inferences. It was submitted that the AO was adverselyinfluenced by the fact that the bank account particulars given when theassessment was framed could not be complete. The Commissioner, it was urged, called for a remand report, which elaborately dealt with allrelevant aspects. Counsel took exception to the adverse inferencedrawn against the assessee. It is submitted that the inference wasdrawn only on the basis of suspicion without bringing on record anymaterial to show that the amount of `80 lakhs was either assessee’sown money or that it was not received as share capital contributionfrom the three shareholder companies. It is urged that the impugnedaddition has been made by the learned AO arbitrarily by brushingaside the explanation of the assessee and by disregarding the evidencefiled by the assessee to prove the identity and existence of theshareholder companies. Counsel also further submits that the completeincome tax particulars of these shareholder companies were filedbefore the learned AO and it was explained that all the threeshareholder companies are assessed to income tax at Delhi. Theassesseealsofurnishedthelatestaddressesoftheshareholder/applicants, whose particulars could also be verified fromthe Registrar of Companies. Instead of proceeding to make anyinquiry, the AO brushed aside these explanations and wrongly madethe additions. 9.Relying on the judgment in Lovely Exports Pvt. Ltd. (supra), itwas urged that the assessee’s responsibility was to adduce acceptableevidence about the identity of the share applicant and the genuinenessof the transaction. This duty did not extend to actually producing theshare applicants. If the AO wished, he could easily summon them toattend the proceedings. Counsel highlighted that as against the share application money of `1.8 crores received, the AO made an additiononly of `80 lakhs, implying that the transactions in respect of the sumof `1 crore was accepted. Therefore, the addition was based purely onan unverified assumption. Learned counsel invited the attention of theCourt to the remand report called for and considered by the CIT(Appeals) and underlined the fact that the impugned order entirelyoverlooked these circumstances. 10.It was argued that the Supreme Court, in CIT v. StellarInvestment Ltd., (2001) 251 ITR 263 (SC), has held that mere inabilityto ensure the presence of the share applicants/investors does not justifya conclusion of bogus investment. Likewise, the decision of theMadras High Court in the case of CIT v. Electropolychem Ltd., (2007)294 (ITR) 661 (Mad) has been relied on. 11.In this case, the AO had sought for details of the bankaccounts of the share applicants. The assessee’s grievance is that hedrew adverse inference from the details furnished to him, withoutgiving an opportunity to it to rebut any queries which could havearisen. Particularly, the assessee sought to urge that the AO did nottake into account the correct bank statements for the relevant periodand took note of only a part of it. It was argued that in the remandreport furnished to the CIT (A), full particulars were made availableand he considered it proper to grant relief to the assessee, which wasthen overturned by the ITAT. 12.It is a fact that during the pendency of the first appeal beforethe Commissioner (Appeals), a remand report was called for by the latter. The remand report contains certain important facts andconclusions, which are extracted below: 12.It is a fact that during the pendency of the first appeal beforethe Commissioner (Appeals), a remand report was called for by the latter. The remand report contains certain important facts andconclusions, which are extracted below: “(f)Now, see the financial worth of the allegedthree applicant companies from whom the assessee isalleged to have received the share application money.Despite repeatedly asked for, the assessee did not filecopies of their audited balance sheet, P& L Account,Income-tax Return, Tax Audit Report and Auditors’report for the assessment year 2007-08, though theassessee had filed copies of their undated confirmations,undated application for allotment of shares, undatedaffidavit and Memorandum And Articles of Association ofthese companies and copies of acknowledgement ofreturn for asst year 2005-06 of two of these companiesduring the course of assessment proceedings. Evenduring the course of remand proceedings, the assesseewas apprised vide this office letter dated 27.10.2010 thatit has not filed the copies of Balance-sheet, P & Laccount alongwith schedules of these so claimed sharesubscribers. But the assessee expressed its inability to filethe same by stating in its letter dated 08. 11.2010 that“Since the said three applicants are in. no way relatedto the assessee company and the management of thesaid share applicant companies are also not under thecontrol of the assessee company, therefore the assesseecannot obtain and file the copies of their Balance-sheets, P & L accounts and its schedules as required byyou in the said letter and also cannot produce thedirectors of the said three companies.” It is quite strange to note that on one hand the assesseehas filed copies of the Bank Statements of all the threeapplicant companies and copies of acknowledgment ofreturn of R.S. Accessories P Ltd. and of M/s TransactionsIndia P.Ltd. for the assessment year 2007-08 vide itsletter dated 27.9.2010 before the learned CIT(A) and on the other hand it is expressing its inability to file the samein its letter dated 08.11.2010 (reproduced above). In the copies of acknowledgement of returns of these twocompanies (acknowledgment of return of the third notfiled) the gross income for assessment year 2007-08 hasbeen shown as under:- M/s R.S. Accessories Pvt.LtdRs.40,194/-(Returnfiled on 31.3.09) M/s Transaction India Pvt.LtdRs. 7,31,619/-(Returnfiled on 31.3.09) As per ROC site, all thesethree companies have beenshown as defaulters of filing DIN 3 and Form 32. TheAuthorised/ Issued paid up share capital of thesecompanies as per ROC site is as under: NameofAuthorizedIssued/ Paid up capitalCompanycapitalM/sR.S.2,00,000/-1,00,000/-AccessoriesP. Ltd.M/sHuba3,27,000/-2,000/-Services P.Ltd.M/s10,00,000/-3,79,000/-TransactionIndiaP.Ltd. The assessee company claimed to have received the shareapplicationmoney from the above said three companiesas under: . 1 . M/s Huba Services P. Ltd Rs.25,00,000/- 2. M/s RS. Accessories P. Ltd. Rs.30,00,000/- 3. M/s Transaction India P. Ltd. : Rs.25,00,000/- M/s R.S. Accessories Pvt.LtdRs.40,194/-(Returnfiled on 31.3.09) M/s Transaction India Pvt.LtdRs. 7,31,619/-(Returnfiled on 31.3.09) As per ROC site, all thesethree companies have beenshown as defaulters of filing DIN 3 and Form 32. TheAuthorised/ Issued paid up share capital of thesecompanies as per ROC site is as under: NameofAuthorizedIssued/ Paid up capitalCompanycapitalM/sR.S.2,00,000/-1,00,000/-AccessoriesP. Ltd.M/sHuba3,27,000/-2,000/-Services P.Ltd.M/s10,00,000/-3,79,000/-TransactionIndiaP.Ltd. The assessee company claimed to have received the shareapplicationmoney from the above said three companiesas under: . 1 . M/s Huba Services P. Ltd Rs.25,00,000/- 2. M/s RS. Accessories P. Ltd. Rs.30,00,000/- 3. M/s Transaction India P. Ltd. : Rs.25,00,000/- From the above facts can it be said that the above saidcompanies were of such a worth in investing substantialamount in the share capital of a Private Limited companyand that too without any hope of receiving any dividendsthereon. Even the assessee company (Onassis Axles Pvt.Ltd) is not showing enough profit. As per P L account,the Net profit for assessment year 2006-07 has beenshown at Rs.1,97,707/- and for 2007-08 at Rs.2,47,734/-.No shrewd businessman will invest such a huge amountin the share capital of a private limited company. Can ¡tbe accepted that after investing such a huge amount, theinvestor company will not contact the investee company?Thus the contention of the assessee as mentioned in itsreply dated 08.11.2010 that “Since the said threeapplicants are in no way related to the assesseecompany and the management of the said shareapplicant companies are also not under the control ofthe assessee company, therefore the assessee cannotobtain and file the copies of their Balance sheets, P & Laccounts and its schedules as required by you in thesaid letter and also cannot produce the directors of thesaid three companies’” has no force. Had thesecompanies were of such a worth, they would have giventhe money as loans and advances to earn interest incomeand would certainly have been in contact of theassessee.” 13.Previously, in the remand report, the Commissioner (Appeals)had been informed that the bank statements sought for were given inrespect of a limited period. Thereafter, the bank statements of the threecompanies for the same period – over a year – were sought. Theseestablished a clear pattern. The accounts did not disclose large volumeof transactions. In two cases, the amounts which were ultimately used to subscribe to the shares were deposited in cash on 29.06.2006. In thethird case, the sum of over `24 lakhs was deposited in a span of amonth. All these cash deposits were made into accounts the same dayor on proximate days, and the pay orders given to apply to the shareswere issued from a far-off bank branch in NOIDA. These, togetherwith the share applicants’ lack of resources and the woefullyinadequate share capital, as well as the authorized and subscribedshare capital of the assessee (`50 lakh being the authorized capital,and the paid up capital being `70 lakh, as against it the reserves beingover `2 crores, for reason of the premium received), showed that thetransaction claimed to have resulted in receipt of share money wasdubious. 14.Lovely Exports Pvt. Ltd. (supra) is an authority for theproposition that the assessee is under an obligation to dispel anydoubts regarding the genuineness of an investor and the genuinenessof the transaction. Here, though the assessee furnished particularsrelating to three share applicants, the further inquiry made by the AOraised more questions than answers. The share applicants’ lack ofresources, the assessee’s position vis-à-vis share amounts received andits commercial condition all pointed to the amount received by itfalling within the mischief of Section 68 as unexplained amounts. Thatthe AO or ITAT chose to treat the amount, as bogus share capital, is amatter of inference which the Court would be loath to interfere with. 14.Lovely Exports Pvt. Ltd. (supra) is an authority for theproposition that the assessee is under an obligation to dispel anydoubts regarding the genuineness of an investor and the genuinenessof the transaction. Here, though the assessee furnished particularsrelating to three share applicants, the further inquiry made by the AOraised more questions than answers. The share applicants’ lack ofresources, the assessee’s position vis-à-vis share amounts received andits commercial condition all pointed to the amount received by itfalling within the mischief of Section 68 as unexplained amounts. Thatthe AO or ITAT chose to treat the amount, as bogus share capital, is amatter of inference which the Court would be loath to interfere with. 15.For the above reasons, this Court answers the question framed,in favour of the revenue and affirms the view of the ITAT. The appealis, therefore, dismissed, with no order as to costs. S. RAVINDRA BHAT(JUDGE) R.V. EASWAR(JUDGE)FEBRUARY 13, 2014