In a recent judgment, Delhi High Court has upheld ITAT in holding that the mere fact that some of the investors of share application money have a common address is not a valid basis to doubt their identity or genuineness. Accordingly additions made u/s 68 were deleted.

Case Law Referred:
CIT v. Lovely Exports (P) Ltd. 216 CTR 195 (SC); CIT v. Divine Leasing and Finance Ltd (SC) ; CIT v. Kamdhenu Steel & Alloys Limited [SLP (Civil) CC 15640 of 2012)] ; CIT v. Sophia Finance Ltd. (1994)205 ITR 98 (FB) (Del); CIT v. Dolphin Canpack Ltd. 283 ITR 190; CIT v. Nipun Builders and Developers (2013) 350 ITR 407 (Del)

Case Details:
ITA 234-235-236/2015
Commissioner of Income Tax (Appellant) vs Five Vision Promoters Pvt. Ltd (Respondent)
Date of Order : 27-11-2015
Coram: Justice Vibhu Bakhru, Justice S. Muralidhar

Question before the Court:
“Whether the ITAT erred in deleting the addition made under Section 68 of the Act of share application money by holding that the identity and genuineness of the share applicants was established?”

Facts of the Case(s):
Appellant was a company incorporated under the Companies Act, 1956 incorporated on 14-01-2005 with the object of running a shopping mall. The business of the Assessee had not commenced till 31st March 2009 because the Mall was under construction. On 14th October 2008 a search was conducted in the premises of SVP Builders India Limited (SVP Builders). In SVP Group of Companies, the appellant was one of four core companies. The Revenue alleged that  SVP group was engaged in taking ‘on-money’ in cash and in turn was routed back into the group companies in the form of share application/unsecured loans, share capital etc. Thus they were acting as 'conduit channels' for converting black money into white.

Notices were issued u/s 153C to the appellant for AYs 2007-08, 2008-09 and under Section 271F of the Act for AY 2009-10. It was noticed that for all the three yr=ears, few companies contributed for the significant part of the share capital. For example 15 companies  contributed Rs. 2.36 crores, 4 companies contributed 2 crores and 20 companies contributed 4.55 crores in AY 2007-08, 2008-09 and 2009-10 respectively.

During the assessment, AO noted that none of the companies were found to be operating at the given addresses, many of the summons issued were returned unserved with the remarks "unknown" or "no such person". Some of the companies submitted replies and some filed affidavits but did not submit any other details. Also, the nexus of the shareholders and the beneficiary, i.e. the SVP Group stood proved from the fact that shares were bought back by the individuals/concerns belonging to SVP Group. Thus concluding that the Assessee had failed to prove the identity, genuineness and creditworthiness of the said shareholders, AO added these investment in sharecapital of the appellant as undisclosed cash credits u/s 68.

CIT(Appeals) also upheld the additions. However ITAT deleted the additions made holding that there was no material to conclude that some of the investors were 'paper' companies.

Excerpts from the Judgment:

A Full Bench of this Court in CIT v. Sophia Finance Limited (supra) held in the context of Section 68 of the Act that:
(i) 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”.
(ii) If the relevant details of the address of 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.
(iii) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices.
(iv) The onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the Assessee nor should the AO take such repudiation at face value and construe it, without more, against the Assessee.
(v) The AO is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and veracity of the repudiation.

In the present case, there is a basic fallacy in the submission of the Revenue about the precise role of the Assessee, Five Vision. The broad sweeping allegation made is that “the Assessee being a developer is charging on money which is taken in cash”. This, however, does not apply to the Assessee which appears to be involved in the construction of a shopping mall. In fact for the AYs in question, the Assessee had not commenced any business. The construction of the mall was not yet complete during the AYs in question. The profit and loss account of the Assessee for all the three AYs, which has been placed on record, shows that only revenue received was interest on the deposits with the bank. The Assessee is, therefore, right in the contention that the basic presumption of the Revenue as far as the Assessee is concerned has no legs to stand. Correspondingly, the further allegation that such ‘on money’ was routed back to the mainstream in the form of capital has also to fail.

The other submission that the Assessee was itself being used as a conduit for routing the ‘on money’ or that the investment in the Assessee was also for routing such 'on money' has not even prima facie been able to be established by the Revenue. On the one hand there is an attempt to treat the cash credit found in the Assessee’s books of accounts to be ‘undisclosed income of the Assessee’ by showing the investors to be 'paper companies'. On the other hand, the attempt is to show that this money in fact belongs to certain other entities whose source has not been explained by the Assessee. As noted by the ITAT in the assessment proceedings of the investor companies, the monies invested were sought to be added as income of those companies by the AOs. The said additions were deleted by the CIT (A) in their cases holding that the additions if at all should be made in the hands of the beneficiaries. The Revenue then filed appeals in the ITAT insisting on the additions being sustained. Thus there is no clarity in the stand of the Revenue in these cases.

Coming to the core issue concerning the identity, creditworthiness and genuineness of the investor companies, it is seen that as far as the Table I investors were concerned, only 9 were searched and in their cases, the ITAT on a very detailed examination was satisfied that they not only existed, but that the Assessee had discharged the primary onus of proving their creditworthiness and genuineness. They had responded to the summons issued to them. Directors of 14 of these companies appeared before the AO and produced their books of accounts.

……the CIT (A) observed: “I have carefully appreciated the contentions and do admit that at least these few companies do not seem to be having connection with the majority of the 'conduit' companies and their common directors and that their financial credit worthiness is on much better footing.”

..........notices were issued under Section 131 of the Act to which many of them responded confirming having made investments. The Assessee had been asked by the CIT (A) to produce 7 directors of the Table III companies. 6 directors appeared and their statements were recorded. They had confirmed that they had subscribed to the share capital of the Assessee. These directors had not only produced the books of accounts but showed that the source of investment was duly recorded therein. The Revenue on the other hand did not produce any further evidence to dispute the above evidence produced by the Assessee.

As far as Table II shareholders were concerned, if the Revenue was of the view that they were simply using the Assessee for parking their undisclosed income, then it was certainly open to the Revenue to make additions to the income of those Table-II companies. As far as Table-I shareholders was concerned, none of them denied having made the investment in the Assessee company. The AO does not appear to have undertaken any particular investigation into the affairs of the Table-I, II or Table III companies apart from issuance of the notices under Section 131 of the Act which were duly responded to.

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