ITO 4(3)(1), MUMBAI v. PROVID TRADE IMPEX P.LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI D.MANMOHAN VICE PRESIDENT & SHRI R.K.PANDA AM I.T.A. NO. 2219/MUM/2009 (ASSESSMENT YEAR 2005-06) I.T.O. 4(3)(1) 6 TH FLOOR R. NO. 651 AAYAKAR BHAVAN MUMBAI-20 VS. M/S. PROVID TRADE IMPEX PVT. LTD. 701 EMBASSY HOUSE NARIMAN POINT MUMBAI-21 PAN: AAADCP6981D APPELLANT RESPONDENT APPELLANT BY : SHRI A.R. BAIWALL RESPONDENT BY : SHRI SUNIL MEHTA ORDER DATE OF HEARING: 09.04.2010 DATE OF ORDER: 21.04.2010 PER R.K.PANDA AM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 1 ST JANUARY 2009 OF THE CIT(A)-XV MUMBAI RELATING TO ASSESSMENT YEAR 2005-06. 2. IN GROUNDS OF APPEAL NO. 1 THE REVENUE HAS CHALLENG ED THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS. 1 08 50 000 MADE BY THE ASSESSING OFFICER U/S. 68 OF THE INCOME-TAX ACT 1961 (THE ACT) BEING UNEXPLAINED CASH CREDIT. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASKED THE ASSE SSEE TO EXPLAIN THE SHARE APPLICATION MONEY OF RS.1 08 50 000 RECEIVED DURING THE YEAR BY THE COMPANY WHICH WAS GIVEN BY MR. MAYANK PAREKH. ACCORDING TO THE ASSESSING OFFICER SINCE THE INCOME OF MR. MAYANK PA REKH WAS RS.85 500 ONLY DURING THE A.Y. 2005-06 THEREFORE H E HAS NO ITA NO. 2219/MUM/2009 M/S. PROVID TRADE IMPEX PVT. LTD. ========================= 2 CREDITWORTHINESS TO INVEST IN THE SHARE CAPITAL. F ROM THE BALANCE SHEET OF SHRI MAYANK PAREKH FILED BY THE ASSESSEE THE AS SESSING OFFICER OBSERVED THAT HE HAS GIVEN THE SHARE APPLICATION MO NEY BY TAKING LOAN OF RS.1 08 50 000 FROM MR. SANJAY AGARWAL. FROM TH E VARIOUS DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NO TED THAT THE MONEY TAKEN BY MR. MAYANK PAREKH FROM SHRI SANJAY AGARWAL AND INVESTED AS SHARE APPLICATION MONEY HAS BEEN UTILISED TOWARDS P URCHASE OF OFFICE IN POSH AREA LIKE NARIMAN POINT. WHEN THE ASSESSIN G OFFICER ASKED MR. MAYANK PAREKH TO ESTABLISH THE CREDITWORTHINESS OF SHRI SANJAY AGARWAL BY FILING HIS RETURN OF INCOME BALANCE SHE ET AND BANK ACCOUNT ETC. THE ASSESSEE VIDE LETTER DATED 27 TH DECEMBER 2007 SUBMITTED THE REQUISITE DETAILS. THE ASSESSING OFFICER NOTED FRO M THOSE DETAILS THAT SHRI SANJAY AGARWAL HAS RECEIVED AN IDENTICAL AMOUN T ON THE SAME DAY ON WHICH HE ADVANCED THE AMOUNT TO SHRI MAYANK PARE KH. HE ACCORDINGLY OBSERVED THAT EVEN SANJAY AGARWAL IS NO T THE SOURCE OF SUCH FUND. ON THE BASIS OF THE VARIOUS DETAILS FUR NISHED BY THE ASSESSEE THE ASSESSING OFFICER CAME TO THE CONCLUS ION THAT THIS IS A CHAIN OF CIRCULATION OF MONEY BETWEEN PARTIES TO WH ICH THEY HAVE INTRODUCED UNACCOUNTED FUNDS INTO BANK ACCOUNT FOR PURCHASE OF PROPERTY. HE NOTED THAT SHRI MAYANK PAREKH HAS NO CREDITWORTHINESS AND NO CAPACITY TO RETURN THE LOAN AND HIS CREDITWO RTHINESS IS NOT PROVED DUE TO HIS SMALL INCOME. THE CREDITWORTHIN ESS OF BOTH SHRI MAYANK PAREKH AND SHRI SANJAY AGARWAL ARE DOUBTFUL. HE ACCORDINGLY TREATED THE SHARE APPLICATION MONEY OF RS.1 08 50 0 00 AS UNACCOUNTED CASH CREDIT U/S. 68 OF THE ACT AND ADDED THE SAME T O THE TOTAL INCOME OF THE ASSESSEE COMPANY. 4. IN APPEAL THE CIT(A) DELETED THE ADDITION. WHILE DOING SO HE OBSERVED THAT THE ASSESSING OFFICER MADE THE ADDITI ON ON FLIMSY GROUNDS SINCE HE HAS ONLY DOUBTED THE CREDITWORTHIN ESS OF THE SHAREHOLDERS. HOWEVER THE ASSESSEE HAS PROVED THE CASE BY GIVING ALL THE NECESSARY EVIDENCES. ACCORDING TO HIM IF THE ASSESSING OFFICER WAS NOT SATISFIED AND REQUIRED FURTHER INFORMATION HE COULD HAVE ITA NO. 2219/MUM/2009 M/S. PROVID TRADE IMPEX PVT. LTD. ========================= 3 DEMANDED THE SAME FROM THE ASSESSEE WELL IN TIME BE FORE THE FINALISATION OF THE ASSESSMENT WHICH HE FAILED TO D O. HE OBSERVED THAT THE EXISTENCE OF THE SHAREHOLDER VIZ. MR. MAYANK P AREKH IS NOT IN DOUBT WHO HAS OBTAINED LOAN FROM ONE MR. SANJAY AGARWAL. THE COPY OF RETURN OF INCOME OF SHRI MAYANK PAREKH WHO HAS INVE STED IN THE SHARE APPLICATION MONEY WAS FURNISHED BEFORE THE ASSESSIN G OFFICER WHICH MEANS IDENTIFICATION AND GENUINENESS OF THE TRANSAC TION IS PROVED. THE OBSERVATION OF THE ASSESSING OFFICER THAT THE INCOM E OF MR. MAYANK PAREKH AMOUNTING TO RS.85 000 BEING SMALL FOR WHICH HE HAS NO CREDITWORTHINESS IS ALSO NOT CORRECT SINCE HE HAS O BTAINED LOAN FROM ONE MR. SANJAY AGARWAL. HE NOTED THAT THE SOURCE O F DEPOSIT HAS BEEN DULY EXHIBITED BY THE ASSESSEE COMPANY. THE ASSESS EE COMPANY EVEN EXPLAINED THE SOURCE OF THE SOURCE. RELYING ON A C OUPLE OF DECISIONS HE OBSERVED THAT THE ASSESSING OFFICER HAS MADE THE AD DITION MERELY ON THE BASIS OF SURMISES AND DOUBTS WITHOUT ESTABLISHI NG ANY COGENT EVIDENCE AS TO HOW THE ASSESSEE WAS RESPONSIBLE FOR THE SHARE APPLICATION MONEY OF THE DIRECTOR AND HOW ACTUAL MO NEY WAS BELONGING TO THE ASSESSEE. FURTHER THE ASSESSING OFFICER HAS ALSO FAILED TO ESTABLISH AS TO HOW CREDITOR OF MR. MAYANK PAREK H WAS NOT A GENUINE PERSON AND HOW THERE WAS A NEXUS BETWEEN THE ASSESS EE AND A THIRD PERSON. HE ACCORDINGLY DIRECTED THE ASSESSING OFFI CER TO DELETE THE ADDITION OF RS.1 08 50 000. AGGRIEVED WITH SUCH OR DER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 5. THE LEARNED DR STRONGLY RELIED ON THE ORDER OF THE ASSESSING OFFICER. REFERRING TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SUMATI DAYAL VS. CIT REPORTED IN 214 ITR 80 1 HE SUBMITTED THAT THE SURROUNDING CIRCUMSTANCES AND THE TEST OF HUMAN PROBABILITY CLEARLY SHOW THAT THE SHARE APPLICATION MONEY INVES TED BY ONE OF THE DIRECTORS IS NOT GENUINE AND IT BELONGS TO THE ASSE SSEE COMPANY. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. ITA NO. 2219/MUM/2009 M/S. PROVID TRADE IMPEX PVT. LTD. ========================= 4 6. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND REFERRED TO THE DECISION OF HONBLE SUPREME COURT I N THE CASE OF CIT VS. LOVELY EXPORTS PVT. LTD. REPORTED IN 216 CTR 195 AN D SUBMITTED THAT IF THE SHARE APPLICATION MONEY IS RECEIVED BY THE ASSE SSEE COMPANY FROM ALLEGED BOGUS SHAREHOLDERS WHOSE NAMES ARE GIVEN TO THE ASSESSING OFFICER THEN THE DEPARTMENT IS FREE TO PROCEED TO REOPEN THEIR INDIVIDUAL ASSESSMENTS IN ACCORDANCE WITH LAW BUT I T CANNOT BE TREATED AS UNDISCLOSED INCOME OF THE ASSESSEE COMPANY. HE ALSO RELIED ON THE FOLLOWING DECISIONS: 1. CIT VS. ACHAL INVESTMENTS LTD. 268 ITR 211 (DEL) 2. CIT VS. ANTARCTICA INVESTMENTS PVT. LTD. 262 ITR 4 93 (DEL) 3. NEMICHAND KOTHARI VS. CIT & ANR. 264 ITR 254 (GAU. ) 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BO TH THE SIDES PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE COMPANY HAS RECEIVED SHARE APPLIC ATION MONEY OF RS.1 08 50 000 FROM ONE OF THE DIRECTORS MR. MAYANK PAREKH. WE FIND THE ASSESSING OFFICER MADE THE ADDITION ON THE GROU ND THAT THE INCOME OF MR. MAYANK PAREKH BEING RS.85 500 FOR THE A.Y. 2 005-06 IS VERY SMALL AND THAT THE LOAN OBTAINED BY MR. PAREKH FROM SHRI SANJAY AGARWAL IS A CIRCULAR TRANSACTION SINCE SHRI SANJAY AGARWAL ON THE VERY SAME DAY HAS OBTAINED A LOAN OF EQUIVALENT AMOUNT T O ADVANCE THE LOAN. DESPITE SPECIFIC QUERIES BY THE BENCH NONE O F THE PARTIES COULD THROW ANY LIGHT AS TO WHETHER ANY PROCEEDINGS HAVE BEEN INITIATED AGAINST EITHER SHRI PAREKH SHRI AGARWAL OR AGAINST THE PERSON FROM WHOM MR. AGARWAL HAS OBTAINED THE LOAN. IT IS WORT H MENTIONING HERE THAT THE COPIES OF RETURN OF INCOME OF SHRI PAREKH AND SHRI AGARWAL WERE BEFORE THE ASSESSING OFFICER AND THERE IS NOTH ING ON RECORD AS TO WHETHER THE ASSESSING OFFICER HAS INITIATED PROCEED INGS AGAINST THOSE PERSONS IF THEY ARE ASSESSED UNDER HIM OR HAS FORWA RDED THE SAME TO THE RESPECTIVE ASSESSING OFFICERS FOR NECESSARY ACT ION AT THEIR END. ITA NO. 2219/MUM/2009 M/S. PROVID TRADE IMPEX PVT. LTD. ========================= 5 8. WE FIND THE HONBLE SUPREME COURT IN THE CASE OF LO VELY EXPORTS PVT. LTD. (SUPRA) HAS HELD THAT WHEN THE SH ARE APPLICATION MONEY IS RECEIVED BY THE ASSESSEE COMPANY FROM THE SHAREHOLDERS WHOSE NAMES ARE GIVEN TO THE ASSESSING OFFICER THEN THE DEPARTMENT IS FREE TO PROCEED TO REOPEN THEIR INDIVIDUAL ASSESSME NTS IN ACCORDANCE WITH LAW BUT IT CANNOT BE REGARDED AS UNDISCLOSED I NCOME OF THE ASSESSEE COMPANY. SINCE IN THE INSTANT CASE THE NA ME OF THE DIRECTOR WHO HAS GIVEN THE SHARE APPLICATION MONEY WAS PROVI DED TO THE ASSESSING OFFICER AND SINCE THE DIRECTOR ALSO HAS G IVEN THE SOURCE OF THE FUND THEREFORE IN OUR OPINION NO ADDITION U/S. 6 8 OF THE ACT CAN BE MADE IN THE HANDS OF THE ASSESSEE COMPANY. IN THIS VIEW OF THE MATTER THE ORDER OF THE CIT(A) IS UPHELD AND THE GROUND RA ISED BY THE REVENUE IS DISMISSED. 9. IN GROUNDS OF APPEAL NO. 2 THE REVENUE HAS CHALLEN GED THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS. 13 446 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PRE-OPERATIVE EXPEN SES. 9.1 AFTER HEARING BOTH THE SIDES WE FIND THE ASSES SING OFFICER DISALLOWED AN AMOUNT OF RS.13 446 ON THE GROUND THA T THIS EXPENDITURE IS PRE-OPERATIVE EXPENSES SINCE THE ASSESSEE HAS NO T EARNED ANY INCOME. WE FIND THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THESE EXPENSES RELATE TO BANK CHARGES AUDIT FEE PRELIMI NARY EXPENSES WRITTEN OFF AND SUNDRY EXPENSES WHICH ARE INCURRED IN THE NORMAL COURSE OF BUSINESS AND ARE REVENUE IN NATURE. WE F IND ON THE BASIS OF THE ARGUMENTS ADVANCED BY THE ASSESSEE THE CIT(A) DELETED THE ADDITION BY HOLDING AS UNDER: 5.1 I HAVE CONSIDERED THIS ISSUE AND FOUND THAT AO HAS MADE THIS ADDITION FOR THE SAKE OF ADDITION WITHOUT ELABORATING THE ISSUE AS TO HOW ALL THESE EXPENSES ARE NOT OF REVENUE NATURE. CONTRARY TO THE APPREHENSION OF THE ASSESSING OFFICER THE APPELLANT HAS EXPLAINED THAT ALL THESE EXPENSES ARE OF REVENUE NATURE WHICH IS NOT A PRE- OPERATIVE EXPENSE. OBVIOUSLY BANK CHARGE OF RS.581 AUDIT EXPENSES OF RS.6061/- PRELIMINARY EXPENSES WRITTEN OF IN ITA NO. 2219/MUM/2009 M/S. PROVID TRADE IMPEX PVT. LTD. ========================= 6 THE EXTENT OF RS.1780/- AND SUNDRY EXPENSES OF RS.5 024/- IS OF REVENUE IN NATURE REQUIRED TO BE INCURRED FOR RU NNING A BUSINESS. THEREFORE THE ASSESSING OFFICER HAS WRO NGLY DISALLOWED THE EXPENDITURE. IN THE RESULT THE GROU ND NO. 2 IS ALLOWED AND AO IS DIRECTED TO DELETE THE DISALLO WANCES SO MADE. 10. THE LEARNED DR COULD NOT CONTROVERT THE FINDINGS OF THE CIT(A). WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE CIT(A) HOLDING THAT THE BANK CHARGES AUDIT EXPENSES SUND RY EXPENSES PRELIMINARY EXPENSES WRITTEN OFF ARE REVENUE IN NAT URE. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 11. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. PRONOUNCED ON 21 ST APRIL 2010 SD/- (D. MANMOHAN) VICE PRESIDENT SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI DATED 21 ST APRIL 2010 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-XV MUMBAI 4. THE CIT CITY-15 MUMBAI 5. THE DR C BENCH. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI TPRAO