IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA No.562/Hyd/12 : Assessment year 2008-09 M/s. USP Organics P. Ltd., V/s. Dy. Commissioner of Income-tax Hyderabad Circle 3(2), Hyderabad ( PAN - AAACU 6806 D ) (Appellant) (Respondent) ITA No.727/Hyd/12 : Assessment year 2008-09 Dy. Commissioner of Income- V/s. M/s. USP Organics P. Ltd., tax Circle 3(2), Hyderabad Hyderabad ( PAN - AAACU 6806 D ) (Appellant) (Respondent) Assessee by : Shri S.Rama Rao Department by : Shri Phani Raju DR Date of Hearing 03.06.2014 Date of Pronouncement 25.07.2014 ORDER Per Smt. Asha Vijayaraghavan, Judicial Member: These are cross appeals for assessment year 2008-09, and they are directed against order of Commissioner of Income- tax(Appeals) IV, Hyderabad dated 29.2.2012. Since factual background and issues are involved are common, these appeals are being disposed of with this common order for sake of convenience. 2. first effective grievance of assessee in its appeal is against disallowance of expenditure of Rs.1,95,000 claimed by assessee. 2 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 3. We heard both sides and perused orders of Revenue authorities on this issue. expenditure in question disallowed by Assessing Officer and sustained by CIT(A), relates to ROC fee and stamp duty incurred by assessee company for purpose of increasing its Authorised Share Capital from Rs.1 lakh to Rs.2,81,02,500. Assessing Officer disallowed this expenditure, holding same to be of capital nature. CIT(A), in impugned order, confirmed view taken by Assessing Officer. He referred to Apex Court decision in case of Punjab State Industrial Development Corporation Ltd. V/s. CIT (225 ITR 792), wherein expenditure incurred for enhancement of capital was held to be of capital nature. He also referred to decision of Delhi High Court in case of CIT V/s. Hindustan Insecticides Ltd. (250 ITR 338), wherein besides holding that expenditure in question, being of capital nature, is to be disallowed, it was also held that same would also not be admissible even on staggered basis under S.35D in view of fact that it was limited to circumstances cited therein and not for mere expansion of capital base. Following these decisions, CIT(A) upheld disallowance made by Assessing Officer. In view of various decisions on issue, we deem it fit to set aside issue to file of Assessing Officer, who shall determine eligibility and quantum of admissible deduction under S.35D of Act, and re-decide issue in accordance with law, of course, after giving reasonable opportunity of hearing to assessee. 4. other issue, involved in both these cross-appeals, relates to addition made by Assessing Officer and sustained by CIT(A), in terms of S.68 of Act, disbelieving unsecured loans and share application money received by assessee. 5. Facts of case in relation to this issue are that Assessing Officer noticed that assessee had received share application money and unsecured loans from three persons, as per details given below 3 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad Sl. Name of person Share Unsecured Total No. application loans (Rs.) money(Rs.) (Rs.) 1. Sri G R K Raju 1,18,60,000 26,00,000 1,44,60,000 2. Ms G.Uma 71,94,200 9,00,000 80,94,200 3. Ms. P.Girija . 41,26,000 41,26,000 TOTAL 1,90,54,200 76,26,000 2,66,80,200 During assessment proceedings, assessee was required to furnish details in respect of increase in share capital and unsecured loans, confirmatory letters, details regarding mode of receipt and bank statements, alongwith copies of IT returns of loan creditors or any other evidence to prove their credit-worthiness. Assessee filed required confirmatory statements and details of their sources. 6. In response, with regard to creditor/investor, GRK Raju, assessee submitted confirmation for total amount of Rs.1,44,60,000 alognwith copy of his income-tax returns, as per which his total income was Rs.30,28,300. letter dated 26.111.2010 was also filed giving details of source of investment made by him, which furnished following details- Sl. No. Description Amount(Rs.) 1. Loan from Banks 32,82,000 2. Refund of loan from M/s. Kopalle Pharma Chemicals Ltd. 10.00.000 3. Amount raised form Dr.Raj A. Dantuluri 19,93,895 USA(NRI) 4. Loan raised from Sri K.Pardha Saradhi 4,00,000 5. Loan received from Sri T.Sreedhar 1,00,000 6. oan received from Sri K V R K Varma L 10,00,000 7. Loan received from Ms. P.Bhanumathi 5,00,000 8. Loan received from Sri V S S S L 2,40,000 Jagannatha Rao 4 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 9 Loan received from Sri Koneru Srikanth 5,00,000 10. Loan received from Sri Siva Sai 5,00,000 11. Loan received from Sri Nikhil B. Jagini 5,00,000 12. Loan raised from Sri K. Sandeep Reddy 5,00,000 13 Balance from my own income 39,44,105 TOTAL 1,44,60,000 Assessing Officer noticed that in support of above information, assessee only filed confirmation statements, but did not furnish details of loan creditors of GRK Raju giving their bank accounts, details of FIRCs, modes/dates of receipt and their sources. Even their identities were not established. He found that addresses given in confirmations given by them were also not complete. Accordingly, Assessing Officer concluded that creditworthiness of Shri GRK Raju and his own loan creditors was not established and added total of Rs.1,44,68,000 as unexplained credits in books of assessee. 7. As for investor/creditors Smt.G.Uma, assessee had filed confirmation letter from her explaining source of investment as under : Sl. No. Description Amount (Rs.) 1. Refund of investment in M/s. USP Organics P. Ltd. 20,00,000 Loan from Banks 2. Amounts raised from Dr.Raj A.Dantuluri, NRI 20,00,000 3. Amount received by her husband from Nagar- juna Management Services P. Ltd. 20,00,000 4. Loan raised from Smt. M.Madhavi Latha 10,00,000 5. Amount received from G.Sitarama Raju 50,000 6. Loan raised from her brother Sri G.Sreedhar 4,00,000 7. Balance from savings including husband s income 7,28,238 TOTAL 80,94,200 5 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 8. Assessing Officer noted from above that Smt. Uma had shown sources of investments made by her as loans from relatives and friends. On other hand, she noticed that return of income for assessment year had been filed by her showing total income of Rs.3,50,400 only. Besides, she noticed that details regarding modes of receipt, copies of FIRCs and evidence regarding their creditworthiness or their income tax particulars etc. were also not furnished. assessee did not even file bank account copies of Smt. G. Uma to verify transaction in her bank accounts. Assessing Officer therefore, opined that onus was on assessee company to prove genuineness of transaction. Since assessee failed to prove same, besides creditworthiness of alleged creditor, entire amount of unsecured loans and share application money was treated as unexplained credit under S.68 of Act. 9. As for third investor/creditor, viz. Smt. P.Girija, Assessing Officer noticed that assessee had shown having received unsecured loan of Rs.41,26,000 from her on various dates during year. Once certification of confirmation letter filed by her, Assessing Officer noticed that details regarding source of investment or bank accounts had not been given therein. Concluding, therefore, that assessee had failed to prove genuineness of transactions and creditworthiness of loan creditor, treated unsecured loan of Rs.41,26,00 shown in name of Smt.P.Girija as unexplained credit under S.68 of Act. 10. In support of her action of treating alleged investments/unsecured loans as unexplained, Assessing Officer drew support from various judicial pronouncements, including decision of coordinate Bench of Tribunal in DCIT V/s. Rasun Exports P. Ltd. (ITA 1185/Hyd/2009); decisions of jurisdictional High Court in case of R B Mittal V/s CIT(246 ITR 283); besides of Apex Court in case of Sumati Dayal V/s. CIT (214 ITR 801). 6 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 11. On appeal, CIT(A), following decision of Apex Court in case of CIT V/.s. Lovely Exports (216 ITR 195), deleted additions made by Assessing Officer with regard to claim of receipt of share application money of Rs.1,18,60,000 from GRK Raju and of Rs.71,94,200 from Smt. Uma, vide para 10 of impugned order which reads as under- 10. I have gone through facts of case and submissions of appellant. So far as contribution of share application money of Rs.1,18,60,000/- and Rs.71,94,200/- by Sri G R K Raju and Miss G Uma is concerned, from report of Assessing Officer it is clear that appellant had duly established identities of said persons with necessary evidence. It is seen that in their decision in case of CIT V/s. Lovely Exports (216 ITR 195) (SC), Hon ble Apex Court have opined that even if share application money is received by assessee company from alleged bogus share holders, whose names are given to Assessing Officer, then department is free to proceed in their individual assessments in accordance with law and it cannot be regarded as undisclosed income of assessee. Admittedly, in instant case, appellant had not only given names of share holders but had duly established their identities also. Following said decision of Hon ble Supreme Court, therefore, no addition can be made under sec. 68 in hands of appellant company on account of share application money contributed by Sri GRK Raju and Miss. Uma. addition to extent of Rs.1,18,60,000/- and Rs.71,94,200/-, on account of share application money contributed by them, is deleted. As for unsecured loans of Rs.26,00,000 in name of GRK Raju, and of Rs.9 lakhs in name of Smt.G.Uma and Rs.41,26,000 in name of Smt. P.Girija, CIT(A), concurring with findings of Assessing Officer that assessee has failed to discharge onus that lies on it, confirmed addition made by Assessing Officer. 12. Aggrieved by addition sustained by CIT(A), assessee preferred its appeal ITA No.562/Hyd/2012, whereas contesting relief granted by CIT(A), Revenue preferred its appeal, ITA No.727/Hyd/2012 before us. 13. We have considered rival submissions and perused impugned orders of Revenue authorities. As for grievance of Revenue in its appeal, viz. in relation to addition on account of share 7 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad application money, we find that assessee has not only established identity of share-holders who have made investments, but also filed confirmation letters from them, who have explained sources for investments made. Thus, as far as assessee is concerned, it being corporate entity, has discharged onus on it, having identified source from which it has received said share application money, and also attempted to explain their sources as well. As such, there is no justification for any addition in that behalf in assessment of assessee-company. Since assessee has not only identified share holders, but also filed confirmations from them, it was for Assessing Officer to make further inquiry as to their creditworthiness and, if at all, warranted, such addition may be warranted in hands of share holders, in case their sources for investment in question, are not established. view taken by CIT(A) is in consonance with settled position of law laid down by various decisions including decision of Apex Court in case of Lovely Exports (supra). In this view of matter, we uphold order of CIT(A) on this issue and reject grounds of Revenue in its appeal. 14. As for grievance of assessee in its appeal, being additions under S.68 of Act, sustained on account of unsecured loans, we find from records that evidences in form of confirmation letters from concerned parties and copies of income-tax returns to justify sources have been produced before us. CIT(A) has accepted same set of evidences for accepting sources for share application money from two individuals, namely, GVK Raju and G.Uma, but has sustained addition made by Assessing Officer, with respect to unsecured loans under S.68 of Act. We are of opinion that CIT(A), having accepted genuineness of transactions, identity of parties and credit-worthiness of three parties, while deciding issue of contribution to share capital, is not justified in arriving at contrary conclusions, by proceeding to examine source of source. Hence, additions confirmed by CIT(A) under S.68 towards unsecured loans from these two individuals is deleted. 8 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 15. As for unsecured loans from P.Girija, assessee has filed confirmation letter at pages 52 and 53 and amount has been claimed to have been received by cheques. As seen from record, Assessing Officer has not examined all these aspects of matter, and proceeded to disallow on basis of bald observation that Smt.Girija does not have credit- worthiness. Even remand report called for by CIT(A), copy of which is furnished at page 76 of paper-book before us, does not make any mention as to examination of said individual by Assessing Officer. In course of hearing before us, Learned Departmental Representative fairly admitted that this issue may be sent back to file of Assessing Officer for fresh examination, as bank accounts and FDRs filed before CIT(A) constitute additional evidence. In this view of matter, and considering totality of facts and circumstances of case, we set aside matter to file of Assessing Officer, with direction to re-examine genuineness of unsecured loans claimed to have been received by assessee from Smt.P.Girija, in accordance with law, and after giving reasonable opportunity of hearing to assessee. 16. In result, appeal of Revenue is dismissed and assessee s appeal is partly allowed for statistical purpose. Order pronounced in court on 25th July, 2014 Sd/- Sd/- (B.Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member Dt/- 25th July, 2014 9 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad Copy forwarded to: 1. M/s. USP Organics P. Ltd., C/o. Shri S.Rama Rao, Flat No.102, Shirya's Elegance, No.3-6-643, Street No.9, Himayatnagar, Hyderabad 500029 2. Dy. Commissioner of Income-tax Circle 3(2), Hyderabad 3. Commissioner of Income-tax(Appeals) IV Hyderabad 4. Commissioner of Income-tax III, Hyderabad 5 Departmental Representative, ITAT, Hyderabad. B.V.S Usp Organics Pvt.Ltd. v. DCIT- Circle-3(2)