By TIOL News Service

AHMEDABAD, JUNE 29, 2018: THE issue before the Bench is - Whether allotment of shares made by assessee to a prima facie shell company cannot be accepted as genuine and therefore, warrants rejection. Verdict is YES.

Facts of the case

The assessee-company filed return for the relevant AY. During the course of scrutiny assessment proceedings, the AO noticed that the assessee was incorporated during the year under consideration with authorized capital of Rs. 10 lacs equity shares of Rs. 10 each amounting to Rs. 1 crore. It was therefore, observed that the assessee had issued 338250 equity shares of Rs. 10 each at a premium of Rs. 30 per equity shares. Out of the 15 subscribers, 3 were from Kanpur, 3 were from Jodhpur, 6 were from Delhi, 1 from Kolkata and 1 from Ahmedabad. Therefore, the assessee was asked to furnish the complete details of the subscribers. However, when the AO was not satisfied with the explanation given by the assessee, he issued notice u/s 133(6) to the concerned subscribers. However, one notice sent to one Gurukul Vinimay Pvt. Ltd. returned unserved. Accordingly, the AO rejected the share allotment to to such party and made addition by treating the contribution made by it as unexplained cash credit. On assessee's appeal, the CIT(A) confirmed the decision.

The Tribunal held that,

++ the Assessing Officer never questioned the assessee company how it could offer shares to complete strangers in violation of the specific provisions of the Companies Act by which a Private Limited Company is prohibited from inviting the public to subscribe for any securities of the company. Out of the 15 subscribers, 3 are from Kanpur, 3 are from Jodhpur, 6 are from Delhi, 1 from Kolkatta and 1 from Ahmedabad. The assessee company is based in Ahmedabad. There is nothing on record to show that the shares applicants are related to the promoters of the assessee company. Moreover, why would these persons (presumably strangers) purchase shares of a Private Limited Company which are not freely transferrable nor traded in the stock exchange;

++ the Assessing Officer in his wisdom has accepted the genuineness of the transaction in respect of 14 subscribers out of total 15 subscribers. The powers of the CIT(A) are coterminus to that of the A.O. which means that the First Appellate Authority can enhance the assessment after giving notice but the CIT(A) in his wisdom confirmed the assessment. The addition has been made only in respect of share allotment to Gurukul Vinimay Pvt. Ltd. The Tribunal cannot and should not comment on the wisdom of the Assessing Officer and therefore, will restrict our findings in respect of share allotment transaction to Gurukul Vinimay Pvt. Ltd;

++ though, there is no definition of Shell Company but anything that throws light on this global menace cannot be brushed aside lightly. The financial statements of Gurukul Vinimay Pvt. Ltd. show that it has all the ingredients of a Shell Company. The assessee company has done transaction with this company and the transaction cannot be accepted as genuine by any stretch of imagination. One fail to understand how a Kolkata based company come to know that one Ahmedabad based company is offering shares at a premium. It appears that the assessee company has allotted shares to a complete stranger and shares offered to a complete stranger is as good as offering to general public. Therefore, considering the facts of the case in hand in totality in the light of the relevant provisions of the Companies Act and the relevant provisions of the Contract Act, we have no hesitation in upholding the addition of Rs. 15 lacs.

(See 2018-TIOL-987-ITAT-AHM)