These are cross appeals for the assessment year 2008-09, and they are directed against the order of the Commissioner of Income- tax(Appeals) IV, Hyderabad dated 29.2.2012. Since factual background and the issues are involved are common, these appeals are being disposed of with this common order for the sake of convenience.

2. The first effective grievance of the assessee in its appeal is against disallowance of expenditure of Rs.1,95,000 claimed by the assessee. ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 2

3. We heard both sides and perused the orders of the Revenue authorities on this issue. The expenditure in question disallowed by the Assessing Officer and sustained by the CIT(A), relates to ROC fee and stamp duty incurred by the assessee company for the purpose of increasing its Authorised Share Capital from Rs.1 lakh to Rs.2,81,02,500. The Assessing Officer disallowed this expenditure, holding the same to be of capital nature. The CIT(A), in the impugned order, confirmed the view taken by the Assessing Officer. He referred to the Apex Court decision in the 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 the decision of the Delhi High Court in the case of CIT V/s. Hindustan Insecticides Ltd. (250 ITR 338) , wherein besides holding that the expenditure in question, being of capital nature, is to be disallowed, it was also held that the same would also not be admissible even on a staggered basis under S.35D in view of the fact that it was limited to the circumstances cited therein and not for mere expansion of the capital base. Following these decisions, the CIT(A) upheld the disallowance made by the Assessing Officer. In view of the various decisions on the issue, we deem it fit to set aside the issue to the file of the Assessing Officer, who shall determine the eligibility and quantum of admissible deduction under S.35D of the Act, and re-decide the issue in accordance with law, of course, after giving reasonable opportunity of hearing to the assessee.

4. The other issue, involved in both these cross-appeals, relates to the addition made by the Assessing Officer and sustained by the CIT(A), in terms of S.68 of the Act, disbelieving the unsecured loans and share application money received by the assessee.

5. Facts of the case in relation to this issue are that the Assessing Officer noticed that the assessee had received share application money and unsecured loans from three persons, as per the details given below ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 3 Sl. No. Name of the person Share application money(Rs.) Unsecured loans (Rs.) Total (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 the 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 the required confirmatory statements and details of their sources.

6. In response, with regard to the creditor/investor, GRK Raju, assessee submitted a confirmation for a total amount of Rs.1,44,60,000 alognwith a copy of his income-tax returns, as per which his total income was Rs.30,28,300. A letter dated 26.111.2010 was also filed giving details of the source of the investment made by him, which furnished the 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 USA(NRI) 19,93,895

4. Loan raised from Sri K.Pardha Saradhi 4,00,000

5. Loan received from Sri T.Sreedhar 1,00,000

6. Loan received from Sri K V R K Varma 10,00,000

7. Loan received from Ms. P.Bhanumathi 5,00,000

8. Loan received from Sri A V S S S L Jagannatha Rao 2,40,000 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 4 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 The Assessing Officer noticed that in support of the 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 the addresses given in the confirmations given by them were also not complete. Accordingly, the Assessing Officer concluded that the creditworthiness of Shri GRK Raju and his own loan creditors was not established and added the total of Rs.1,44,68,000 as unexplained credits in the books of the assessee.

7. As for the investor/creditors Smt.G.Uma, assessee had filed a confirmation letter from her explaining the source of investment as under : Sl. No. Description Amount (Rs.) 1. Refund of investment in M/s. USP Organics P. Ltd. Loan from Banks 20,00,000

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 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 5

8. The Assessing Officer noted from the above that Smt. Uma had shown the sources of the investments made by her as loans from relatives and friends. On the other hand, she noticed that the return of income for the assessment year had been filed by her showing a 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. The assessee did not even file the bank account copies of Smt. G. Uma to verify the transaction in her bank accounts. The Assessing Officer therefore, opined that the onus was on the assessee company to prove the genuineness of the transaction. Since the assessee failed to prove the same, besides the creditworthiness of the alleged creditor, the entire amount of unsecured loans and share application money was treated as unexplained credit under S.68 of the Act.

9. As for the third investor/creditor, viz. Smt. P.Girija, Assessing Officer noticed that the assessee had shown having received unsecured loan of Rs.41,26,000 from her on various dates during the year. Once certification of the confirmation letter filed by her, the Assessing Officer noticed that details regarding source of investment or bank accounts had not been given therein. Concluding, therefore, that the assessee had failed to prove the genuineness of the transactions and creditworthiness of the loan creditor, treated the unsecured loan of Rs.41,26,00 shown in the name of Smt.P.Girija as unexplained credit under S.68 of the Act.

10. In support of her action of treating the alleged investments/unsecured loans as unexplained, the Assessing Officer drew support from various judicial pronouncements, including the decision of the coordinate Bench of the Tribunal in DCIT V/s. Rasun Exports P. Ltd. (ITA 1185/Hyd/2009); decisions of the jurisdictional High Court in the case of R B Mittal V/s CIT(246 ITR 283); besides of the Apex Court in the case of Sumati Dayal V/s. CIT (214 ITR 801) . ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 6

11. On appeal, the CIT(A), following the decision of the Apex Court in the case of CIT V/.s. Lovely Exports (216 ITR 195), deleted the additions made by the Assessing Officer with regard to the 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 the impugned order which reads as under-

10. I have gone through the facts of the case and the submissions of the appellant. So far as the 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 the report of the Assessing Officer it is clear that the appellant had duly established the identities of the said persons with necessary evidence. It is seen that in their decision in the case of CIT V/s. Lovely Exports (216 ITR 195) (SC), the Honble Apex Court have opined that even if the share application money is received by the assessee company from alleged bogus share holders, whose names are given to the Assessing Officer, then the department is free to proceed in their individual assessments in accordance with law and it cannot be regarded as undisclosed income of the assessee. Admittedly, in the instant case, the appellant had not only given the names of the share holders but had duly established their identities also. Following the said decision of the Honble Supreme Court, therefore, no addition can be made under sec. 68 in the hands of the appellant company on account of share application money contributed by Sri GRK Raju and Miss. Uma. The addition to the 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 the unsecured loans of Rs.26,00,000 in the name of GRK Raju, and of Rs.9 lakhs in the name of Smt.G.Uma and Rs.41,26,000 in the name of Smt. P.Girija, the CIT(A), concurring with the findings of the Assessing Officer that the assessee has failed to discharge the onus that lies on it, confirmed the addition made by the Assessing Officer.

12. Aggrieved by the addition sustained by the CIT(A), assessee preferred its appeal ITA No.562/Hyd/2012, whereas contesting the relief granted by the CIT(A), Revenue preferred its appeal, ITA No.727/Hyd/2012 before us.

13. We have considered the rival submissions and perused the impugned orders of the Revenue authorities. As for the grievance of the Revenue in its appeal, viz. in relation to addition on account of share ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 7 application money, we find that the assessee has not only established the identity of the share-holders who have made the investments, but also filed confirmation letters from them, who have explained sources for the investments made. Thus, as far as the assessee is concerned, it being a corporate entity, has discharged the onus on it, having identified the source from which it has received the 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 the assessment of the assessee-company. Since the assessee has not only identified the share holders, but also filed confirmations from them, it was for the Assessing Officer to make further inquiry as to their creditworthiness and, if at all, warranted, such addition may be warranted in the hands of the share holders, in case their sources for the investment in question, are not established. The view taken by the CIT(A) is in consonance with the settled position of law laid down by various decisions including the decision of the Apex Court in the case of Lovely Exports (supra). In this view of the matter, we uphold the order of the CIT(A) on this issue and reject the grounds of the Revenue in its appeal.

14. As for the grievance of the assessee in its appeal, being the additions under S.68 of the Act, sustained on account of unsecured loans, we find from the records that evidences in the form of confirmation letters from the concerned parties and copies of income-tax returns to justify the sources have been produced before us. The CIT(A) has accepted the same set of evidences for accepting the sources for the share application money from two individuals, namely, GVK Raju and G.Uma, but has sustained the addition made by the Assessing Officer, with respect to unsecured loans under S.68 of the Act. We are of the opinion that the CIT(A), having accepted the genuineness of the transactions, identity of the parties and credit-worthiness of the three parties, while deciding issue of contribution to share capital, is not justified in arriving at contrary conclusions, by proceeding to examine the source of the source. Hence, the additions confirmed by the CIT(A) under S.68 towards unsecured loans from these two individuals is deleted. ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 8

15. As for the unsecured loans from P.Girija, the assessee has filed confirmation letter at pages 52 and 53 and the amount has been claimed to have been received by cheques. As seen from the record, the Assessing Officer has not examined all these aspects of the matter, and proceeded to disallow on the basis of bald observation that Smt.Girija does not have credit- worthiness. Even the remand report called for by the CIT(A), copy of which is furnished at page 76 of the paper-book before us, does not make any mention as to the examination of the said individual by the Assessing Officer. In the course of hearing before us, the Learned Departmental Representative fairly admitted that this issue may be sent back to the file of the Assessing Officer for fresh examination, as the bank accounts and FDRs filed before the CIT(A) constitute additional evidence. In this view of the matter, and considering totality of facts and circumstances of the case, we set aside the matter to the file of the Assessing Officer, with a direction to re-examine the genuineness of the unsecured loans claimed to have been received by the assessee from Smt.P.Girija, in accordance with law, and after giving reasonable opportunity of hearing to the assessee.

16. In the result, appeal of the Revenue is dismissed and assessees appeal is partly allowed for statistical purpose. Order pronounced in the court on 25 th July, 2014 Sd/- Sd/- (B.Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member Dt/- 25 th July, 2014 ITA No.562 & 727/Hyd/2012 M/s. USP Organics P.Ltd., Hyderabad 9 Copy forwarded to:

1. M/s. USP Organics P. Ltd., C/o. Shri S.Rama Rao, Flat No.102, Shiryas 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