Acquisition of RIL shares through financially incapable RPPL constitutes a benami transaction, but freezing untainted shares is invalid.

ORDER

1. This Order disposes of the Appeals Nos. FPA-PBPT-1481/MUM/ 2021 filed by Shri Om Parkash Agarwal and FPA-PBPT-1482/ MUM/2021 filed by M/s Rajput Plastics & Polymers Pvt. Ltd., against the Order No. 15/AA/pBPTA/2021-22 dated 27.09.2021 (Impugned Order) passed by the Ld. Adjudicating Authority under Section 26 (3) of the Prohibition of Benami Property Transaction Act, 1988 (PBPTA), New Delhi in Reference No. R-1949/2020. Ld. Adjudicating Authority (AA) confirmed the Provisional Attachment Order dated 28.01.2020 (PAO) passed by the Initiating Officer, BPU, Mumbai under Section 24 (4)(a)(i) of PBPTA, whereby shares of M/s Responsive Industries Ltd. held by M/s Rajput Plastics & Polymers Pvt. Ltd. (RPPL) were attached.

2. Ld. Counsel for the Appellants submitted that the Appellant Shri Om Prakash Agarwal is one of the promoters of M/s Responsive Industries Ltd. (RIL). While he was undergoing treatment for advanced stage cancer, in USA, the Show Cause Notice (SCN) and the PAO had been issued on the basis of the information gathered during survey under Section 133A of the Income Tax Act, 1961 at the premises of the RPPL. For the reasons that the Directors of RPPL S/Shri Ashok Jha and Ajay Pratap Singh were persons of limited means and the RPPL earned small amount of profit the Initiating Officer (IO) drew an inference that the RPPL was a fictitious Company. This logic was extended by the IO to conclude that the shares of RIL held by RPPL were being held on the instructions of and for the benefit of the alleged Beneficial Owner namely Shri Om Prakash Agarwal. On 28.01.2020 the IO passed a PAO under Section 24 (4)(a)(i) of the PBPTA. Ld. Counsel argued that the amount of Rs. 2,41,50,000/- paid by M/s Axiom Cordages the amount of Rs.1,00,81,448/- paid by RIL to RPPL were on account of repayment of earlier outstandings. Shri Om Prakash Agarwal, the Appellant was never a partner in M/s Axiom Cordages and had held no position in RIL for past ten years.

3. Ld. Counsel for the Appellants challenged the findings made by the Ld. AA that:

“On the strength of fund provided by M/s Gauri Shankar Investments Pvt Ltd, a group company of the broker entity. It is also clear that M/s Gauri Shankar Investment Pvt Ltd had provided the fund on the instance of the promoter of RIL and its sister concern Axiom Cordages Ltd because ultimately they provided the fund to RPPL to return the money to M/s Gauri Shankar Investments Pvt. Ltd. These affairs are confined within a closed group of interested persons i.e. broker and promoters of RIL and therefore getting a direct evidence linking promoter Shri O. P. Agarwal with the consideration paid for acquisition of shares is impossible.”

Ld. Counsel stated that the Impugned Order has failed to take into account that M/s Gauri Shankar Investments Pvt. Ltd. was an unrelated party and further that M/s Axiom Cordages, as well as M/s RIL had not provided the funds to repay the outstanding credit of M/s Gauri Shankar Investments Pvt. Ltd. Ld. Counsel for the Appellants contended that the Impugned Order is bad on facts and in law since it holds RPPL as paper concern as S/Shri Ashok Jha and Ajay Pratap Singh allegedly created the fictitious Company on instructions of Shri Om Prakash Agarwal.

4. Ld. Counsel for the Appellants filed Misc. Petition No. 470 of 2023 on 11.10.2023 to de-freeze and release 11,09,262 shares of RIL which had not been identified as benami property. Ld. Counsel emphasized that on 10,42,935 shares of RIL had been attached under the PBPTA. Ld. Counsel stated that the Appellant RPPL owned and possessed 21,52,197 equity shares of RIL out of which only 10,42,935 were attached by the PAO dated 31.10.2019 issued under Section 24 (3) of the PBPTA. Ld. Counsel drew attention to Paragraph 3 of the PAO dated 31.10.2019 wherein it is stated that RPPL acquired the benami property being 10,42,935 shares of RIL during 2018-19. Moreover, he submitted that even the Impugned Order in Paragraph 2 states that the IO had provisionally attached 10,42,935 shares of RIL held by RPPL. Ld. Counsel alleged judicial overreach on the part of the Respondent so as to illegally/erroneously to direct the NSDL as well as CDSL to freeze the demat account of the Appellant which consist of 21,52,197 of equity shares of RIL. Ld. Counsel argued that even the SCN had been issued only for 10,42,935 shares. The Appellant is hampered in conducting its normal business activity for 11,09,262 shares of RIL. He therefore prayed for the appropriate direction to NSDL and CDSL to release excess shares numbering 11,09,262 shares of RIL. He therefore prayed for allowing the Appeals and the Application.

5. Ld. Counsel for the Respondent submitted that RPPL was incorporated on 26.07.2017 and in the Financial Year 2017-18 it did not have financial profile which can corroborate the fact that it could acquire 10,42,935 shares of RIL on the basis of its own resources. Even its Directors did not have profiles which could reflect capacity on their part to acquire the said number of shares of RIL. Shri Ashok Jha had never filed ITR and Shri Ajay Pratap Singh filed ITRs with minimal income. Even though RPPL had somewhat large turn over its income was meagre as well as employee expenses were just Rs. 15,000/-. Ld. Counsel doubted whether RPPL had any business activity at all. During the survey action under Section 133 A of the Income Tax Act, 1961 , it was found that at the address of the registered office of RPPL the premises had never been used for office/factory/godown. In fact, the statement of the owner and the tenant of the premises reveal that it had never been used by RPPL. Shri Ashok Jha in his statement dated 23.10.2019 under oath tendered under Section 131 of the Income Tax Act, 1961 stated that he was driver of Shri Om Prakash Agarwal and earned salary of Rs. 18,000/- per month. He further stated that that Shri Ajay Pratap Singh would bring documents for his signature which he would sign in accordance with the instructions of Shri Om Prakash Agarwal. He did not have any knowledge about the contents of these documents. He had not even heard of RPPL. Ld. Counsel stated that Shri Ajay Pratap Singh in his statement on oath tendered on 26.12.2019 under Section 19(1) of the PBPTA claimed that he had been receiving remuneration from RPPL and there was no other employee in the said Company. He in fact stated that he did not remember whether the remuneration given to him was in cash or in cheque. In fact, he said that he was a fitness trainer and spiritual yoga teacher. The address of RPPL was the same as M/s RIL and M/s Axiom Cordages, which made it appear that Shri Ajay Pratap Singh concocted a story. Shri Singh stated that all the operations of the Company were handled on phone which made it convenient not to produce written communication. Ld. Counsel for the Respondent cited the following from Paragraph 11 of the Impugned Order:

“Shri. Ajay Pratap Singh submitted that the source of fund for RPPPL for purchase of the 10,42,935 RIL shares under question, was from surplus of unpaid creditors of RPPPL. This claim of Shri Ajay Pratap Singh, according to the IO, is not only a generic cover up statement but is also inaccurate. As per the bank statement of RPPPL, the immediate source of funds (almost Rs 9 crores) which have been used to purchase the shares of RIL is from M/s Gouri Shankar Investments Pvt Ltd. It cannot be the case of RPPPL that purchase/sale of its trading products has been done with M/s Gouri Shankar Investments Pvt Ltd, and no proof has been submitted towards the same. RPPPL’s undated submission on its sales and purchase parties does not contain the name of Gouri Shankar Investments Pvt Ltd in the list. Further, receipt of the said funds from Gouri Shankar Investments Pvt Ltd has not been disclosed by RPPPL in its ITR/Tax Audit Report as a loan creditor either. Moreover, this company (Gouri Shankar Investments Pvt Ltd) is a group company of Kamal Kumar Jalan Securities and Priyasha Meven Finance Ltd, which are the brokers of the Responsive Group as well. The bank account has been used by RIL/Axiom Cordages Ltd (both part of the RIL proimoter group, of which Shri Om Prakash Agarwal is the promoter) as a conduit for moving funds between themselves and the broker group entities (i.e., Kamal Kumar Jalan Securities, Priyasha Meven Finance Ltd and Gouri Shankar Investments Pvt Ltd), thereby firmly establishing the link between RPPPL and the promoter group of RIL. Part of the Rs 9 crores of Gouri Shankar has been repaid by RPPPL using funds received by RPPPL from RIL/Axiom Cordages Ltd. Letters were written to Kamal Kumar Jalan Securities, Priyasha Meven Finance as well as Gouri Shankar Investments Pvt Ltd enquiring about these transactions. However, no reply has been received. In view of the above discussion, the truth is that funds have been routed from the promoter group of RIL, on behalf of Shri Om Prakash Agarwal.”

6. Ld. Counsel for the Respondent contended that RPPL had used funds provided by RIL and its promoter group Axiom Cordages to acquire the impugned shares of RIL. He further submitted that Shri Ashok Jha is a person of no-means and Shri Ajay Pratap Singh is too close to Shri Om Prakash Agarwal. Both carry out work of RPPL on instructions of Shri Om Prakash Agarwal. RPPL never existed at its registered address. Ld. Counsel submitted that the transaction clearly satisfied the provisions of benami transaction as per Section 2 (9) (A) of PBPTA, RPPL being the Benamidar and Shri Om Prakash Agarwal being the Beneficial Owner. Ld. Counsel for the Respondent reiterated that even while preferring the present Appeal, the Benamidar RPPL has not brought any documentary evidence on record in order to bolster its claim about advance of Rs. 12,93,62,494/- given to M/s Axiom Cordages for supply of raw material, out of which Rs. 2,41,50,000/- were returned to the RPPL, which was further used to repay M/s Gauri Shankar Investments Pvt. Ltd. Ld. Counsel further argued that on perusal of the Bank account statement of Benamidar, funds to the tune of Rs. 9,00,00,000/- were received by the Appellant from M/s Gouri Shankar Investments Pvt. Ltd. The story of unpaid creditors is absolutely false and fabricated as the Benamidar has failed to provide any documentary evidence with respect to any commercial transaction between itself and M/s Gauri Shankar Investments Pvt. Ltd. Even the receipt of funds by Appellant from M/s Gouri Shankar Investments Pvt. Ltd. were not disclosed by the Benamidar in its ITR for the relevant year as a loan creditor. Ld. Counsel for the Respondent contended that there is live nexus between the trail of funds which ought to be seen keeping in view the peculiar facts and circumstances of the present matter. Ld. Counsel therefore prayed to dismiss these Appeals.

7. We have considered the rival submissions and the material on record. It is not disputed that 10,42,935 shares of RIL were acquired by RPPL in the Financial Year 2018-19. The important question which needs to be answered is whether RPPL acquired these shares out of its own resources or whether Shri Om Prakash Agarwal provided for the consideration of these shares. The Appellants have denied that the consideration for these shares were provided by Shri Om Prakash Agarwal. However, the Respondent has contended that, in view of the financial profile and the existential status of RPPL the funds to acquire the said shares were provided by Shri Om Prakash Agarwal.

8. It is on record RPPL was incorporated on 26.07.2017 with Shri Ajay Pratap Singh and Shri Ashok Jha as Directors. The two Directors held 50% of the shares of RPPL which had paid up capital of Rs. 1,00,000/-. It is an admitted fact that RPPL received funds from M/s Gouri Shankar Investments Pvt. Ltd. to buy the said shares of RIL. Part of the said funds were returned to M/s Gouri Shankar Investments Pvt. Ltd. by RPPL from the funds amounting to Rs. 2,41,50,000/- received from M/s Axiom Cordages Ltd. and Rs. 1,00,81,448/- received from RIL. The Appellants have argued that the RPPL was a supplier of raw material to RIL and Rs. 1,00,81,448/- was part payment towards such supply. In so far as Rs.2,41,50,000/- is concerned the arguments of the Appellants and that Axiom Cordages Ltd. was given Rs. 12,93,62,494/- as advance for supply of raw material made by them to RPPL and the said amount was returned to RPPL as to repay M/s Gouri Shankar Investments Pvt. Ltd. We observe that no documentary evidence has been submitted by the Appellants as to corroborate their arguments that RPPL was in commercial dealings with M/s RIL and M/s Axiom Cordages Ltd. In this regard, we reproduce Paragraph 33 of the Impugned Order:

“33. As regards the merits of the case, the Initiating Officer has satisfactorily made out his case. The primary requirements of the existence of the benami property, a benami transaction and holding, benamidar and beneficial owner are established on the above grounds. It is clear that shares have been acquired on the strength of fund provided by M/s Gouri Shankar Investments Pvt Ltd, a group company of the broker entity through which shares have been acquired. Apparently the benamidar had no source of it’s own to acquire these shares. It is also clear that M/s Gauri Shankar Investment Pvt Ltd had provided the fund on the instance of the promoter of RIL and it’s sister concern Axiom Cordages Ltd because ultimately they provided the fund to RPPPL to return the money to M/s Gauri Shankar Investments Pvt Ltd. These affairs are confined within a closed group of interested persons i.e., broker and promoters of RIL and therefore getting a direct evidence linking promoter Shri O.P. Agarwal with the consideration paid for acquisition of shares is impossible. It was within the knowledge of the closed group as to why Gauri Shankar Investments Pvt Ltd decided to sponsor the acquisition of the shares and the Initiating Officer cannot be burdened with onus to bring out that reason. However, the only possible conclusion based on the circumstantial evidences is that the particular chain of financial transactions were designed to route promoters-controlled fund to the benamidar in order to acquire the shares of the RIL from the market. Thus, the Initiating Officer is correct in stating that the consideration for acquisition of shares were provided by Shri. Om Prakash Agarwal. So far as benefit of this holding of shares by the benamidar is concerned, it is apparent that RPPPL itself has been created as a safe heaven for the use of the promoters of RIL. Two persons having not much education and mere subsistence income are holding a company having turn over above 200 crore and having no knowledge of the said ownership is much beyond imagination in a real scenario. The RPPPL has purchased 10,42,935 shares of RIL from the stock exchange and for this purchase of the benami property, it has used funds provided ultimately by RIL and the promoter group of RIL, i.e., from Axiom Cordages Ltd. The RPPPL is a company that is being held and run in the name of Shri Ajay Pratap Singh and Shri Ashok Jha, who are both closely linked to the promoter of RIL- Shri Om Prakash Agarwal. Shri Ashok Jha is a person of nomeans and a non-filer and is employed as driver of Shri Om Prakash Agarwal for more than 20 years and the other Director Shri Ajay Pratap Singh is close to Shri Om Prakash Agarwal, as evidenced by the fact that the latter has introduced the former for membership to The Bombay Presidency Radio Club Limited. Even Ashok Jha has stated in his statement on oath that Shri Ajay Pratap Singh, the other director/shareholder is also an employee of Shri Om Prakash Agarwal. The directors of RPPPL are no way connected with the claimed business activities of RPPPL. While Ashok Jha never attends to any of the work as stated by Shri Ajay Pratap Singh, even the latter has no idea about even basic things pertaining to the business. This shows that these directors/ shareholders are carrying out their actions on the directions of Shri Om Prakash Agarwal. Shri Ashok Jha has stated on oath that he has signed documents relating to RPPPL on the directions of Shri Om Prakash Agarwal, his employer, without checking on the nature of documents being signed. Shri. Ashok Jha is totally unaware of his shareholding/directorship in RPPPL. In fact, he has never heard of the name of this company and has never received any benefits from RPPPL. Further there are discrepancies in the response given by Shri Ajay Pratap Singh in his statement recorded by the IO. He does not know even basic things about the company, then it leaves no doubt that he is carrying out the operations on the directions of Shri Om Prakash Agarwal.”

We may add here that there is nothing documentary or otherwise as to explain the reasons for extension of loan by M/s Gouri Shankar Investments Pvt. Ltd. to RPPL.

9. We also observe that it is on record that RPPL did not function from its registered address. The investigation revealed that no office or godown was located at that address. The landlord of that registered address in their statement corroborated that RPPL did not operate from there. In fact, the statement of the true tenants Shri Mithun Singh further corroborates that RPPL was not functioning there. It is also on record that RPPL was functioning from the same address as the RIL and M/s Axiom Cordages Ltd. The statements of S/Shri Ajay Pratap Singh and Ashok Jha clearly shows that they were not responsible for the regular operation from the RPPL. We are therefore not convinced that RPPL was an entity which had a status either economic or existential as to undertake the investment in 10,42,935 shares of RIL from the Stock Exchange. It is interesting to note that their said transaction was facilitated by the broker Kamal Kumar Jalan Securities, which has M/s Gouri Shankar Investments Pvt. Ltd. as its Group Company. It has not been denied by the Appellant that Kamal Kumar Jalan Securities have been broker to Shri Om Prakash Agarwal for long. Another Company involved in these transactions was Priyasha Meven Finance, which is also a Group Company of Kamal Kumar Jalan Securities. Given the close nexus of these Companies with Shri Om Prakash Agarwal and the fact that the financial capacity of RPPL to fund the purchase of RIL shares, the conclusions drawn in the Impugned Order cannot be doubted.

10. The Appellants have also cited the Judgments and have raised the issue that it is for the IO to establish the intend behind the transaction and to demonstrate that Shri Om Prakash Agarwal had in fact provided the funds to RPPL. We note from the judgments cited from them that the Hon’ble Supreme Court has observed in the matter relating to Binapani Paul v. Pratima Ghosh AIR 2008 SC 543 on 27 April, 2007 the following:

“Burden of proof as regards the benami nature of transaction was also on the respondent. This aspect of the matter has been considered by this Court in Valliammal (D) By LRS. v. Subramaniam and Others [(2004) 7 SCC 233] wherein a Division Bench of this Court held:

“13. This Court in a number of judgments has held that it is well established that burden of proving that a particular sale is benami lies on the person who alleges the transaction to be a benami. The essence of a benami transaction is the intention of the party or parties concerned and often, such intention is shrouded in a thick veil which cannot be easily pierced through. But such difficulties do not relieve the person asserting the transaction to be benami of any part of the serious onus that rests on him, nor justify the acceptance of mere conjectures or surmises, as a substitute for proof. Refer to Jaydayal Poddar v. Bibi Hazra, Krishnanand Agnihotri v. State of M.P., Thakur Bhim Singh v. Thakur Kan Singh, Pratap Singh v. Sarojini Devi and Heirs of Vrajlal J. Ganatra v. Heirs of Parshottam S. Shah. It has been held in the judgments referred to above that the question whether a particular sale is a benami or not, is largely one of fact, and for determining the question no absolute formulas or acid test, uniformly applicable in all situations can be laid. After saying so, this Court spelt out the following six circumstances which can be taken as a guide to determine the nature of the transaction:

14. The above indicia are not exhaustive and their efficacy varies according to the facts of each case.

Nevertheless, the source from where the purchase money came and the motive why the property was purchased benami are by far the most important tests for determining whether the sale standing in the name of one person, is in reality for the benefit of another. We would examine the present transaction on the touchstone of the above two indicia.”

The facts and the circumstances of the present case bring out clearly that the money utilized by RPPL to acquire the shares of RIL was not its own, but that of M/s Gouri Shankar Investments Pvt. Ltd. We have also discussed the proximity and the nexus of M/s Gouri Shankar Investments Pvt. Ltd. with Shri Om Prakash Agarwal. It is also to be noted that Rs. 1,00,81,448/- was directly received by RPPL to repay M/s Gouri Shankar Investments Pvt. Ltd. The other amount of Rs. 2,41,50,000/- was received by RPPL from M/s Axiom Cordages which is part of the Promoter Group of RIL. Therefore, the inference that Shri Om Prakash Agarwal provided the consideration to RPPL for acquisition of the impugned shares is inescapable. Shri Om Prakash Agarwal did so through an arrangement with closely connected Companies, even though he may not have had at that point in time direct controlling interests in these closely connected Companies. The Judgment (supra) itself acknowledges that ‘such intention is shrouded in a thick veil which cannot be easily pierced through.’ However, the very fact that there is evidence on record as to question the economic viability and existence of RPPL, the indications that the said Company was merely used as Benamidar by Shri Om Prakash Agarwal are so obvious. It therefore follows that the intention to engage in benami transaction, even though shrouded in a thick veil, is revealed as to avoid purchase of the impugned shares from the market directly by Shri Om Prakash Agarwal yet achieve the said intention by indirect purchase of the said shares by a Company which is under his control through two persons, one of whom was his driver and the other person closely known to him, who would not question his authority. We therefore conclude that the acquisition of 10,42,935 shares of RIL was a benami transaction in which Shri Om Prakash Agarwal was the Beneficial Owner and M/s Rajput Plastics & Polymers Pvt. Ltd. was the Benamidar.

11. The Appellants have raised the question in the Misc. Petition No. 4703 of 2020 filed on 11.10.2023 that instead of 10,42,935 shares of RIL which were provisionally attached and subsequently confirmed in the Impugned Order, the communication given by the Respondent to freeze demat account of the Appellant to both NSDL and CDSL has resulted in excess shares numbering 11,09,262 of RIL held by RPPL to have been attached. The Appellants have argued that the Respondent had no authority under the PBPTA to issue such direction for freezing of complete demat account of the Appellant, which also included shares which are not even alleged at benami property. We have gone through the records and do not find any material that has been laid before us as to demonstrate that 11,09,262 shares of RIL were under consideration of any of the proceedings relating to attachment of 10,42,935 shares of RIL. The PAO and the Impugned Order neither discussed 11,09,262 shares of RIL nor attached the said shares. Even though the PAO states the attachment as shares of M/s Responsive Industries Ltd. held by M/s Rajput Plastics & Polymers Pvt. Ltd., it has to be read in the context of Paragraph 3 of the PAO, where it is explicitly mention that the number of shares which had been impugned were 10,42,935. The Impugned Order has to be accordingly read and it also reiterates the same in Paragraph 2 of the said Order. Moreover, the SCN issued on 31.10.2019 has in Paragraph 16 categorically states the following:

“16. Now therefore, you are hereby called upon two show cause why the 10,42,935 shares of RIL should not be treated as Benami Property held by you as Benamidar, for the ultimate benefit of Shri Om Prakash Agarwal.”

In view of the aforementioned the freezing/attachment of 11,09,262 shares of RIL is set aside and the Respondent is directed to clarify to the Authorities concerned for release of the said shares to the rightful owner. The Misc. Petition No. 4703 of 2020 filed on 11.10.2023 is accordingly disposed of.

12. In view of the aforementioned discussions and analysis, the Impugned Order dated 27.09.2021 is upheld and Reference No. R-1949/2020 is allowed. Consequently, the Appeals Nos. FPA-PBPT-1481/MUM/ 2021 filed by Shri Om Parkash Agarwal and FPA-PBPT-1482/ MUM/2021 filed by M/s Rajput Plastics & Polymers Pvt. Ltd. are dismissed. Applications pending, if any, are disposed of accordingly.