2012 (12) TMI 762 - HC - Income Tax

Assessee must fully prove share applicants' identity and creditworthiness under Section 68 or face income additions

COMMISSIONER OF INCOME TAX, DELHI-V Versus M/s. NR. PORTFOLIO PVT. LTD.

The HC held that the assessee's duty to prove the identity, genuineness, and creditworthiness of share applicants under s 68 does not end with furnishing ... Unexplained income u/s 68 - CIT(A) deleted the addition - Concept of “shifting onus” - onus to prove - identity, genuineness, and creditworthiness of the share applicants - Held that:- An assessee’s duty to establish that the amounts which the AO proposes to add back, u/s 68 are properly sourced, does not cease by merely furnishing the names, addresses and PAN particulars, or relying on entries in a Registrar of Companies website. One must remember that in all such cases, more often than not, the company is a private one, and share applicants are known to it, since they are issued on private placement, or even request basis. If the assessee has access to the share applicant’s PAN particulars, or bank account statement, surely its relationship is closer than arm’s length. Its request to such concerns to participate in income tax proceedings, would, viewed from a pragmatic perspective, be quite strong, because the next possible step for the tax administrators could well be reopening of such investor’s proceedings. That apart, the concept of “shifting onus” does not mean that once certain facts are provided, the assesse’s duties are over. If on verification, or during proceedings, the AO cannot contact the share applicants, or that the information becomes unverifiable, or there are further doubts in the pursuit of such details, the onus shifts back to the assessee. At that stage, if it falters, the consequence may well be an addition under Section 68. As decided in A. Govindarajulu Mudaliar v CIT-[1958 (9) TMI 3 - SUPREME COURT], whether a receipt is to be treated as income or not, must depend very largely on the facts and circumstances of each case. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature - Having regard to the totality of facts and circumstances, particularly the remand report, which was not considered by the CIT (A) and the ITAT in its proper perspective, this Court is of the opinion that the question of law requires to be answered in favour of the revenue. ISSUES: Whether the Income Tax Appellate Tribunal erred in directing deletion of the sum added as unexplained income under Section 68 of the Income Tax Act.What is the scope of the assessee's burden to prove the identity, genuineness, and creditworthiness of share applicants under Section 68.Whether furnishing PAN details, share application forms, and other documentary evidence alone suffices to discharge the onus under Section 68.Whether the Assessing Officer is duty-bound to investigate the creditworthiness and genuineness of transactions when doubts arise.The legal effect of non-appearance or non-cooperation of share applicants summoned under Section 131 in proceedings concerning unexplained income. RULINGS / HOLDINGS: The Tribunal erred in directing deletion of the addition under Section 68 without properly considering the comprehensive remand report which highlighted serious doubts on the genuineness of the share application amounts.The assessee's duty to establish the source of income under Section 68 does not cease by merely furnishing names, addresses, and PAN particulars; if information becomes unverifiable or doubtful, the onus shifts back to the assessee.'When the assessee has proved the identity of the share applicants by either furnishing their PAN number or income tax assessment number and shown the genuineness of transaction by showing money either by account payee cheque or by draft or by any other mode, then the onus of proof would shift to the revenue.' However, this principle applies only if the information is verifiable and the share applicants respond to inquiries.The Assessing Officer is 'duty-bound to investigate the creditworthiness of the creditor/subscriber, the genuineness of the transaction and the veracity of the repudiation.'Non-compliance or non-appearance of share applicants summoned under Section 131, especially where summons are returned unserved with remarks such as 'NO SUCH FIRM/COMPANY/PERSON' or 'LEFT WITHOUT ADDRESS,' supports the inference that the transactions may be accommodation entries and justifies addition under Section 68. RATIONALE: The Court applied the legal framework under Section 68 of the Income Tax Act, which requires the assessee to prima facie prove (1) identity of the creditor/subscriber, (2) genuineness of the transaction, and (3) creditworthiness or financial strength of the creditor/subscriber.The Court relied on precedent affirming that furnishing PAN details, share application forms, and statutory documents constitutes acceptable proof only if the information is verifiable and the share applicants cooperate in proceedings; mere paper evidence is insufficient if the parties are 'entry operators' or absconding.The Court emphasized the principle from A. Govindarajulu Mudaliar v CIT that failure to satisfactorily explain the source and nature of cash receipts entitles the Assessing Officer to infer that such receipts are assessable income.The Court noted a doctrinal balance must be maintained between protecting the revenue's interest in excoriating conversion of unaccounted money and protecting the assessee from harassment where evidence shows absence of culpability.The Court found that the remand report, which was not adequately considered by the lower authorities, revealed that the share applicants were either untraceable or non-existent, and the assessee's financial activity did not justify the infusion of share capital, justifying the addition under Section 68.The Court rejected the view that the assessee's duty ends upon furnishing basic details, holding that the 'concept of 'shifting onus' does not mean that once certain facts are provided, the assessee's duties are over.'