2012 (12) TMI 845 - HC - Income Tax

HC upholds addition of Rs. 4.34 Cr unexplained share money under Section 68 despite assessee's initial burden discharge

The HC upheld the AO's addition of unexplained share application money under Section 68, rejecting the CIT(A) and ITAT's findings. Despite the assessee ... Unexplained credit - share application money from 9 applicants - CIT (A) opined that the assessee had discharged the basic onus cast upon it after considering the ruling in Lovely Exports [2008 (1) TMI 575 - SC ORDER] - rule of “shifting onus” - Held that:- While there can be no doubt that in Lovely Exports [2008 (1) TMI 575 - SC ORDER] the Court indicated the rule of “shifting onus” i.e. the responsibility of the Revenue to prove that Section 68 could be invoked once the basic burden stood discharged by furnishing relevant and material particulars, at the same time, that judgment cannot be said to limit the inferences that can be logically and legitimately drawn by the Revenue in the natural course of assessment proceedings. The information that assessee furnishes would have to be credible and at the same time verifiable. In this case, 5 share applicants could not be served as the notices were returned unserved. In the backdrop of this circumstance, the assessee's ability to secure documents such as income tax returns of the share applicants as well as bank account particulars would itself give rise to a circumstance which the AO in this case proceeded to draw inferences from. The AO also noticed that before issuing cheques to the assessee, huge amounts were transferred in the accounts of said share applicants. Having regard to the totality of the facts, i.e., that the assessee commenced its business and immediately sought to infuse share capital at a premium ranging between Rs.90-190 per share and was able to garner a colossal amount of Rs. 4.34 Crores, this Court is of the opinion that the CIT (Appeals) and the ITAT fell into error in holding that AO could not have added back the said amount under Section 68 - The question of law consequently is answered in favour of the Revenue. ISSUES: Whether the Assessing Officer (AO) was justified in making an addition under Section 68 of the Income Tax Act on unexplained share application money despite the assessee furnishing details such as PAN, addresses, bank statements, and ROC returns of the share applicants.Whether the identity, creditworthiness, and genuineness of share applicants must be established solely by the assessee or if the Revenue can rely on further inquiries and evidence to disprove the genuineness of the transactions.Whether failure to serve notices under Section 133(6) on some share applicants justifies treating the share application money as unexplained cash credit.Whether additions under Section 68 can be made based on suspicion, surmises, or returned notices without concrete evidence.The applicability and scope of the Supreme Court decision in CIT v. Lovely Exports Pvt. Ltd. and subsequent case law on the burden of proof and shifting of onus in unexplained cash credit cases under Section 68. RULINGS / HOLDINGS: The Court held that the AO's addition under Section 68 was justified on the facts because the assessee failed to discharge the burden of proving the source of the share application money beyond furnishing basic identity documents, especially given that five notices under Section 133(6) were returned unserved and the share applicants disclosed very meager income; thus, the addition of Rs. 4.34 Crores as unexplained cash credit was upheld.The Court emphasized that while the initial burden lies on the assessee to prove the identity and genuineness of the creditors, once basic proof is furnished, the onus shifts to the Revenue to disprove the genuineness; however, the Revenue is entitled to draw legitimate inferences from credible and verifiable information, including returned notices and suspicious financial transactions.The Court found that failure to serve notices under Section 133(6) on five out of nine share applicants, combined with the low declared income and unusual fund transfers into their accounts, justified the AO's adverse inference and addition under Section 68.The Court rejected the proposition that additions under Section 68 cannot be made on suspicion, surmises, or conjectures alone but clarified that suspicion cannot replace evidential documents; in this case, the AO's conclusions were based on tangible facts and not mere suspicion.The Court distinguished the Supreme Court ruling in CIT v. Lovely Exports Pvt. Ltd., holding that while it establishes the principle of burden shifting, it does not preclude the Revenue from drawing legitimate inferences or making additions where the assessee's evidence is not credible or verifiable. RATIONALE: The Court applied the legal framework under Section 68 of the Income Tax Act, which requires the assessee to prove the identity, creditworthiness, and genuineness of the source of unexplained cash credits, initially placing the burden on the assessee and then shifting it to the Revenue upon discharge of basic proof.The Court relied on precedent decisions including CIT v. Lovely Exports Pvt. Ltd., CIT v. Dwarkadhish Investment (P) Ltd., and other Supreme Court authorities establishing that the assessee must furnish 'such materials as are necessary and in its possession' to discharge the initial burden.The Court recognized that the Revenue has 'all the power and wherewithal to trace any person' and may draw inferences from returned notices and financial inconsistencies, thereby not limiting the Revenue's ability to investigate and challenge the genuineness of transactions.The judgment reflects a doctrinal balance between protecting genuine transactions and preventing misuse of share capital to conceal undisclosed income, clarifying that burden shifting is not absolute and must be considered in light of the totality of facts and credibility of evidence.No dissenting opinion was recorded; the Court affirmed the concurrent findings of the CIT (Appeals) and ITAT were erroneous in deleting the addition, thereby allowing the Revenue's appeal.