Tree plantation scheme deposits treated as taxable income under section 28 after fraudulent collection findings

ITAT Delhi dismissed the appeal where the assessee collected deposits from small investors through a tree plantation scheme called "Kuber Dhanvarsha." The tribunal found that deposits ranging from Rs. 1,250 to Rs. 10,000 were collected with cryptic addresses making depositors difficult to trace. Based on Additional Sessions Judge's finding that the assessee had no intention to return funds and the fraudulent nature of the scheme, ITAT treated the entire collection as taxable income under section 28 rather than unexplained cash credits under section 68, sustaining the tax authorities' additions.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs. 34,71,33,750/- under section 68 of the Income-tax Act, 1961 (the Act) on account of subscription received from members under the Tree Plantation Scheme "Kuber Dhanvarsha" for Assessment Year 1997-98 is justified.

(b) Whether the assessee has satisfactorily explained the identity, genuineness, and creditworthiness of the deposits received under the scheme, as required under section 68 of the Act.

(c) Whether the amount added should be limited only to the extent of unclaimed deposits, as directed by the ITAT in earlier proceedings.

(d) Whether the deposits received by the assessee under the scheme constitute genuine liabilities or are to be treated as income of the assessee due to failure to prove the genuineness and intention to repay.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Justification of addition under section 68 and explanation of credits

Relevant legal framework and precedents: Section 68 of the Income-tax Act requires that where any sum is found credited in the books of an assessee as share capital or share application money or any sum received as a loan or deposit, the assessee must explain the nature and source of such sum and prove the identity and genuineness of the creditor or depositor. Failure to do so results in such sum being added to the income of the assessee.

Court's interpretation and reasoning: The Tribunal examined whether the assessee has discharged the onus to prove the identity, creditworthiness, and genuineness of the deposits received under the "Kuber Dhanvarsha" plantation scheme. The assessee submitted that the entire amount was claimed by the depositors and recovery proceedings were ongoing, supported by SEBI's audit report and recovery certificate quantifying the maturity value payable to depositors. The assessee argued that since SEBI had quantified and issued recovery certificates, the deposits were genuine and not liable to be added under section 68.

The Tribunal noted that the assessee relied heavily on the SEBI-appointed auditor's report and SEBI's recovery certificate, which quantified the maturity value payable to depositors, significantly exceeding the deposit amount. The assessee contended that this substantiated the genuineness of the deposits.

Key evidence and findings: The SEBI audit report dated 15.09.1998 and recovery certificate dated 03.06.2016 were key evidences submitted by the assessee showing the total deposits received and the maturity amount payable. The audit report detailed scheme-wise and year-wise amounts payable, including Rs. 34.71 crores for the year under consideration. The SEBI recovery certificate quantified the liability at Rs. 2462.17 crores (including penalty), indicating the full amount was claimed and quantified.

However, the CIT(A) and the Tribunal observed that the assessee had failed to provide details of depositors who had claimed the amounts or any confirmation of repayment. The assessee did not produce documentary evidence of payments made to depositors or specifics of unclaimed deposits as directed by the ITAT in earlier remands. The Tribunal noted that the SEBI audit report was an estimation and not proof of actual repayment or genuineness of each deposit.

Application of law to facts: The Tribunal applied section 68's requirement that the assessee must prove the identity and creditworthiness of depositors and genuineness of transactions. The failure to provide details of unclaimed deposits or proof of repayment meant the assessee did not discharge the onus. The Tribunal emphasized that mere reliance on SEBI's audit report or recovery certificate without concrete evidence of repayment or depositor confirmations was insufficient.

Treatment of competing arguments: The assessee argued that SEBI's recovery certificate and audit report conclusively established the genuineness and that the amount was not income but refundable deposits. The Revenue and CIT(A) countered that the assessee failed to comply with ITAT directions to submit details of unclaimed deposits and repayments and that SEBI had convicted the company and its director for offences under SEBI Act for failure to return deposits, indicating no intention to repay.

Conclusions: The Tribunal upheld the addition under section 68, concluding that the assessee failed to prove identity, genuineness, and creditworthiness of the deposits. The deposits were held to be income of the assessee, not genuine liabilities, due to failure to repay and non-cooperation in furnishing details.

Issue (c): Limitation of addition to unclaimed deposits as per ITAT direction

Relevant legal framework and precedents: The ITAT in earlier proceedings had remanded the matter directing the AO to examine only the unclaimed deposits and add to income only to that extent.

Court's interpretation and reasoning: The Tribunal noted that despite repeated directions, the assessee failed to furnish details of unclaimed deposits or repayments. The AO proceeded to add the entire amount received under the scheme. The CIT(A) and the Tribunal found that the assessee's failure to comply with directions justified sustaining the addition in full.

Key evidence and findings: The assessee did not submit any report or details on unclaimed deposits despite multiple notices and directions. The AO's report was not submitted. The assessee's submissions to collect information from SEBI were noted but no concrete information was produced.

Application of law to facts: The Tribunal held that since the assessee did not furnish information to identify and quantify unclaimed deposits, the entire amount received was liable to be added. The non-compliance with ITAT directions was fatal to the assessee's case.

Treatment of competing arguments: The assessee argued that the entire amount was claimed by depositors and recovery proceedings were ongoing, hence no unclaimed deposits existed. The Revenue relied on the non-submission of details and SEBI's adverse findings to support addition of the entire amount.

Conclusions: The Tribunal confirmed that the addition could not be limited to unclaimed deposits due to assessee's non-compliance and sustained the addition of the entire amount under section 68.

Issue (d): Nature of deposits - genuine liabilities or income

Relevant legal framework and precedents: Under the Income-tax Act, genuine deposits are liabilities and not income. However, if the assessee fails to prove genuineness or shows intention to defraud, such amounts can be treated as income under section 28 or added under section 68.

Court's interpretation and reasoning: The Tribunal examined the nature of the deposits and the conduct of the assessee. It noted that the scheme was found to be a Collective Investment Scheme (CIS) prohibited under SEBI regulations. The assessee's application for registration was rejected, and SEBI directed winding up and refund of deposits.

The Tribunal relied on SEBI's findings and the conviction of the company and its director for offences under SEBI Act, including failure to return deposits and misleading investors. The Tribunal observed that the assessee had not returned any deposits despite directions and penalties, indicating no intention to repay.

Key evidence and findings: SEBI orders, audit reports, recovery certificates, and court convictions were key evidences showing the scheme's illegality, failure to repay, and fraudulent intention. The balance sheets showed large non-current liabilities representing deposits that remained unpaid over years, with no winding up report filed.

Application of law to facts: The Tribunal applied principles that where deposits are not genuine or intended to be repaid, they are liable to be treated as income. The assessee's conduct and SEBI findings led to the conclusion that the deposits were ill-gotten gains and taxable as income.

Treatment of competing arguments: The assessee argued that the deposits were genuine and did not belong to the assessee but to the investors, relying on SEBI's quantification and recovery proceedings. The Revenue and Tribunal rejected this, emphasizing the failure to repay, conviction, and fraudulent intention.

Conclusions: The Tribunal concluded that the deposits were not genuine liabilities but income of the assessee and upheld the additions accordingly.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"The assessee has failed to discharge the onus cast upon it under section 68 of the Act to prove the identity, creditworthiness and genuineness of the deposits received under the Tree Plantation Scheme 'Kuber Dhanvarsha'. Mere reliance on SEBI audit reports and recovery certificates without furnishing details of unclaimed deposits or proof of repayment is insufficient."

"The assessee's failure to comply with directions of the ITAT to furnish details of unclaimed deposits justifies addition of the entire amount received under the scheme and not limiting it to unclaimed deposits."

"Considering the findings of SEBI, the conviction of the company and its director, and the assessee's conduct of non-repayment of deposits, the deposits received by the assessee are not genuine liabilities but ill-gotten income taxable under the Act."

"The addition of Rs. 34,71,33,750/- under section 68 is sustained, and the appeal of the assessee is dismissed."

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