TaxTMI 
TaxTMI 
2011 (12) TMI 394
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....decisions of the Apex Court and various High Courts, the issue keeps bouncing back with new dimensions and intricacies. In all these appeals, we are again confronted with the additions which were made by the AO under Section 68 of the Act. All these appeals, which pertain to different assessees, are filed by the Revenue as the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') has deleted the additions made by the Assessing Officer. 2. Before we embark upon the discussion on factual aspects, in the appeals, which prompted the AOs to make the additions, it would be appropriate to revisit the legal position as enunciated in various judgments interpreting the provisions of Section 68/69 of the Act. We may record that this very Bench had the occasion to deal with another batch of appeals touching upon this very issue, which culminated into judgment dated 31.1.2011 with lead case entitled CIT v. Oasis Hospitalities (P.) Ltd. [2011] 333 ITR 119/198 Taxman 247 (Bom.). As catena of judgments were taken note of and the ratio culled out therein after undertaking in-depth analysis, we are of the view that our purpose can be served by borrowing liberally from the said....
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....ure and source of those sums received by the assessee on account of share capital. It is in this scenario, the question arises about the genuineness of transactions. The plain language of Section 68 of the Act suggests that when the assessee is to give satisfactory explanation, burden of proof is on the assessee to provide nature and source of those receipts. 6. What kind of proof is to be furnished by the assessee, is the question. It has come up for discussion in various judgments rendered by this Court, other Courts as well as the Supreme Court. The law was discussed by a Division Bench of this Court in the case of Commissioner of Income Tax v. Divine Leasing and Finance Ltd. [299 ITR 268]. Since the entire gamut of case law as on that date was visited in the said judgment, we may initiate our discussion by taking note of this case. In this case, the Court highlighted the menace of conversion of unaccounted money through the masquerade or such channels of investment in the share capital of a company and thus stressed upon the duty of the Revenue to firmly curb the same. It was also observed that, in the process, the innocent assessee should not be unnecessary harassed. A deli....
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....f the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as a capital receipt but if the assessed offers no Explanation at all or the Explanation offered is not satisfactory then, the provisions of Section 68 may be invoked. 8. The Court also referred to the earlier Division Bench judgment in the case of Commissioner of Income Tax v. Dolphin Canpack Ltd. [(2006) 283 ITR 190] and quoted the following observation: ". . . credit entry relates to the issue of share capital, the ITO is also entitled to examine whether the alleged shareholders do in fact exist or not. Such an inquiry was conducted by the AO in the present case. In the course of the said inquiry, the assessed had disclosed to the AO not only the names and the particulars of the subscribers of the shares but also their bank accounts and the PAN issued by the IT Department. Super added to all this was the fact that the amount received by the company was all by way of cheques. This material was, in the opinion of the Tribunal, sufficient to discharge the onus that lay upon the assessed." 9. The Court took....
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....lear from the above that the initial burden is upon the assessee to explain the nature and source of the share application money received by the assessee. In order to discharge this burden, the assessee is required to prove: (a) Identity of shareholder; (b) Genuineness of transaction; and (c) Credit worthiness of shareholders. 12. In case the investor/shareholder is an individual, some documents will have to be filed or the said shareholder will have to be produced before the AO to prove his identity. If the creditor/subscriber is a company, then the details in the form of registered address or PAN identity, etc. can be furnished. 13. Genuineness of the transaction is to be demonstrated by showing that the assessee had, in fact, received money from the said shareholder and it came from the coffers from that very shareholder. The Division Bench held that when the money is received by cheque and is transmitted through banking or other indisputable channels, genuineness of transaction would be proved. Other documents showing the genuineness of transaction could be the copies of the shareholders register, share application forms, share....
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....e view is taken by the Karnataka High Court in Madhuri Investments Pvt. Ltd. v. ACIT (in ITA No. 110 of 2004, decided on 18.02.2006). In this case also, some of share applicants did not appear and notices sent to them were returned with remarks 'with no such person'. Addition was made on that basis which was turned down by the High Court in the following words: "6. Having heard the learned counsel for the parties, we notice that whenever a company invites applications for allotment of shares from different applicants, there is no procedure contemplated to find out the genuineness of the address or the genuinenity of the applicants before allotting the shares. If for any reason the address given in the application were to be incorrect or for any reason if the said applicants have changes their residence or the notices sent by the assessing officer has not been received by such applicants, the assessee company cannot be blamed. Therefore, we are of the view that the Tribunal was not justified in allowing the appeal of the revenue only relying upon the statement of Sri Anil Raj Mehta, a Chartered Accountant." 17. However, in Commissioner of Income Tax v. Arunananda Textiles Pvt.....
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....on money, no presumption can be drawn that same belong to the assessee and cannot be assessee in his hands as his undisclosed income unless some nexus is established that share application money for augmenting the investment in business has flown from assessee's own money. In coming to this conclusion, the Court relied on CIT v. Steller Investment Ltd. (1991) 99 CTR (Del.) 40, which has since been affirmed by the Supreme Court in CIT v. Steller Investment Ltd. (2000) 164 CTR (SC) 287. In view thereof, this question need not be decided again." 19. This very aspect came up for consideration before different Courts on number of occasion and was dealt with in favour of the assessee. 20. The observations of the Supreme Court in the case of Lovely Exports (supra) go to suggest that the Department is free to proceed to reopen the individual assessment in case of alleged bogus shareholders in accordance with law and, thus, not remediless. It is, thus, for the AO to make further inquiries with regard to the status of these parties to bring on record any adverse findings regarding their creditworthiness. This would be moreso where the assessee is a public limited company and has issued....
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.... of the Act suggests that (i) there has to be credit of amounts in the books maintained by the assessee; (ii) such credit has to be a sum of money during the previous year; and (iii) either (a) the assessee offers no explanation about the nature and source of such credits found in the books or (b) the explanation offered by the assessee, in the opinion of the AO, is not satisfactory. It is only then that the sum so credited may be charged to income tax as the income of the assessee of that previous year. The expression "the assessee offers no explanation" means the assessee offers no proper, reasonable and acceptable explanation as regards the sums found credited in the books maintained by the assessee. The opinion of the AO for not accepting the explanation offered by the assessee as not satisfactory is required to be based on proper appreciation of material and other attending circumstances available on the record. The opinion of the AO is required to be formed objectively with reference to the material on record. Application of mind is the sine qua non for forming the opinion. In cases where the explanation offered by the assessee about the nature and source of the sums found cr....
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....arious judgments and noted by us above. At the same time, it is also well established principle of law that in any matter, the onus brought is not a static one. Though initial burden is upon the assessee, once he proves the identity of credits/share application by either furnishing Permanent Account Numbers or copies of bank accounts and shows the genuineness of the transaction by showing money in the banks is by account payee cheques or by draft, etc., then the onus to prove the same would shift to the assessee. The question which assumes importance at this stage is to what the Revenue is supposed to do to dislodge the initial burden discharged by the assessee and to throw the ball again in the assessee's court demanding the assessee to give some more proofs, as the documents produced earlier by the assessee either become suspect or are rendered insufficient in view of the material produced by the Department rebutting the assessee's documentary evidence. This is the aspect which has to be gone into in all these cases. Before that, we would like to refer to the observations of some Courts touching the core issue relating to discharge of burden. (A) CIT v. Rathi Finlease Lt....
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....in trying to ascertain the source of the depositor, assuming he is identified, in order to determine whether that depositor is a mere name lender or not. Be that as it may, it is clear that the Income tax Officer has jurisdiction to make enquiries with regard to the nature and source of a sum credited in the books of account of an assessee and it would be immaterial as to whether the amount so credited is given the colour of a loan or a sum representing the sale proceeds or even receipt of share application money. The use of the words "any sum found credited in the books" in section 68 indicates that the said section is very widely worded and an Income tax officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money. ** ** ** ..............On the basis of the language used under Section 68 and the various decisions of different High Courts and the Apex Court, the only conclusion which could be arrived at is: (i) that there is no distinction between the cash credit entry existing in the books of the firm whether it is of a partner or of a third party, (ii) that the bu....
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....ovided by the Act lies upon the assessee. (See Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536). But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee, viz. the receipt of money, and if he fails to rebut it the said evidence being unrebutted, can be used against him by holding that it was a receipt of an income nature. While considering the explanation of the assessee the Department cannot, however, act unreasonably. ** ** ** ..............This raises the question whether the apparent can be considered as the real. As laid down by this Court the apparent must be considered the real until it is shown that there are reasons to believe that the apparent is not the real and that the taxing authorities are entitled to look into the surrounding circumstances to find out the reality and the matter....
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....lication money of Rs. 2.74 Crores from various applicants. The assessee filed details of all the share applicants and the amounts received along with their confirmation and copies of the bank accounts of such investors from as many as 32 share applicants. All these applicants were private limited companies. The AO was of the opinion that the creditors were not genuine parties and were only entry providers. He referred to the report dated 02.3.2006 of the Directorate of Income Tax (Investigation), Unit-V, New Delhi in this behalf. He issued detailed questionnaire on 09.11.2006 wherein he also gave specific reasons in respect of each of the applicant which was of the following nature: (i) In the bank account of the various share applicants, they had deposited cash for specific purpose for applying for share in addition to providing entry to the assessee, the same modus was adopted in the other cases as well. (ii) Many companies did not exist at the addresses furnished. The registered letters sent to them had been received back undelivered. (iii) There were reports of the Inspectors (Income Tax) that many parties were not genuine assessees and were not in ex....
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....ries. In most of the cases in which the assessee company filed bank statements of the share applicants, the deposits in the accounts of such applicants were shown to have been received by way of transfer of funds to them but when such statements were requisitioned directly from the banks under Section 133(6) of the Income Tax Act, it was discovered that cash had been deposited in the accounts of the share applicants before being transferred to the account of the assessee company. This anomaly is almost universal except in a few cases where transfer entries have been rotated. In certain other cases both cash has been deposited and entries rotated. The claim of the assessee that he was unaware of this state of affairs is much too difficult to digest. In the light of this fact, other contentions of the assessee company in its representation dated 17.11.2006 become redundant. The claim of the assessee company of its inability to produce the shareholders physically is hollow because no such shareholder exists to be physically present for any deposition. " 10. We have taken note of the aforesaid assessment order in detail as the entire argument of the learned Counsel for the Revenue w....
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....e in this case. In these circumstances, respectfully following the decision of the Hon'ble Jurisdictional High Court as also Hon'ble Supreme Court referred to supra the addition made by the AO and has confirmed by the Ld. CIT(A) in regard to the alleged bogus shareholders represented by the increase in share capital of the assessee cannot be treated as unexplained cash credits in the hands of the assessee. However, respectfully following the decision of the Hon'ble Court referred to supra, it is directed that the Department is free to proceed to re-open the individual assessments of such alleged bogus shareholders. The direction is being given under Section 151(i) read with section 153(3) of the Income Tax Act." 12. What does follow from the aforesaid? It is not in doubt that the assessee had given the particulars of registration of the investing/applicant companies; confirmation from the share applicants; bank accounts details; shown payment through account payee cheques, etc. As stated by us in the beginning, with these documents, it can be said that the assessee has discharged its initial onus. With the registration of the companies, its identity stands established, the appli....
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.... factor. As pointed out above, these applicant companies have PAN and assessed income tax. No effort was made to examine as to whether these companies were filing the income tax return and if they were filing the same, then what kind of returns these companies were filing. If there was no return, this could be another factor leading towards the suspicion nurtured by the AO. Further, if the returns were filed and scrutiny thereof reveals that such returns were for namesake, this could yet another be contributing factor in the direction AO wanted to go. Likewise, when the bank statements were filed, the AO could find out the address given by those applicant companies in the bank, who opened the bank accounts and are the signatories, who introduced those bank accounts and the manner in which transactions were carried out and the bank accounts operated. This kind of inquiry would have given some more material to the AO to find out as to whether the assessee can be convicted with the transactions which were allegedly bogus and or companies were also bogus and were treated for namesake. We say so with more emphasis because of the reason that normally such kind of presumption against the ....
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....s and treat the subscribed capital as the undisclosed income of the company." (Emphasis supplied) 17. Even in the instant case, it is projected by the Revenue that the Directorate of Income Tax (Investigation) had purportedly found such a racket of floating bogus companies with sole purpose of landing entries. But, it is unfortunate that all this exercise is going in vain as few more steps which should have been taken by the Revenue in order to find out causal connection between the cash deposited in the bank accounts of the applicant banks and the assessee were not taken. It is necessary to link the assessee with the source when that link is missing, it is difficult to fasten the assessee with such a liability. 18. We may repeat what is often said, that a delicate balance has to be maintained while walking on the tight rope of Sections 68 and 69 of the Act. On the on hand, no doubt, such kind of dubious practices are rampant, on the other hand, merely because there is an acknowledgement of such practices would not mean that in any of such cases coming before the Court, the Court has to presume that the assessee in questions as indulged in that practice. To make the assessee ....
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....ess is relied upon, but opportunity to cross-examine is not afforded to the assessee. (ii) On the contrary, it is a case where the AO(s) did not collect the required evidence which they were supposed to do. To put it otherwise, once the assessee had discharged their onus and the burden shifted on the AO(s), they could not come out with any cogent evidence to make the additions. No doubt, as indicate by us above, the AO(s) could have embark upon further inquiry. If that is not done and the AO(s) did not care to discharge the onus which was laid down, for this "negligence" on the part of the AO(s), he cannot be provided with "fresh innings". (iii) The order of the AO(s) had merged in the order of the CIT(A) and in some of the cases before us and before the CIT(A), the assessees had succeeded. (iv) This Court is acting as appellate Court and has to act within the limitations provided under Section 26A of the Act. The appeals can be entertained only on substantial questions of law. In the process, this Court is to examine as to whether the order of the Tribunal is correct and any substantial question of law arises therefrom. The Tribunal has passed the impugn....
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....ished. The documents furnished by the assessee was as follows: (i) Date of notice/order sheet entry -16.6.2008 and Date of reply - 18.8.2008 (a) Letters from the share-applicants for all shareholders with PAN and account payee cheques details; (b) Certificate of incorporation (ii) Date of notice/order sheet entry - 26.9.2008 and Date of reply - 07.10.2008 (a) Letters from the share-applicants for four shareholders; (b) Confirmation; (c) Bank statement (d) PAN 25. All the shareholders are corporate entities, who are duly registered with the Registrar of Companies and are also assessed to tax. 26. The AO sent notice to these 17 shareholders, out of which 13 remained unserved and 4 who were served did not respond. When this was put to the assessee, the assessee furnished latest address of all the 17 shareholders. The AO allegedly deputed and inspected to verify their existence. The Inspector purportedly furnished three reports dated 11.9.2008 regarding 13 shareholders and another report dated 16.10.2008 regarding four shareholders alleging that none of these shareholders are physically "available" at the giv....
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....nd, Patna High Court in the case of Addl. CIT v. Bahri Bros [1985] 154 ITR 244/22 Taxman 3 has held that the question of identity fails into oblivion, if the transaction is through account payee cheques. The same view has been expressed by the Calcutta High Court in the case of Mather & Platt (India) Ltd. v. CIT [1987] 168 ITR 493/32 Taxman 38. Moreover, no summons had been issued to bankers of the shareholders and the Registrar of Companies despite specific request of assessee. The assessee seeks to reply upon the case of CIT v. Genesis Commet (P) Ltd. [2007] 163 Taxman 482 (Delhi), wherein it has been held that an officer, if he was not inclined to believe material placed by the assessee he could have used coercive powers available to him. 28. The contention of the assessee has been found to be convincing by the Tribunal and the learned Tribunal has allowed the appeal thereby deleting the addition. The Revenue is in appeal before us. The entire case of the Revenue based on the plea that as per the report, the investing companies were not found at the given addresses and on this basis, argument is raised that the companies are non-existing and the transactions were bogus and no....
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....observed that the Assessing Officer could not point out and discrepancy in the evidences relied upon by the assessee. He has neither brought out any direct or inferential evidence to contradict the contention of the assessee. It is further observed that even though A.O. has vast powers under section 131 and 133(6) of the Act, he has not used any of his powers to verify the genuineness of the claim of the assessee by verifying the documents furnished by it. If A.O. had doubted the impugned transaction after receiving the evidences which had been produced by the assessee in support of its claim it was very much open to the A.O. to do his independent enquiry and verification. This has not been done by the A.O. Further, what is the desired documentary evidence required to support the claim of the assessee as required by the A.O. is not coming out of the order of the A.O. Though the share-applicants could not be examined by the AO, since they were existing on the file of the Income Tax Department and their income-tax details were made available to the AO, it was equally the duty of the AO to have taken steps to verify their assessment records and if necessary to also have them examined ....
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....not dispute the aforesaid conclusion of the CIT(A) based on the record before him. However, the plea of the Revenue was that the CIT(A) could have remitted the case back to the AO for granting the opportunity to cross- examine the assessee. On this submission and without commenting upon the merits of the order passed by the CIT(A), the Tribunal took the view that the matter needs further examination and therefore, restored the same to the file of the AO in the following words: "We have considered the facts of the case and submissions made before us. We are of the view that the investment by various companies in the shares of the assessee company require further examination and in particular the information received from investigation has to be verified further by recording statements of the applicants in present of the assessee. Therefore, the matter is restored to the file of the AO to make enquiries as above and allow the assessee to cross-examine the applicants so as to arrive at the correct facts in the matter." 34. In our discussion on the aspect of remand in ITA No.972/2009, we have indicated that if the addition is set aside only because of some procedural defect or ir....
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....dated 28.3.2008. In the relevant year, the assessee had received share application money from two different entities M/s Suma Finance and Investment Ltd. Rs. 60,85,776/- and M/s Ankur Marketing Ltd. Rs. 14,34,500/-. The assessee in all received amount of Rs. 75,20,276/- is as share application money. The amount received is well-supported and explained by the documentary evidences. The assessee had filed the confirmations of accounts, PAN details, and share application from the applicants. The AO treated the said amount Rs. 75,20,276/- as cash credit and mode the addition under Section 68 and also added and amount of Rs. 18,801/- by way of alleged Commission Expenses under section 69C of the Act. In all the addition under Section 68 was Rs. 75,39,077/- (Rs. 75,20,276/- + Rs. 18,801/-) by the AO. 38. The main reason for making the addition was that the share applicants were not produced or non-attendance of the applicants was in response to the notices issued to them. The assessee filed an appeal before CIT(A). 39. The assessee had challenged the issuances of notice under Section 148 of the Act and also the merits of the additions made. The CIT(A) vide its order dated 21.5.2009....
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....pplied his own mind to the issue or carried out any incumbent verification before issuing the notice. 42. We find this contention of the assessee to be correct. In Para 2, the AO has reproduced the particulars of allegedly bogus transactions as "given by the Directorate of Income Tax (Investigation) after making the necessary inquiries". The AO did not even care to see those particulars, which are repetitive in nature as is clear from the following: Name of the assessee/Beneficiaries Name of the Bank Beneficiaries Name of the Operator Instrument No. Operator's A/c No. and Bank Date on which entry taken Amount (in Rs.) M/s Infomediary India Pvt. Ltd. Indian Bank M/s. Suma Finance Investment Ltd. 311108 2919, Corpn. Bank, Karol Bagh, New Delhi 23-Mar-01 10,46,568/- -do- -do- -do- 311108 -do- 16-Feb-01 10,46,568/- -do- -do- -do- 302578 -do- 16-Feb-01 3,80,760/- -do- -do- -do- 302578 -do- 16-Feb-01 3,80,760/- -do- -do- -do- 302581 -do- 16-Feb-01 5,61,120/- -do- -do- -do- 302581 -do- 16-Feb-01 5,61,120/- -do- -do- M/s Ankur Market....
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....he authority. Their existence is not disputed. What is mentioned is that these companies were used as conduits. In that view of the matter, the principle laid down in Lovely Exports (P) Ltd. (supra) gets squarely attracted. The same has not been referred to while passing the order of rejection. The assessee in his objections had clearly stated that the companies had bank accounts and payments were made to the assessee company through banking channel. The identity of the companies was not disputed. Under these circumstances, it would not be appropriate to require the assessee to go through the entire gamut of proceedings. It is totally unwarranted." 45. Similar view is taken by another Division Bench of this Court in CIT v. SFIL Stock Broking Ltd. [2010] 325 ITR 285. In that case also, the AO had recorded the reasons to believe in similar manner, viz., more information received from the Deputy Director of Income Tax (Investigation) and the Court took the view that these were no reasons within the meaning of Section 148 of the Act. Following discussion in this behalf needs to be noted: "9. In the present case, we find that the first sentence of the so-called reasons recorded by....
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....n/approval of the Commissioner and whether the same satisfy the pre-conditions mentioned in Section 147 of the Act." 48. On examination, the Court set aside the notice under Section 148 of the Act and in the process, discussion therein is as under: "14. The first sentence of the reasons states that information had been received from Director of Income-Tax (Investigation) that the petitioner had introduced money amounting to Rs. 5 lacs during financial year 2002-03 as per the details given in Annexure. The said Annexure, reproduced above, relates to a cheque received by the petitioner on 9th October, 2002 from Swetu Stone PV from the bank and the account number mentioned therein. The last sentence records that as per the information, the amount received was nothing but an accommodation entry and the assessee was the beneficiary. 15. The aforesaid reasons do not satisfy the requirements of Section 147 of the Act. The reasons and the information referred to is extremely scanty and vague. There is no reference to any document or statement, except Annexure, which has been quoted above. Annexure cannot be regarded as a material or evidence that prima facie shows or establishes n....
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....s enclosed as Annexure, has been referred. This is the only material relied upon by the Assessing Officer. The said Annexure has been quoted above. In this connection, we may notice that M/s Swetu Stone Pvt. Ltd. is an incorporated company and the petitioner has pleaded and stated that the said company has a paid-up capital of Rs. 90 lacs. The company was incorporated on 4th January, 1989 and was also allotted a permanent account number in September, 2001. To this extent, there is no dispute. In these circumstances, we feel the judgments of the Delhi High Court in Commissioner of Income Tax v. SFIL Stock Broking Limited, [2010] 325 ITR 285 (Delhi) and Sarthak Securities Company Private Limited v. Income Tax Officer, 2010 (329) ITR 110 (Delhi), in which CIT v. Lovely Exports (P) Limited, (2009) 216 CTR 195 (SC) has been applied and followed, are applicable. We may notice here that the respondent in their counter affidavit have stated that Swetu Stone Pvt. Ltd. is unidentifiable and, therefore, the aforesaid decisions should not be applied and the ratio of the decision dated 7th January, 2011 in Writ Petition (Civil) No. 7517/2010, AGR Investment Limited v. Additional Commissioner of....