TaxTMI 
TaxTMI 
2008 (2) TMI 883
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.... bogus share capital and premium to be separately added under s. 68 and learned CIT(A) further erred in sustaining the same to the extent of Rs. 38 lakhs thereby correcting arithmetical error after excluding Rs. 90 lakhs to be added under s. 68. 2. On the facts and in the circumstances, the learned AO further erred in treating the genuine credits of Rs. 90,00,000 in respect of share capital and premium as sham, bogus and accommodation entries merely on presumption and suspicion and learned CIT(A) grossly erred in confirming the same. 3. On the facts and in the circumstances of the case, the learned AO further erred in disallowing Rs. 52,470 arbitrarily considering the revenue loss as capital loss and learned CIT(A) erred in confirming the same." 3. The Department has taken the following sole issue in its grounds of appeal : "On the facts and in the circumstances of the case, the learned CIT(A) was not justified in deleting the disallowance of Rs. 17,70,240 made by the AO under s. 40A(3) of the IT Act, 1961." 4. Both the parties were heard regarding the issues raised by them in the respective appeal and their legal implications. 5. First we shall take up the assess....
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.... assessee was made to pay a Central Excise duty of Rs. 25 lakhs. Further suo motu the assessee has offered an income of Rs. 50 lakhs for the period on account of unaccounted sales based on the seized papers. During the proceedings under s. 143(2) of the Act, the assessee explained that out of Rs. 50 lakhs offered by him, about Rs. 34.5 lakhs has been offered on account of income of those months and about Rs. 14.5 lakhs has been offered on account of peak investments. 6.4 The assessee in its reply dt. 13th Nov., 2006 filed before the AO has mentioned the peak investments and profit on unaccounted sales as under : "That the assessee has verified and finally prepared the details of unaccounted sales, estimated expenses and profits thereon as per a dummy ledger and cash book in computer. In this set of books enclosed herewith estimated manufacturing and other expenses of about 84 per cent have been shown on the date of sale. As per this book there is net profit of about Rs. 34.50 lacs. Further it may be seen that maximum cash shortage works out to Rs. 14.38 lacs on 6th Jan., 2006. Considering both these items the assessee has declared total income of Rs. 50 lacs and credited the ....
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....lescoping to this extent. He, therefore, added the only difference amount of Rs. 58,00,000 to the total income of the assessee as lump sum addition on the basis of extrapolation. 7. Aggrieved by the order of the AO, the assessee filed appeal before the learned CIT(A) who confirmed the action of the AO by observing as under : "Hence it has been proved beyond any doubt that appellant indulged in out of books sales. When for the entire period, the appellant has disclosed a gross turnover of Rs. 32.13 crores, then only for 56 days of the relevant assessment year spreading over 14th Jan., 2004 to 10th March, 2004, the appellant has admitted [by itself] to have suppressed sales to the extent of Rs. 2.21 crore. Hence, the action of the AO in treating that there was a suppression of sales for the initial 9 months is on valid ground and hence, sustained. Then production and subsequent removal has not been noted in RG-1 register, which is an admitted fact and hence, on the date of search, the appellant had suppressed sales to the extent of Rs. 2.21 crore only for 56 days for which documents could be detected. After establishing the issue, now the question would arise as to whether t....
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....come generated in the first 9 months was reintroduced by way of share capital (with share premium) on the last week of the assessment year. Hence, the concealment under this head should be restricted to Rs. 38 lakhs in place of Rs. 58 lakhs as computed by the AO." 7.1 Aggrieved by the order of the CIT(A), the assessee is further in appeal before the Tribunal. 8. The learned counsel for the assessee, Shri R.S. Khemka reiterated the submissions made before the learned CIT(A). He vehemently assailed the action of the AO. Firstly, he submitted that the action of the AO is based purely on guesswork without any basis or any material fact. He submitted that no details were available to the AO to arrive at such figure. He submitted that had there been any concealed sales for the first 9 months, it could have been detected by the Central Excise authority during the search operation. He invited our attention to the reply of the assessee dt. 18th Dec., 2006 (which is filed on pp. 79 to 81 of the paper book I of the assessee) filed by the assessee in compliance to the show-cause notice issued by the AO wherein it has been submitted that the sales as per papers seized by excise authoritie....
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....ee (b) Evidences required from AO to be produced (c) After taking into account all relevant material gathered by AO. It is therefore clear from plain reading of s. 143(3) that the assessment of income should be based on relevant and gathered material and not beyond that, but the learned AO has not given due consideration on this point raised by the appellant. 10. He further submitted that even in the case of search by the IT Department the additions are restricted to be based on loose papers and other documents seized during the course of search and not beyond this. The AO has gone beyond the period (January, 2004 to March, 2004) for which the documents were seized by the Central Excise authorities, which is not at all justified, particularly when the assessee himself has declared a sum of Rs. 50 lakhs as income on account of unaccounted sales and peak investments. 11. He distinguished the judgment of the Hon'ble Supreme Court in case of H.M. Esufali (supra) and submitted that the ratio of the aforesaid apex Court decision is not applicable to the facts of the case of the assessee for the following reasons : 11.1 That the cited case pertains to sales-tax and C....
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....ll and true disclosure of unrecorded transactions and payment of excise duty. 11.7 He, therefore, vehemently submitted that the orders of learned AO as well as the CIT(A) were not in accordance with law. In support of the contentions that such hypothetical calculations of turnover and estimation of GP merely on presumptions and surmises are not sustainable. The learned counsel for the assessee relied on the following decisions : (1) Dhakeswari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC); (2) CIT vs. Mahesh Chand (1992) 104 CTR (All) 327 : (1993) 199 ITR 247 (All); (3) CIT vs. R.Y. Durlabhji (1995) 211 ITR 178 (Raj); (4) Mange Ram Mittal vs. Asstt. CIT (2006) 105 TTJ (Del)(SB) 594; (5) CIT vs. Dr. M.K.E. Memon (2001) 168 CTR (Bom) 184 : (2001) 248 ITR 310 (Bom); (6) CIT vs. C.J. Shah & Co. (2000) 246 ITR 671 (Bom); (7) CIT vs. Achal Alloys (P) Ltd. (1996) 130 CTR (MP) 22 : (1996) 218 ITR 46 (MP); (8) Asstt. CIT vs. A.T. Associates (2006) 99 TTJ (Nag) 74; (9) Dr. Prakash Rathi vs. ITO (2006) 104 TTJ (Jd) 504; (10) Dy. CIT vs. Gandhar Oil Refinary (I) Ltd. (2006) 104 TTJ (Mumbai) 630; (11) CIT vs. Kashiram Textile Mills (P) Ltd. (2006) 202 CTR ....
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....d from January, 2004 to initial week of March, 2004. On the basis of the papers impounded, the assessee was made to pay Central Excise duty of Rs. 25,00,000. Further, the assessee suo motu has offered an income of Rs. 50 lakhs for the period on account of unaccounted sales based on the seized papers. During the proceedings under s. 143(3), the assessee explained that out of Rs. 50 lakhs offered by it, about Rs. 34.5 lakhs has been offered on account of income of those months and about Rs. 14.5 lakhs has been offered on account of peak investment. The assessee in its reply dt. 13th Nov., 2006 which is filed on p. 76 of the paper book I has mentioned the peak investment and profit on accounted sales as under : "That the assessee has verified and finally prepared the details of unaccounted sales, estimated expenses and profits thereon as per a dummy ledger and cash book in computer. In this set of books, enclosed herewith estimated manufacturing and other expenses of about 84 per cent have been shown on the date of sales. As per this books, there is a net profit of about Rs. 34.50 lakhs. Further, it may be seen that maximum cash shortage works out to Rs. 14.38 lakhs on 6th Jan., 20....
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.... the income of Rs. 1.48 crores. In this regard, it is pertinent to mention here that the correct figure comes to Rs. 1.28 crores. This action of the AO in our view is not correct since there is no material on record to support the same. It is worthwhile to mention that at one place, the AO proposed the estimation at Rs. 90 lakhs i.e. Rs. 10 lakhs per month for a period of nine months and at the other place, proposed Rs. 1.48 crores which shows that the AO was not certain in regard to the addition to be made on account of unaccounted sales for the period of nine months. In our opinion, the addition of Rs. 58 lakhs (corrected figure is Rs. 38 lakhs) made by the AO is arbitrary and unwarranted on the facts and in the circumstances of the case. 14. We find force in the argument of the learned counsel for the assessee that as per s. 143(3)(iii) of the Act, the assessment of income has to be made on available evidence but the learned AO as well as the learned CIT(A) have not given due consideration to this argument raised by the assessee before them. Even in the case of search by the IT Department, the additions are restricted based on loose papers and other documents seized during th....
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.... which was confirmed by the learned CIT(A) in appeal. 17. The basic facts and circumstances in regard to this ground have been discussed in extenso in ground No. 1 above. In a nutshell, the facts are that the AO estimated the income at Rs. 1.48 crores and deducted Rs. 90 lakhs from Rs. 1.48 crores on allegation of being unaccounted income generated by issue of shares to Kolkata based companies which has been separately added under s. 68 of the Act. Thus, the AO made an addition of Rs. 90,00,000 under s. 68 treating amount received towards share capital and premium as sham bogus and accommodation entries. 18. While making such huge addition under s. 68, the AO in page No. 13 of the assessment order made his observations as under : "(i) The assessee has raised funds through issue of shares during the relevant financial year. There is an increase of Rs. 18 lakhs in the share capital account and Rs. 72 lakhs in the share premium account. The only source of this money is from four Kolkata based companies, whose details, quantum of investment and the return of income are as follows : Name of share-holder Address Share capital (Rs.) Share premium (Rs.) Total (Rs.) ....
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....n reflected. During the course of assessment proceedings, all these documents have been verified by the learned AO. Thereafter the learned AO came to a conclusion that although furnishing of PAN, IT returns etc. can be said to be a proof of identity, but other onus on the assessee are yet to be discharged. The fact that directors of these companies did not bother to come forward and explain the source of their investment, has constrained me to take an adverse view against their creditworthiness and genuineness of the transactions undertaken by them. The learned AO again raised his doubt and mentioned that the above companies are mere conduits and the money in the form of share application money appears to be routed through them. Thus the learned AO after relying upon the judgments of various High Courts decided that the assessee has been unable to discharge the primary onus and made addition of Rs. 90 lakhs under s. 68 of IT Act, 1961." 19. On appeal, the learned CIT(A) confirmed the addition with the following observations : "Considering the matter in totality, I am of the considered opinion that the AO was able to make out a case that the genuineness of the creditor was not....
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.... justified. 22. In support of above, reliance is placed on the ratio of decisions in cases of Dhakeswari Cotton Mills Ltd. vs. CIT (supra), Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151(SC) and Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288(SC) for the proposition that there must be something more than mere suspicion in support of an assessment and mere suspicion cannot take the place of proof for the purpose of passing an order of assessment. Similarly the decision of Hon'ble Supreme Court in case of Mehta Parikh & Co. vs. CIT (1956) 30 ITR 181(SC) may be usefully referred wherein it has been held that any addition not supported by any evidence will be erroneous in point of law. 23. While referring to s. 68, it is submitted that where any sum is found credited in the books of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee is not satisfactory in the opinion of the AO, then the sum so credited "may be charged" to income-tax as the income of the assessee of that previous year. In the present case, the assessee has issued shares only against crossed cheques/drafts given by the shares....
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....e in this case : (i) In this case the assessee furnished details about the shareholders along with details of the amounts received towards subscription by way of cheques. (ii) The assessee obtained the subscription through nationalized banks and after inviting the subscription through public advertisement. (iii) The assessee also gave the list of share subscribers with their income-tax file numbers. (iv) The AO issued notice to 37 subscribers, out of which 10 subscribers appeared and produced satisfactory evidence regarding the genuineness and creditworthiness for investment. (v) 14 persons failed to respond. The AO hence without looking into the existence, creditworthiness of those persons whose details were available on record made addition without further enquiry. (vi) The Court held that once the assessee has placed materials before the AO it is for the AO to test and establish whether there is a case for an addition under s. 68. Even where the assessee has given details of the income-tax numbers of the subscribers along with cheque or draft numbers, the AO can test the genuineness of the transaction. (vii) The contention of the assessee that the decision o....
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....ompanies is nothing but share premium amount and the question as to why these companies would receive share premium" is totally immaterial and irrelevant in the present case which has no bearing in the present case. If the affairs of the above companies, on which the appellant has no control, create any kind of doubt or suspicion then the Department having long hands, should have no hesitation in making roving enquiries against the above companies. 25.2 Thereafter it is incumbent on the AO to make necessary enquiry on the income-tax file numbers submitted and to arrive at a conclusion but no such enquiry was made by the learned AO. 26. Further reliance is placed on the decision of : (i) CIT vs. Dolphin Canpack Ltd. (2006) 204 CTR (Del) 50 : (2006) 283 ITR 190/204 (Del); In its return the assessee claimed to have received share application money of Rs. 62 lacks. Confirmations of the persons in whose favour the shares were issued were also filed, apart from evidence to show that the share capital was paid by cheques in all the cases. The AO, all the same, asked for certain further information and not being satisfied made addition of the sum as cash credits. The Tribunal, ....
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....vs. First Point Finance Ltd. (2006) 206 CTR (Raj) 626 : (2006) 286 ITR 477 (Raj); Where it was not denied that all the shareholders/share applicants were genuinely existing persons, it was also not denied that each of them was an income-tax assessee and the copies of the returns of their income were also placed before the AO by assessee which fact was also not denied : Held that no material had been brought on record except inferring that the investors in the opinion of the AO were not creditworthy to link the assessee with such investment of money made by those persons. In such cases merely because the creditors had failed to prove their source of investment, the same could not be added in the income of the assessee but it ought to be added by finding persons who had lent their names. There is no presumption that the assessee is the Benami owner of the investment made by the existing person. Thus, the addition on account of share capital was not justified. Pran Land Housing & Finance Ltd. vs. ITO (sic) It is primarily the duty of the assessee to establish the identity of the shareholders. Onus under s. 68 is on the assessee to prove the identity of the shareholders. ....
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....ions. (vii) Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC); Held that explanation should be considered objectively by the AO before he takes a decision to accept or reject. It was further held that if the explanation given by the assessee shows that the receipt is not of income nature, the Department cannot convert "good proof into no proof" or act unreasonably and reject it. (viii) Sona Electric Company vs. CIT (1984) 43 CTR (Del) 287: (1985) 152 ITR 507(Del); and Roshan Di Hatti vs. CIT 1977 CTR (SC) 200 : (1977) 107 ITR 938 (SC); Held that the explanation should not be rejected arbitrarily or capriciously mere on suspicion. (ix) CIT vs. Metachem Industries (2000) 161 CTR (MP) 444 : (2000) 245 ITR 160 (MP); Held that "once it is established that the amount has been invested by a particular person, be he a partner or an individual, then the responsibility of the assessee is over. Whether that person is an income-tax payer or not and where he had brought this money from, is not the responsibility of the firm". (x) Dy. CIT vs. Rohini Builders (2003) 182 CTR (Guj) 373 : (2002) 256 ITR 360 (Guj); Facts of the case : "The assessee was a firm engaged in the....
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....o the High Court. Held that considering the facts and circumstances of the case narrated by the Tribunal and the law explained by it, the appeal was liable to be dismissed. [The Supreme Court has dismissed the Special Leave Petition filed by the Revenue against this judgment'(2002) 254 ITR (St) 275]. (xi) Dr. Sanjay Tiwari, ITA No. 245/Nag/2006 In above, onus laid on the assessee was discharged therefore addition under s. 68 was held to be unwarranted and deleted. Photocopy of the order is enclosed. 27. The learned counsel for the assessee further submitted that in the present case the assessee has complied with all the requirements to prove the genuineness of the amount received towards share application money and premium (i) identity of the creditor, (ii) genuineness of the transaction and (iii) creditworthiness of the creditors by filing relevant documents. But on dissatisfaction the learned AO failed to make necessary enquiries and relied on the reports of the Inspectors thereby rejecting the explanation of the appellant arbitrarily for making the addition under s. 68 without having any positive and definite evidences to show that the explanation is false'Sr....
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....learned AO could not prove that the investor companies are mere conduit companies providing accommodation entries and the unaccounted money of the assessee is routed through them. It is incumbent upon the AO to issue summons under s. 131 before making the addition which he failed to do so. Therefore, it is clear that the addition made by the AO is based on doubts and surmises which cannot be said to be justified. The decisions relied upon by the learned counsel for the assessee reported in (1954) 26 ITR 775(SC) (supra), 30 ITR 182 (SC)(sic) and (1959) 37 ITR 288(SC) (supra) clearly support the case of the assessee wherein the principle laid down by the apex Court is that there must be something more than mere suspicion in support of an assessment and mere suspicion cannot take place of proof for the purpose of passing an order of assessment. It is well settled that the AO should not base his decision merely on suspicion however it may be strong. 31. Under s. 68 of the Act, it is provided that where any sum found credited in the books of account of an assessee and the assessee offers no explanation about the nature and source thereof or the explanation offered by the assessee is ....
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....'s appeal, the Revenue has objected to the order of the learned CIT(A) against the deletion of the disallowance of Rs. 17,70,240 made by the AO under s. 40A(3) of the IT Act, 1961. 36. The brief facts relating to this ground are that on the perusal of the documents of the assessee received from the 'Central Excise Department' that the assessee has incurred cash expenses to the tune of Rs. 88,51,203 violating the provisions of s. 40A(3) of the IT Act, 1961. Vide questionnaire dt. 19th June, 2006, the assessee was asked by the AO to explain as to why 20 per cent of each expenditure executed in contravention to the provisions in s. 40A(3) of the IT Act, 1961 be not disallowed. In this connection, a letter dt. 22nd Nov., 2006 was issued to the assesseet which reads as under : "It has been accepted by you that you have indulged in cash purchases violating the provisions of s. 40A(3) of the IT Act, 1961 to the tune of Rs. 88,51,203. You are hereby afforded an opportunity to provide complete postal addresses of the persons from whom you have made such purchases/made payments. If you fail to give complete addresses of such concerns it is to be assumed that your are not....
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....itional option to disallow 20 per cent of such expenses. The learned CIT(A) deleted the disallowance by observing as under : "I do not agree with the submission of the AO. Firstly, the AO has admitted that the seized documents, record both the figures of suppressed sales and purchases. It is also a fact that the AO has not added the entire suppressed sales for the initial 9 months. What he has done, he has taken the only GP ratio on this suppressed sales which has been computed/estimated by him. If we rely on the argument of the AO that for arriving at the figure of suppressed sales, the expenditures have already been booked by way of electricity duty etc. then in all fairness, the AO could have disallowed the entire expenditures which were noted in the seized documents for 56 days. But, in reality, the learned AO has taken a very peculiar stand. He has accepted the expenditure and thereafter he has applied s. 40A(3) on such cases where it is in violation of r. 6DD. The fact remains that once the right side of the figure of the seized document is accepted by the Department, there is no option for the Department to reject the left side of the figure of the same seized material....
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....of the case and decisions relied upon by the learned counsel for the assessee. We have also carefully gone through the orders of the Revenue authorities. In the case of the assessee, the disallowance under s. 40A(3) has been made by the learned AO out of unrecorded purchases from the records seized by excise authorities. Such records are not at all a part of the regular books of accounts therefore a lump sum of Rs. 50 lacs as income was surrendered on account of unrecorded transactions discovered during raid by the Excise Department. That s. 40A(3) was inserted by Finance Act, 1968 w.e.f. 1st April, 1969. The logic and philosophy behind enactment of the above provision is designed to counter evasion of tax through claims for expenditure shown to have incurred in cash with a view to frustrating proper investigation by the Department as to the identity of the payee and reasonableness of the payment. In the present case, the disallowance under s. 40A(3) has been made by the AO out of unrecorded purchases from the records seized by excise authorities. Such records are not at all a part of the regular books of accounts therefore a lump sum of Rs. 50 lacs as income was surrendered on acc....