AI Drafter 
TaxTMI 
TaxTMI 
2012 (2) TMI 528
X X X X Extracts X X X X
X X X X Extracts X X X X
.....N. Agrawal, learned counsel for the assessee who submitted that identity of share subscribers/share applicants has been proved, therefore, in view of the decision in the case of decision of the Hon'ble Supreme Court in the case of Lovely Exports (P) Ltd. (2008) 172 Taxman 44, no addition u/s 68 of the Act could be made in the hands of the present assessee, whereas the learned Senior DR, Shri Arun Dewan, defended the impugned order. 3. We have considered the rival submissions and perused the material available on file. Brief facts of the case are that the assessee company declared total income of Rs. 70,212/- in the return of income filed on 11.3.08. The Assessing Officer issued notices u/s.143(2) on 18.9.08 which were served on the assessee within the prescribed period. Thereafter, a detailed questionnaire along with notice u/s.142(1) was issued on 28.7.2009 to the assessee which was responded by the assessee. During the course of assessment proceedings, after examining the submissions of the assessee and the balance sheet, the Assessing Officer observed that during the year under consideration, the assessee has shown receipt of share application money from various companie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces u/s 133(6). It was noted by the Assessing Officer that one share applicant namely M/s Lakeview Vinimay Pvt. Ltd. admitted that the shares have been allotted before 31.03.07. The learned Assessing Officer was of the view that the financial capacity of share subscribers was not sound, therefore, he opined that it was the own money of the assessee. He was also of the view that the transactions are only manipulated transactions. The learned Assessing Officer was also of the view that it is a case of unaccounted income brought back into the books of accounts of the assessee company in a systematic and organized manner. He further observed that these companies have been used as mere conduit companies for routing of unaccounted money into the business in the garb of share application money. The source of share application money as received by the assessee company was treated as not properly explained. The learned Assessing Officer also observed that during the course of his statement, the director has himself admitted that the all the share applicants are either his friend or family members. The learned Assessing Officer was also of the opinion that these companies have no business wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m banking channel. It was contended that the Assessing Officer failed to appreciate that in the facts of the assessee's case considering the compliance made, provision of section 68 should not have been attracted and reliance has been placed on the Hon'ble Supreme Court decisions in the cases of CIT vs. Steller Investment Limited (2001) 251 ITR 263 (SC) and CIT Vs. Lovely Exports (P) Ltd. (2008) 172 Taxman 44. 3.6 On consideration of the above facts and the submissions made by the learned counsel for the assessee, the learned Commissioner of Income Tax (Appeals) observed as under :- "4.01 Coming to the facts of the case, the AO has clearly brought out relevant facts in the assessment order. The assessee miserably failed to explain and establish the soundness of the decision made by such alleged share applicants for making such substantial investment in the assessee company and some totally vague and unconvincing explanation was offered in this behalf. The AO has clearly made out a case that the share applicant companies were merely paper companies and were not genuine existing legal entities having the financial worth to have made such investment in the assessee company. It i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r book on pages 26, 27, 28 & 33 are annexed to the appeal order as Annexure A 1 to A 4). B. Lake View Vinimay Ltd. (i) Share capital stands at Rs. 2,,17,500/- and Reserve & Surplus stand at Rs. 402.412 lakhs. The application of funds reveal Investment of Rs. 261.99 lakhs and Loans & advances at Rs. 165.31 lakhs. Investments are made entirely in Pvt. Ltd. Cos. and there is cross Investment of Rs. 1,90,000/- in Sri Lal Traders Pvt. Ltd. against investment of Rs. 4.37 lakhs made in this Company by Srilal Traders Pvt. Ltd. as noticed above. (ii) P. & L. A/c reveal that on sale of Rs. 46.52 lakhs and interest on loans at Rs. 1,20,000/- , final net profit stands at Rs. 14,032/- only on such huge share holders funds of Rs. 24.58 lakhs. Details of loans and advances again reveal that loans stand at Rs. 10 lakhs and further advances are given for shares at Rs. 154.95 lakhs. No income whatsoever is accounted from such huge investment in shares and advances given for shares exceeding Rs. 4 crores which clearly suggests that these are only accommodation entries. (Copy of Balance sheet, P.&L. A/c and Investment details as included in Paper book at page 84, 85, 86 and 91 enclos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on substantial premium from dummy share holders / accommodation entries. It can thus be safely concluded that all these four companies are fictitious paper companies only. 4.1 Now, the legal contentions are examined. It is worthwhile to note that the observation made by Hon'ble Supreme Court while dismissing SLP in the case of Lovely Exports as has been reported as judgment delivered by the CTR at 216 CTR 295 has been simply stated to be dismissal of SLP in the oldest and still considered to be most leading and reliable Indian Tax Reporter on page 319 ITR 5,6 (statute) in following manner. "Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....was now presided over by B.N.Kirpal J. (as the Chief Justice of India then was) had enunciated that section 68 reposes in the Income-tax Officer or the Assessing Officer the jurisdiction to inquire from the assessee the nature and source of the sum found credited in its books of account. If the explanation offered by the assesee is found not to be satisfactory further enquiries can be made by the Income-tax Officer himself, both in regard to the nature and the source of the sum credited by the assessee in its books of account, since the wording of section 68 is very wide. The full Bench opined that (page 105): "If the shareholders exist then, possibly, no further enquiry need be made. But if the Incometax Officer finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital. Shares cannot be issued in the name of non-existing persons ... If 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 assessee offers no explanation at all or the explanation offered is not ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year." 4.1.5 The proposition of law laid down is very clear and well-established by various judicial decisions. The landmark judgment elucidating the nature of onus cast u/s.68 on an assessee is that of Shankar Industtries v. Addl.CIT (1978) 114 ITR 689 (Cal.). The principle laid down is to be found on page 698 in the following words: "We would like to observe that the law on this point is now well settled. It is necessary for the assessee to prove prima facie the transaction which results in a cash credit in his books of account. Such proof includes proof of the identity of this creditor, the capacity of such creditor to advance the money and, lastly, the genuineness of the transaction. These things must be proved prima facie and only after the assessee has adduced evidence to establish prima facie in the aforesaid, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d to reject the assessee's case summarily or arbitrarily or without sufficient reason. It is true that the authority's duty is to examine all the materials carefully and objectively. But it is found that the authority concerned after careful consideration of all relevant materials has come to the conclusion that the assesee's case of a loan from a third party cannot be accepted it is not open to this court to disturb the finding in reference under section 66(1)." This precisely provides the concept of "shifting of onus" in a case covered by section 68 of the Act. 4.1.8 If the above principles of statutory onus on an assesee u/s.68 and of the shifting of such onus from the assessee on to the AO are applied to any case including the present assessee's case, the following position shall emerge. Prima facie proof of the three ingredients and that too cumulatively shall have to be examined at three different stages one after the other but if an assessee fails to establish at the first stage, the identity of the creditor itself, there is no question of an AO examining the matter at the second stage of ensuring and satisfying himself of the capacity of the creditor to advance the mo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ight compartments. An assessee's explanation of the nature and source of the credits cannot be entertained and held by the AO as satisfactory unless and until the ground reality i.e. the de facto existence of the creditor is first established prima facie paving the way for the AO to examine further the capacity and genuineness aspects. Hence merely based on arranged affairs and supporting documents, the identity cannot be said to be established, and in any case NOT the CAPACITY and GENUINENESS of transaction. The AO as discussed above has clearly established the two individuals to benami persons on behalf of one of the Director. 4.2 It has been further established by a series of decisions that the conclusion whether a cash credit in the books of account of an assessee is properly explained or not is a question of fact [CIT V.S.Nelliappan (1967) 66 ITR 722 (SC); CIT V. Manick Sons (1969) 74 ITR 1, 6(S ). Also see, Jadunandan Sahu Deokisanram V. CIT (1984) 16 ITR 175 (Pat); Hari Chand and Prem Chand Bassi V. CIT (1974) 94 ITR 557 (Delhi); Lakshmiratan Cotton Mills Co. Ltd. V. CIT(1972) Tax LR 585(All); Ram Kumar Jalan V.CIT. Further, whether the explanation offered by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r from other sources is not relevant [CIT V. Durga Prasad More(1969) 72 ITR 807 (SC)].The principle laid down in CIT V. M. Ganapathi Mudaliar [(1964) 53 ITR 623 (SC)], that once it is found that a receipt by the assessee was income of the assessee it is not necessary for the revenue to locate its exact source applies alike to cases in which an entry is found in the books of accounts of the assessee as to cases in which no entry is found [CIT V.Durga Prasad More (1969) 72 ITR 807(SC)]. 4.3 Thus, to recapitulate, the correct position that emerges is that onus lies on the assessee to establish identity and creditworthiness of the loan/cash credits and genuineness of the transaction and in each case it has to be decided on consideration of totality of facts and circumstances of the case whether such onus has been discharged by the assessee or not and there is no burden on the AO to link up or establish the source of such credit to the known sources or activities in any manner. In view of such clear proposition of law, it has to be examined whether aforesaid brief decision of Hon'ble Supreme Court in Lovely exports(supra) dismissing the SLP simpliciter after condoning delay with brie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r which subsists, remains operative and is capable of enforcement in the eye of law. (ii) The Jurisdiction conferred by article 136 of the Constitution is divisible into two stages. The first stage is up to the disposal if the prayer for special leave to file an appeal. The second stage commences if and when the leave to appeal is granted and the special leave petition is converted into an appeal. (iii) The doctrine of merger is not a doctrine of universal or unlimited application. It will depend on the nature of jurisdiction exercised by the superior forum and the content or subject-matter of challenge laid or capable of being laid shall be determinative of the applicability of merger. The superior jurisdiction should be capable of reversing, modifying or affirming the order put in issue before it. Under article 136 of the Constitution, the Supreme Court may reverse, modify or affirm the judgment decree or order appealed against while exercising its appellate jurisdiction and not while exercising the discretionary jurisdiction disposing of a petition for special leave to appeal. The doctrine of merger can, therefore be applied to the former and not to the latter. (iv) An ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erative part, i.e. the mandate or decree issued by the court which may have been expressed in positive or negative form. The application of the doctrine depends on the nature of the appellate or revisional order in each case, the scope of the statutory provisions conferring the appellate or revisional jurisdiction and the content and subject matter of challenge laid or which could have been laid. Apart altogether from the merits of the grounds for rejection, the mere rejection by a superior forum resulting in refusal to exercise its jurisdiction which is invoked cannot by itself be construed as the imprimatur of the superior forum on the correctness of the decision sought to be appealed against. Article 141 of the Constitution of India speaks of declaration of law by the Supreme Court: for a declaration of law there should be a speech, i.e. a speaking order. A decision which is not express and is not founded on reasons nor on consideration of the issues, cannot be deemed to be a law declared, to have binding effect as is contemplated by article 141. A summary dismissal by the Supreme Court, without laying down any law, is not a declaration of law envisaged by article 141. Whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he shares and that the companies were not found to be in existence, the Tribunal has hastened to come to the conclusion that addition was not justified. In coming to this conclusion, the Tribunal has observed that since AO had himself examined the bank accounts of three subscribing companies and found that there were numerous transactions, the genuineness of the transaction could not have been assailed. Section 68 enjoined the assessee to offer an explanation about the nature and source of the sum found credited in his books and if the explanation was not satisfactory, the amount can be credited and charged to income as income of the assessee. Since the assessee, though tried to explain the genuineness of the credit on the basis of letters of confirmation, it could not be explained as to how the transaction was materialized when the companies were not in existence and the amount was paid by cheque only on the date on which the amount was credited to the account of the company. It was for the assessee to discharge this burden. Therefore, the assessee failed to discharge the burden with regard to the credit in its book and the existence of the creditors to indicate the genuineness of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tricts the right to ...... (b) limits ............. (c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company: (d) Prohibits....] ........ as a single member Clause (c) as above, makes it clear that the subscribers to shares of private company cannot be from public. It, therefore, follows that the subscribers to shares of private company can be only private persons. Such private persons must invariably be persons of confidence and acquaintance of directors of private company and there should be normally, no difficulty in producing them before the AO. And in case, they are not produced, the natural corollary is that the real position is not the same as emerges form papers and documents furnished in this behalf. The company very tactfully and intelligently has tried to overcome the condition of inviting subscription from public. In reply to query from this office to establish genuineness of transaction, it has been admitted by the Assessee that no dividend was distributed and such share applicant companies are found to be dummy / paper companies as discussed in para 4.02 above. Further, investment of almost entire networth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(Supra), it has been held that onus still rests on the assessee to establish genuineness of share application transactions besides establishing Identity & Credit worthiness of such share applicants. AO's power and duty to investigate the reality and genuineness of transactions has also been recognized and emphasized. I. GOLD LEAF CAPITAL CORPORATION OF INDIA LTD. VS JCIT 308 ITR (AC) 94 (DELHI) II. ITO VS CHANDIGARH THEATERS (P.) LTD 125 TTJ (CHD) III. MOTLAY FINANCE (P.) LTD VS ACIT- ITAT INDORE BENCH. (ITA NO. 96/IND/48 DECIDED ON 28/01/07) 4.8 Thus, on overall consideration of the facts and circumstances of the case and as discussed in detail above, the amounts claimed to be received by the assessee do not in any way appear to be genuine share capital. They are nothing but arranged affairs being pre-ordained series of transactions and tax evasion device where money laundering transactions have been camouflaged as share application money. Hence no credence can be placed on the copies of various documents filed to support such claim of share capital contribution and addition of Rs. 30 lakhs is hereby confirmed." 4. We have considered the rival submissions and peruse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r identity if the summons would not have been received or the addresses of the share applicants would have been fake, there was no question of service of summons and consequent reply by such share applicants. Under these facts, it can be said that their identity is proved. In view of these facts, the decision from Hon'ble Apex Court in the case of Lovely Exports Private Limited, 18 ITJ 717 clearly comes to the rescue of the assessee, the relevant portion of the same is reproduced hereunder :- ""Share application moneys received by company 11.1.2008- Their Lordships S.H. Kapadia and B. Sudershan Reddy JJ dismissed the Department's special leave petition against the judgment dated November 16, 2006 of the Delhi High Court in I.T.A No.953 of 2006 reported in 299 ITR 268, whereby the High Court affirmed the deletion by the Tribunal of additions made on account of sums received from directors of promoters and also by way of a public issue. The court while dismissing the special leave petition held as follows: "Can the amount of share money be regarded as undisclosed income under section 68 of the Income tax Act, 1961? We find no merit in this special leave petition for the simple....