TaxTMI 
TaxTMI 
2016 (4) TMI 1228
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....he assessee in both these appeals in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called "the Tribunal") read as under:- "1. The learned C.I.T. (A) has erred in upholding the addition of Rs. 1,60,00,000/- (for A.Y. 2006-07) and Rs. 3,75,00,000/- (for A.Y. 2007- 08) on account of alleged bogus share subscription, as unexplained cash credit u/s. 68 of the Income Tax Act, 1961. Your appellant respectfully submits that on facts and in law the addition of Rs. 1,60,00,000/- (for A.Y. 2006-07) and Rs. 3,75,00,000/- (for A.Y. 2007-08) is unjustified and should therefore be deleted." 3. First we shall take up the assessee's appeal in ITA No. 1835/Mum/2014 for the assessment year 2006-07. The brief facts in this case are that the assessee company belongs to Shri Vinod Faria/Milan Dalal group of cases. A search and seizure action u/s 132 (1) of the Act was carried out on 30th May, 2008 at the office and residential premises of Shri Vinod Faria, Director and the key person of the group were covered. The premises of the assessee company at Mahavir Annexe, 345, Kalbadevi Road, Mumbai was also covered u/s 133A of the Act on 30th May, 2008. During the....
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.... this fact has also been admitted by the Director of the assessee company, Mr Vinod Faria in his statement u/s 132(4) dated 31-05-2008. Besides the above two impounded loose Annexures, Annexure A-3 ( pages 1 to 212) also contains the similar nature of incriminating documents showing the clear-cut evidence that the assessee company has introduced bogus share subscription in the names of various parties which are nothing but mere accommodation entries." The case was reopened u/s 147 of the Act as the Revenue had reasons to believe that the income has escaped assessment to the tune of Rs. 1.60 crores. The reasons for reopening of the assessment were recorded and notice u/s 148 of the Act was issued on 4th September, 2009 and served upon the assessee. The Copy of the reasons recorded was provided to the assessee.The assessee requested that the original return filed u/s 139(1) of Act be treated as return of income filed in pursuance of notice u/s 148 of the Act. The Copies of the statements recorded of Shri Parag A. Nisar, Shri Suresh V. Faria and Shri Vinod K. Faria, the Directors of the assessee company were also provided by the AO to the assessee company. The A.O. also referred to ....
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....ect. I am unable to furnish my further comments thereon. While Shri Vinod K. Faria in reply to question No. 32 replied as under:- "Ans. Searches and surveys have been carried out at our group offices as well as at the residences of myself and my brother, Mr. Mahesh Faria and my associates, Mr. Milan Dalal. During the course of search/survey, I have been given to understand that various incriminating evidence has been found evidencing the investment in the immovable and movable properties by me and other entities. We may also not be in a position to prove the genuineness of the share capital subscribed by M/s Royal Rich Developers Pvt. Ltd to the satisfaction of the Department. Considering these facts, I, as an authorized representative of all these entities, declare an income of Rs. 10.00 crore as additional income over and above to the regular income recorded in the' books of accounts. Details of entity and assessment year-wise breakup of the income offered to tax will be furnished separately after going through the seized records and other details from our books of accounts." The A.O. allowed for inspection of the impounded loose papers to the assessee and copies of the i....
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....endent enquiry be made with each shareholder to find out the truth about the genuineness of the share transaction. The assessee contended that the assessee may be given opportunity to produce the shareholders before the A.O. in person, for examination. The ld. CIT(A) forwarded the submissions of the assessee to the A.O. for his remand report. In the said forwarding letter by the learned CIT(A) to the AO, it was mentioned that during the assessment proceedings similar request was made by the assessee to the A.O. for conducting independent enquiries with the shareholders to ascertain the genuineness or otherwise of the share subscription but the A.O. has not acceded to the request, and also it is contended by the assessee that the sufficient time was not given by the AO to the assessee to produce the lenders. In the remand report submitted by the A.O. to learned CIT(A), it was contended by the AO that reasonable opportunity were given to the assessee in remand proceedings, wherein show cause notices were issued on 10th July 2013 and 11th September, 2013 to the assessee, wherein the assessee in reply contended that the assessee is a Private Limited Company registered with the Registra....
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....carried out by the assessee company during this period except deposit of cheques from shareholders. It was observed by the A.O. that the assessee had issued 4 lacs equity shares in financial year 2005-06 and the face value of the shares Rs. 10/- per share while the shares had been issued at a premium of Rs. 30/- per share and the assessee credited an amount of Rs. 1.60 crores as share subscription. During the remand proceedings, assessee was asked by the AO to produce all shareholders for verification of the genuineness of the transaction and show cause notices were issued by the AO to the assessee on 10th September, 2013 asking assessee to produce shareholders between the period of 18.9.2013 to 25.9.2013 along with all relevant documents such as bank statement, copy of return of income, copies of details of allotment of share certificate with allotment letters, capital account and balance sheet. But the assessee failed to produce the shareholders on the stipulated time period from 18-09-2013 to 25-09-2013 and submitted that it will take some more time to co-ordinate and produce the shareholders before the A.O. as large number of shareholders are to be contacted. It was further su....
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..... Mange HUF AAIHP0455L 30000 Yes A013 Jayesh S. Kalola AITPK7624B 25000 Yes A014 Dharmesh J Joshi ADHPJ3912C 40000 No A015 Meena Joysar AEYPJ6107M 37500 Yes A016 Kantilal Joshi AEYPJ0250R 25000 Yes A017 Jeram Karotra AIXPX2394J 35000 No A018 Nishit Madiar AEWPM4655F 25000 Yes A019 Alka Y Gandhi 30000 No A020 Anil J Shinde 25000 No A021 Bharat Patel 37500 Yes A022 Chhya V. Dama AIHPD6019K 30000 Yes A023 Chhtalal T. Kalola AQUPK7634A 12,500 No A024 Drupad N. Bhatt HUF AADHD0055P 37,500 Yes A025 Geetesh Jadhav AKRPJI859P 22,500 No A026 Gopal P Bhanushali AGIPB7609L 26,250 No A027 Haresh P. Bhanushali AACPB6068P 25000 No A028 Jaswantrai J Ghatalia HUF AADHJ5530R 25,000 Yes A029 Kashavji Vershi Bhadra ALJPB2370A 31,250 No A030 Mahendra B Bhadra AFZPB4393P 34,375 Yes A031 Mathuradas B Bhadra AIYPB3294K 34,375 Yes A032 Mayur U Bhanishali AKTPB1741J 12,500 Yes A033 Morarji K Bhanushali HUF AAGHM8194P 25,000 Yes A034 Nanbai Keshavji Bhanushali ALJPB2427N 31,250 Yes A035 Narayan R Mange AHWPM1303K 7,500 Yes A036 Petha Uka Patel AAHPP8401D 30,000 No A037 Rach....
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..... 2006- 07. The assessee has submitted copy of bank statement for the period from 21.3.2006 to 31.3.2006. There is business no activities found during this period except of cheque deposits, which were received from the shareholders. The learned A.O. himself has recorded two finding namely (i) the appellant company was incorporated on 17.3.2006 and (ii)the appellant company has not started any business activities in the 15 days of existence during the financial year relevant to A.Y. 2006-07. Thus, there is no dispute about the above two factual aspects. 2 A.O.'s remark about documents submitted to him/obtained by him during the course of remand proceedings. Copies of documents submitted to him/obtained by him during the course of remand proceedings are enclosed. There are certain errors in remand report which are contrary to these documents. We request your honour to consider the tabular representation of facts enclosed as part of paper book for clearer understanding of the facts. 3 The substance of remand report is that the source of investment in shares is not proved. The remand report nowhere suggests that any of the shareholders is nonexistent. All the shareholders have P....
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.... premium is introduced for the first time w.e.f. 1.4.2013 i.e. A.Y. 2013-14 by amending section 68 of the I.T. Act, 1961. This amendment is prospective in application and does not apply retrospectively to A.Y. 2006-07. Thus for all assessment years prior to A.Y. 2013-14 the law as laid down by Hon'ble Supreme Court in the case of CIT v. Lovely Exports P. Ltd. (SC) 216 CTR 195 continues to apply. It was observed by the ld. CIT(A) that certain incriminating documents were found from the premises of the assessee company during the course of survey from the premises of the assessee, in the form of share application forms, blank transfer forms, blank receipts for repurchase of allotted shares, copies of bank pass books of share subscribers, wherein cash/cheque was deposited apparently immediately before issuing subscription cheque to the assessee company. It was observed that though the company was incorporated only on 17th March, 2006, these subscribers chose to purchase these shares at a premium of Rs. 30/- which raises doubts about the genuineness of the transaction. The share applications were not numbered and they were filled in by the same person raising doubts about the genuine....
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....ny balance before and after subscription in the shares, indicating that these persons hardly have any means. From the acknowledgement of the income tax returns, it was further observed by the learned CIT(A) that income of subscribers in most of the cases was less than Rs. 1 lac. The learned CIT(A) observed that it is not understandable that how a person having meager income of Rs. 80000- 90000, which is hardly sufficient to meet personal expenses of household expenses in expensive city like Mumbai, could make investment running from Rs. 5 lacs to Rs. 10 lacs in shares with the assessee company and that too on premium. It was observed by the learned CIT(A) that on perusal of the Balance Sheet or statement of affairs of share subscribers of the assessee company submitted in some of the cases, the said Balance Sheet/statement of affairs does not have any significant asset other than investment in the assessee company. The learned CIT(A) referred to the amended provisions of Section 68 of the Act to hold that burden of proof in the case of share subscription is quite strong and the assessee has to prove not only the source but the sources' source. The learned CIT(A) held that for all ....
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....ssee reiterated its submissions as were made before the authorities below and submitted that the additions have been made u/s 68 of the Act of Rs. 1.60 crores as unexplained cash credit to the income of the assessee for the instant assessment year. The assessments have been reopened u/s 147/148 of the Act within a period of 4 years. The ld. Counsel further submitted that the assessee is not challenging the reopening of the assessment u/s 147/148 of the Act. The addition of Rs. 1.60 crores has been made based upon the issue of 4 lacs equity shares of Rs. 10 each at a premium of Rs. 30 per share. He submitted that the assessee company was incorporated only on 17th March, 2006 whereas the previous year ending on 31st March, 2006. The ld. Counsel submitted that the assessee has not done any business activities for the above period of 15 days since its incorporation on 17th March 2006 till the end of previous year on 31st March, 2006. The search u/s. 132(1) of the Act had been conducted by the Revenue on the Directors of the assessee company on 30-05-2008 and not on the assessee company. Only survey u/s. 133A of the Act was conducted in the case of the assessee company on 30-05-2008. Th....
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....t the two other Directors namely Mr Suresh V Faria and Mr Parag A Nisar are saying that these are accommodation entries but they are not aware of the affairs of the business of the assessee. It is submitted that even if it is concluded that it is an undisclosed income and accommodation entries have been taken by the assessee, it cannot be concluded that this is an undisclosed income of the assessee as there is no income during the period as the assessee has not undertaken any business during the period of 15 days from 17-03-2006 to 31-03-2006. It is submitted that in the remand proceedings, complete details were furnished about the name, address and PAN etc. of share subscribers along with Balance Sheet and bank statements of the share subscribers to tune of Rs. 115 lacs w.r.t. 13 share subscribers, while for the rest 4 share subscribers subscribing shares of Rs. 45 lacs name, complete address and PAN of the share subscriber were submitted. All the documents were placed in the paper book filed with the Tribunal.It is submitted that it is not the case of Revenue that these parties who subscribed shares were non-existent. It is submitted that the statement of Shri Vinod K Faria recor....
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....e AO. The ld. D.R. relied on the decision of ITAT, Kolkata Bench in the case of Subhlakshmi Vanijya (P.) Ltd. v. CIT, [2015] 60 taxmann.com 60 (Kol. Trib) whereby amendment to section 68 of the Act by insertion of proviso by Finance Act, 2012 was held to clarificatory in the case of closely held companies in which public are not substantially interested and applicable with retrospective effect. The ld. D.R. submitted that all the three Directors of the company have accepted in the statement recorded on oath that these are bogus transactions and are merely accommodation entries wherein cash was paid in lieu of cheque obtained towards share subscription amount. The assessee was asked to produce the shareholders before the A.O. in the assessment as well even in the remand proceedings but the assessee failed to produce them. The summons were issued u/s 131 of the Act directing the shareholders to appear before the AO but none appeared before the AO. It was submitted that the existence of these shareholder's is in doubt. It is also submitted that detailed finding is given by authorities below to come to conclusion that these are non genuine transactions and the share subscribers does no....
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....r, the assessee has not carried out any business activity from 17th March 2006(date of incorporation) to 31st March, 2006 ( end of previous year) i.e. for the fifteen days as it falls in this relevant previous year 2005- 06 as per the facts emerging from the records. There was a survey action carried out by the Revenue on 30th May, 2008 u/s 133A of the Act whereby the assessee's premises were surveyed. Search action was simultaneously conducted by the Revenue u/s 132(1) of the Act on the Directors and other entities on 30-05-2008. Certain documents were found during the course of survey operation and based upon the said documents, the case was reopened and notices were issued u/s 148 of the Act to the assessee by the AO to frame assessment u/s 147/148 of the Act. The said notice u/s 148 of the Act was issued within four years from the end of the assessment year. The original assessment was not framed u/s 143(3) of the Act. The assessee has not challenged the reopening of the assessment u/s 147/148 of the Act, while the assessee has objected to the addition made by the Revenue. The documents found during the course of survey were regarding various share application forms from shar....
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.... genuineness of the transaction on the ground that assessee having no business/project in hand and being merely paper company have received huge share capital money to the tune of Rs. 1.60 crores on issue of 4 lacs equity shares and that too at a huge premium of Rs. 30 per shares as against face value of Rs. 10 per share. The assessee has not filed any valuation report or explanation to justify issuance of shares of face value of Rs. 10 per share at a premium of Rs. 30 per share. The Revenue has also doubted the creditworthiness/capacity of the shareholders having meager known sources of income and assets declared to Revenue in their return of income to have invested huge amounts in the share capital of the assessee and that too at a huge premium of Rs. 30 per share against the face value of Rs. 10 per share of the assessee company which is a newly incorporated company having no existing business/project in hand and is merely a paper company. The authorities below have analysed the documents submitted by the shareholders and came to conclusion that these shareholders have meager income of Rs. 80000-90000 declared in their return of income filed with the Revenue, the Balance Sheet/s....
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.... merely a paper company. The assessee was rightly asked by the Revenue to produce the shareholders in the assessment as well remand proceedings before the AO, as the role of the AO is both of investigator and adjudicator whereby he is duty bound to unravel the truth behind the smokescreen, but the assessee could not produce the shareholders despite sufficient, adequate and proper opportunity granted by the Revenue in the assessment as well remand proceedings. Summons u/s 131 of the Act were issued by the AO to the share subscribers directly directing the shareholders to personally appear before the AO with relevant details and evidences, but there was no compliance by the shareholders and none of the shareholders appeared before the A.O.. However, the details were filed by some of the shareholders in Tapal. No doubt, the assessee has produced the copies of bank statement, acknowledgment of income tax returns, certain confirmations, Balance Sheets/statement of affairs of the share holders with respect to share subscription to the tune of Rs. 115 lacs from 13 shareholders, while name, address and PAN of the rest 4 shareholders subscribing Rs. 45 lacs were produced but in our consider....
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....company was a newly incorporated company having no business/project in hand and having no networth of its own being merely a paper/shell company. It is the contention of the assessee that the documents were not impounded from the premises of the assessee during survey operations u/s 133A of the Act but from the premises belonging to the Promoter- Director of the assessee company namely Mr Vinod K. Faria and hence no additions can be made by the Revenue in the hands of the assessee. It is pertinent to mention here that in closely held family concerns, it is not necessary that all the documents of the assessee company are kept in the business premises of the assessee as they may be kept or secreted at the residential or other premises of the Directors/Promoters as assessee being closely held company having no business in hand may not be equipped with battery of professional staff and proper office/infrastructure of its own to take care of various functions of the business and it is very much possible that Directors or their nominated person is discharging multiple functions in the absence of business in hand of the assessee company. It is already brought on record that the till the a....
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....show the genuineness of the share subscription. This contention of the assessee is also rejected. Section 68 of the Act cast obligation on the assessee where 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 of credit thereof or the explanation offered by the assessee is found not satisfactory in the opinion of the AO, the sum so credited may treated as income and charged to income-tax as income of the assessee of that previous year. The burden/onus is cast on the assessee and the assessee is required to explain to the satisfaction of the AO cumulatively about the identity and capacity/creditworthiness of the creditors along with the genuineness of the transaction to the satisfaction of the AO. All the constituents are required to be cumulatively satisfied. If one or more of them is absent, then the AO can make the additions u/s 68 of the Act as an income. There are companies which are widely held companies in which public are substantially interested which comes out with an initial public offers wherein shares are listed on stock exchanges and widely traded, wherein members of....
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.... against the assessee company and make additions u/s 68 of the Act as unexplained cash credit. The use of the word 'any sum found credited in the books ' in Section 68 indicates that it is widely worded and the AO can make enquiries as to the nature and source thereof. The AO can go to enquire/investigate into truthfulness of the assertion of the assessee regarding the nature and the source of the credit in its books of accounts and in case the AO is not satisfied with the explanation of the assessee with respect to establishing identity and credit worthiness of the creditor and the genuineness of the transactions, the AO is empowered to make additions to the income of the assessee u/s 68 of the Act as an unexplained credit in the hands of the assessee company raising the share capital because the AO is both an investigator and adjudicator. In our considered view, merely submission of the name and address of the share subscriber, income tax returns, Balance Sheet/statement of affairs of the share subscriber and bank statement of the share subscriber is not sufficient as the AO is to be satisfied as to their identity and creditworthiness as well as to the genuineness of the transact....
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....ce the relevant part of the proviso to section, which reads as under : - 'Provided that where the assessee is a company, (not being a company in which the public are substantially interested) and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless- (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in clause (23FB) of section 10'. 13.w. As per this proviso where any share capital etc. is credited in the case of closely held company, the explanation given by such company shall be deemed to be not satisfactory, unless the resident shareholder offe....
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.... later to depict the real intention of the legislature is not specifically made retrospective by the statute. Notwithstanding the fact that such amendment to the substantive provision has been given prospective effect, the judicial or quasi-judicial authorities, on a challenge made to it, can justifiably hold such amendment to be retrospective. The justification behind giving retrospective effect to such amendment is to apply the real intention of the legislature from the date such provision was initially introduced. The intention of the legislature while introducing the provision is gathered, inter alia, from the Finance Bill, Memorandum explaining the provision of the Finance Bill etc. 13.y. The facts of CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC) are that the Finance Act, 2002 amended Explanation 4 to section 271(1)(c) with effect from 01.04.2003 providing that the penalty would be imposed even if the returned income is loss. In the case of Virtual Soft Systems Ltd. v. CIT [2007] 289 ITR 83/159 Taxman 155 (SC) (a Bench comprising of two Hon'ble Judges) it was held that prior to the amendment with effect from 1st April, 2003 penalty for co....
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....rij Mohan Das Laxman Das (supra) and Suwalal Anandilal Jain (supra). 13.aa. A survey of the above judgments makes it patent that any amendment to the substantive provision which is aimed at clarifying the existing position or removing unintended consequences to make the provision workable has to be treated as retrospective notwithstanding the fact that the amendment has been given effect prospectively. In our considered opinion the border line between a substantive provision having retrospective or prospective effect, is quite prominent. One needs to appreciate the nature of the original provision in conjunction with the amendment. Once a provision has been given retrospective effect by the legislature, it shall continue to be retrospective. If on the other hand, if the statute does not amend it retrospectively, then one has to dig out the intention of the Parliament at the time when the original provision was incorporated and also the new amendment. If the later amendment simply clarifies the intention of the original provision, then it will always be considered as retrospective. Like the case of Gold Coin Health Food (P.) Ltd. (supra) in which the Hon'ble Supreme Court hel....
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....re capital'. The burden of proof under 68 can be no different in respect of issue of share capital by closely held companies vis-à-vis loans or gifts. The Hon'ble jurisdictional High Court in Maithan International (supra), Active Traders (P.) Ltd.(supra), Mimec (India) (P.) Ltd. (supra) and Nivedan Vanijya Niyojan Ltd. (supra) has specifically held that the above three ingredients are required to be satisfied even in case of issue of share capital by a closely held company. First two out of the above four judgments have considered the judgment in the case of Lovely Exports (P.) Ltd. (supra). It shows that the intention of the legislature, as interpreted by the Hon'ble jurisdictional High Court, is always to cast duty on the assessee to prove the satisfaction of the three ingredients in case of transaction of issue of share capital by a closely held company in the same way as is in the case of transaction of loans. 13.ac. At this juncture, it would be relevant to note the relevant part of the Memorandum explaining the provisions of the Finance Bill, 2012, which is as under : - "Section 68 of the Act provides that if any sum is found credited in the books of ....
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....ot apply if the shareholder is a well regulated entity, i.e., a Venture Capital Fund, Venture Capital Company registered with the Securities and Exchange Board of India(SEBI). This amendment will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year 2013-14 and subsequent years." 13.ad. A careful perusal of the first para of the Memorandum brings out that the onus of satisfactorily explaining issue of share capital with premium etc. by a closely held company is on the company. In the next para, it has been clarified that : 'Certain judicial pronouncements have created doubts about the onus of proof and the requirements of this section, particularly, in cases where the sum which is credited as share capital, share premium, etc...'. Next para recognizes that judicial pronouncements, while considering that the pernicious practice of conversion of unaccounted money through masquerade of investment in the share capital of a company needs to be prevented, have advised a balance to be maintained regarding onus of proof to be placed on the company. The courts have drawn a distinction and emphasized that in case of private placement of ....
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....ourt has also impliedly approved the proposition that the position anterior to the A.Y. 2013-14 was the same inasmuch as the onus to prove the share capital by a closely held company was on it. We, therefore, hold that the amendment to section 68 by insertion of proviso is clarificatory and hence retrospective. The contrary arguments advanced by the ld. AR, being devoid of any merit, are hereby jettisoned. 13.af. At this stage, we consider it appropriate to discuss the submission of the ld. AR that a simultaneous amendment to section 56(2) connected with the amendment to section 68, has also been made w.e.f. 1.4.2013 and hence section 68 amendment is also retrospective. Before appreciating this argument, we set out clause (viib) of section 56(2) as under : - "where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:" shall be considered as income from other sources. 13.ag. This provision mandates that wher....
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....rate. The later excludes the former and vice versa. Consequently, we are unable to accept the contention of the ld. AR that the proviso to section 68 attached a new obligation and hence should be declared as prospective. It is axiomatic that proving genuineness of a transaction of any credit, including share capital, was always an essential constituent of section 68. Since section 68 covers 'any sum credited' in the books without any exception, which, inter alia, includes share capital, it cannot be held that the examination of share capital with premium etc. was earlier outside the ambit of section 68 and now this amendment has brought it into its purview. We have noted it from several judgments dealing with share capital in pre-amendment period and the Memorandum explaining the provisions that proving the genuineness of share capital etc. by a company has always been considered a necessary requirement to escape the magnetization of section 68. The amendment has simply made express which was earlier implied. We, therefore, hold that though amendment to section 56(2)(viib) is prospective, but to section 68 is prospective. If that is the position, then the assessee is always....
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.... AO to do so, is unsustainable." Thus, it is for the assessee to explain the creditworthiness of the share subscribers and genuineness of the transaction including the source of source. The AO wanted to examine the share subscribers to go to bottom of the truth to find out the real nature of the transaction in order to verify genuineness of the transaction and to verify credit worthiness of the share subscribers that how persons with meager known sources of income and assets have invested huge amount of share money in the assessee company and that too at a huge premium. In the instant case, the business of the assessee is non-existent nor there is any project initiated by the assessee which could warrant justification and rationale for such a huge premium and consequentially investment of such a magnitude vis-à-vis reported and known sources of income and assets of the share subscribers. No rational person with sound mind will invest such a huge amount in the share subscription of a paper/shell company having no worthwhile business/project in hand at such a huge premium and it was for the assessee to have brought on record cogent material to prove the genuineness of the tra....
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....ivate Limited(supra) which are reproduced hereunder: "21. After hearing the learned advocates, we are of the opinion that the following questions arise for consideration:- (a) Whether in the light of the views expressed in the case of Lovely Exports (supra) & Steller Investment (supra) the order under Section 263 directing further investigation is legal? (b) Is the finding of the Commissioner of Income Tax that unaccounted money was or could have been laundered as clean share capital by creating facade of paper work, routing the money through several bank accounts and getting it the seal of statutory approval by getting the case reopened under Section 147 suo motu perverse? (c) Whether the order passed by the assessing officer under Section 143(3)/147 of the Income Tax Act is erroneous and also prejudicial to the interest of the revenue? (d) Whether the impugned judgement of the learned Tribunal is perverse? 22. We shall consider the second question first. In a commentary on the Prevention of Money Laundering Act, 2002 by Dr. M. C. Mehanathan published by Lexis Nexis, 2014, the steps of money laundering are described as follows:- "STEPS OF MONEY-LAUNDERING ....
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....income that comes within the exempted taxation slab constitute the unreported Gross Domestic Product or black economy. Laundering the black money and laundering proceeds of crime are two different issues, although there is frequent overlap between the two. While laundering black money is to be handled through taxation laws or similar laws, the laundering of proceeds of crime is to be handled through special anti-money-laundering laws." 23. The following pieces of evidence are noticeable:- (a) 39 corporate subscribers purchased 7,92,737 shares of Rs. 10 each at a premium of Rs. 390/- per share. In the process the assessee company raised a paid up share capital of Rs. 79.27 lakhs with a premium of Rs. 31.7 crores. (b) From the information made available by the assessee, it appears that 19 out of 39 applicants secured funds, for the purpose of contributing to the share capital of the assessee, on account of share application money. In other words, those 19 applicants collected funds on account of share application money in their respective companies and that money was contributed to the share capital of the assessee. 15 out of the 39 applicants procured the requisite fund by ....
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....es having no real worth. The transaction of sale and purchase of shares was nominal rather than real. (b) The allegation, in response to the notice to show-cause u/s. 263 that "it bears importance to state here that the investor companies of shares were interested to subscribe shares of the assessee company as, according to them, the assessee company had prospect in future," is a plain lie. (c) The blank share application forms etc. tabulated above go to show that the alleged application for shares and the alleged allotment were not in the usual course of the business. (d) In the light of the aforesaid pieces of evidence and the prima facie finding, we are emboldened to say that the three requirements: (A) identity of the share-holders; (B) genuineness of the transaction and (C) the creditworthiness of the share-holders repeatedly impressed, by Mr. Poddar, upon us, have not been satisfied. Identity of the alleged share-holders is known but the transaction was not a genuine transaction. The transactionwas nominal rather than real. The creditworthiness of the alleged share holders is also not established because they did not have any money of their own. Each one of them rece....
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....umati Dayal (supra). Their Lordships held that a capital receipt can become taxable if the explanation offered by the assessee about the nature and source thereof is not satisfactorily explained. The judgement in the case of Lovely Exports (P.) Ltd. (supra) lends no assistance to the assessee because in that case the Division Bench reiterated that omission to make an enquiry, where such an exercise is provoked, shall render the order of the assessing officer both erroneous and prejudicial to the revenue. The Division Bench went on to hold that the revenue should not harass the assessee where "the preponderance of evidence indicates absence of culpability". In the present case there exists reasonable suspicion if not prima facie evidence of culpability. 26. The learned Tribunal in the impugned judgement in paragraphs 3, 4 and 5 observed, inter alia as follows:- "We have heard the rival submissions and perused the relevant material on record. It is relevant to mention that we have disposed of more than 500 cases involving same issue through certain orders with the main order having been passed in a group of cases led by Subhlakshmi Vanijya Pvt. Ltd. v. CIT (ITA No.1104/Kol/2....
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....resses given by her but where an assessment has been made without territorial jurisdiction it could not be said to be prejudicial to the interests of revenue." This Court set aside the order of the learned Tribunal. In an appeal by the assessee before the Apex Court their Lordships upheld the order of this Court holding, inter alia as follows:- "The learned advocate for the assessee contends that under section 33B the Commissioner had no jurisdiction to cancel the assessment made by the Income-tax Officer inasmuch as it cannot be said that where an assessee has been assessed to tax it was prejudicial to the interests of revenue on the ground that no assessment could have been made in respect of the income of which she made a voluntary return. This contention in our view is unwarranted by the language of section 33B. The words of the section enable the Commissioner to call for and examine the record of any proceeding under the Act and to pass such orders as he deems necessary as the circumstances of the case justify when he considers that the order passed was erroneous in so far as it is prejudicial to the interests of the revenue. It is not, as submitted by the learned advoca....
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....ck basis. The case is discussed and heard. Issue relevant for determination of total income of the assessee is discussed as under:" The issues relevant according to the assessing officer were a receipt of a sum of Rs. 61,000/- on account of consultancy charges and the preliminary expenses written off amounting to a sum of Rs. 60,000/-. He, therefore, completed the assessment after making addition of a sum of Rs. 1,21,000/-. When is an order erroneous in so far as the same is prejudicial to the interest of the revenue was considered by this Court in the case of Maithan International (supra) to which one of us (Girish Chandra Gupta, J.) was a party wherein the following views were expressed:- 'It is not the law that the Assessing Officer occupying the position of an investigator and adjudicator can discharge his function by perfunctory or inadequate investigation. Such a course is bound to result in erroneous and prejudicial orders. Where the relevant enquiry was not undertaken, as in this case, the order is erroneous and prejudicial too and, therefore, revisable. Investigation should always be faithful and fruitful. Unless all fruitful areas of enquiry are pursued the enqu....
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.... of Section 92A and 92BA of the Income Tax Act was there at the relevant point of time are not questions which arise for determination in this case. The assessee with an authorised share capital of Rs. 1.36 crores raised nearly a sum of Rs. 32 crores on account of premium and chose not to go in for increase of authorised share capital merely to avoid payment of statutory fees is an important pointer necessitating investigation. Money allegedly received on account of share application can be roped in under Section 68 of the Income Tax Act if the source of the receipt is not satisfactorily established by the assessee. Reference in this regard may be made to the judgement in the case of Sumati Dayal (supra) wherein Their Lordships held that any sum "found credited in the books of the assessee for any previous year, the same may be charged to income tax....". We are unable to accept the submission that any further investigation is futile because the money was received on capital account. The Special Bench in the case of Sophia Finance Ltd. (supra) opined that "the use of the words "any sum found credited in the books" in Section 68 indicates that the said section is very widely worded ....
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....cer. It is true that the assessing officer had requisitioned the necessary details by his notice u/s.142(1) but he thereafter did not apply his mind thereto. The judgement in the case of J. L. Morrison (India) Ltd. has no manner of application because in that case the question essentially was whether the receipt was of a capital or revenue nature. The facts and circumstances were not in dispute. Moreover the view taken by the assessing officer was not shown nor was held by the Court to be an erroneous view. Whereas in this case we have demonstrated in some detail as to why is the order of the assessing officer erroneous and prejudicial to the revenue. The judgement in the case of Malabar Industrial Co. Ltd. (supra) and Max India Ltd. do not apply to the facts of this case for reasons already discussed by us. From the judgement of the learned Tribunal in the case of Subholaxmi, placed before us in great detail by Mr. Poddar, we find that all important issues placed for consideration by no other than Mr. Poddar himself were duly considered by the learned Tribunal. 30. For reasons already discussed we answer the issue No. (a) and (c) in the affirmative and the issue No. (b) and ....
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.... Hatti v. CIT (1977) 107 ITR 938(SC) was decided under the Income Tax Act, 1922 which did not have the provision equivalent to Section 68 and 69 of the Act which creates legal fiction as discussed in preceding para's of this order. The HUF assessee in that case was carrying on business in Lahore till June 1947. In June 1947, its Karta transferred from Lahore certain sums to banks in New Delhi. The Karta thereafter left Lahore for India with a sealed trunk containing gold ornaments, jewellery and cash which he deposited with a bank at Amritsar. Though initially the karta had gone to Mussoorie, he shifted to Delhi in October 1947 and started the gold business at Delhi in February 1948. The first entry in the books of account of the assessee was dated 30- 3-1948 bringing in an aggregate capital of certain amounts including gold ornaments and bank and cash balances. When asked to explain the source of the capital brought into the business, the assessee explained that the gold ornaments and cash were brought at the time of migration from Lahore and that from June 1947 till March 1948, the HUF assessee or its Karta had no other business or means of income from which the assets in questio....
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....ash was given to obtain cheques from the share subscribers. 4. The case of CIT v. Bharat Engineering and Construction Company (1972)83 ITR 187(SC) was again decided under the Act of 1922 where there was no provision equivalent to Section 68 and 69 of the Act.. In Bharat Engg. & Construction Co.'s case (supra ), the assessee-company was an engineering construction company which commenced its business in May 1943, but there were several cash credit entries in the first year of its business aggregating to Rs. 2.50 lakhs. The Assessing Officer called upon the assessee to explain those cash credit entries. The explanation given by the assessee was found to be false by the Assessing Officer, the AAC and the Tribunal. But, the Tribunal felt that those cash credit entries could not represent the income or profits of the assessee as they were all made very soon after the company commenced its activities. The Tribunal was of the view that in the very nature of things the assessee could not have earned such a huge amount as profits very soon after it commenced its activities. The Apex Court, therefore, inferred that it was reasonable to assume that those cash credit entries were capital rece....
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.... the source of the money received by the assessee by way of investments in the assessment year in question was not satisfactorily explained by the assessee. While in the instant year under appeal, the Revenue has categorically held based on material on record that the share subscribers are persons of meager means and shares were issued at huge premium despite the fact that there is no business/project in hand of the assessee. In the instant case under appeal, the Directors of the assessee have admitted in statement recorded on oath that these share subscription is bogus and were merely accommodation entries wherein cash was given to obtain cheques from the share subscribers. 6. CIT v. Lovely Exports Private Limited (2008) 216 CTR 195(SC) - It was held by Hon'ble Calcutta High Court in the case of Rajmandir Estates Private Limited(supra) at para 25 that "the judgement in the case of Lovely Exports (P.) Ltd. (supra) lends no assistance to the assessee because in that case the Division Bench reiterated that omission to make an enquiry, where such an exercise is provoked, shall render the order of the assessing officer both erroneous and prejudicial to the revenue. The Division Benc....
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....stant case the transactions were nominal rather than real. The creditworthiness of the shareholders is not proved because they did not had their own money as every cheque/draft issued in favour of the assessee is preceded by deposit of cash/cheque in the bank account of the shareholder and these share holders are merely name lenders. The genuineness of the transactions is also not proved as to how such a huge sum of money got invested by the share subscribers and that too at a huge premium when the company was merely a paper/shell company having no business/project worth in its hand. The shareholders could not be interrogated by the AO which was essential to unearth the truth as the assessee did not produced the shareholders nor they appeared before the AO in response to summons issued u/s 131 of the Act. The Directors namely Mr. Vinod K Faria and Mr Suresh V. Faria of the assessee company have admitted in their statement recorded on oath u/s 132(4)/131 of the Act that these share subscription was bogus and were merely accommodation entries. The blank transfer forms and receipts from the shareholders were found during survey with respect to transfer of these shares from shareholder....