TaxTMI 
TaxTMI 
2018 (2) TMI 1917
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....confirming the action of the ld. AO in making disallowance of Rs. 5,52,719/- on account of payment made to RSEB. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by quashing the said disallowance of Rs. 5,52,719/-. 3. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the action of the ld. AO in rejecting the books of accounts by invoking the provisions of section of 145(3) of I.T. Act, 1961 and making trading addition of Rs. 30,62,100/- by applying a G.P. rate of 1.84% on the estimated turnover of Rs. 4.50 crores. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by accepting the book results and deleting the said trading addition of Rs. 30,62,100/-." 2. Regarding Ground No. 1, the facts of the case are that during year under consideration, the assessee received share capital of Rs. 33,01,600/- and share premium of Rs. 1,48,82,799/- totaling to Rs. 1,81,84,399. During the course of assessment proceedings, the assessee was required to furnish the necessary details to verify ....
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....g Officer and submitted additional evidence in the form of confirmations from the shareholders which have since been obtained by the assessee company. A remand report from the AO was called by the ld CIT(A). The AO in his remand report stated that the additional evidence so furnished by the assessee in respect of 9 persons by way of confirmation letter do not contain any date on them. Hence the additional evidence so submitted by the assessee may not be relied upon. In his rejoinder, the assessee submitted that the confirmation letters states clearly cheque no. and the date of cheque cleared from the respective shares holder's bank account, therefore, it cannot be said that assessee has not mentioned the dates in the confirmation. It was submitted that merely because the date of signing on conformation is not mentioned, the same does not affect the genuineness of the transactions. 5. The ld. CIT(A) after considering the remand report and the rejoinder filed by the assessee observed that none of the share holders have discharged their respective obligation and the assessee has furnished scanty details after period of 5-6 years and the AO was handicapped on account of few details ....
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....vender Grover is not right that he has not invested in the share capital of the assessee company. It was submitted that the AO has not brought on record any contrary evidence to the confirmation so filed by the assessee. 6. The ld CIT(A) confirmed the addition so made by the AO and his relevant findings are reproduced as under:- "4.9 Having considered the material placed on record, I find that in this case the appellate proceedings have been fixed a number of times in the last about six years and only a few scanty details were filed to substantiate the sources of funds. Despite providing a number of opportunities to the appellant no evidence in the form of copy of bank account of the appellant, copy of their ITR filed, proof of identity of the share applicant in the form of voter card/passport etc. could be filed. The appellant was given another opportunity before the AO in the course of remand proceedings to produce the share applicants but the result remained the same. The appellant has rather justified the furnishing of few details to substantiate its contentions. 4.10 On examination of record, I find that no detail could be filed by the appellant to substan....
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....rs. It is submitted that even in respect of 55% of the share application money received, in respect of which no addition was made by ld. AO, the shareholders did not appear before him during the assessment proceedings. The contradictory stand taken by ld. CIT(A) deserves to be quashed. Particulars Share Capital Securities Premium Total Total Capital Issued during the year 33,01,600 1,48,82,799 1,81,84,399 Fresh issue accepted by ld. AO 20,00,000 80,00,000 1,00,00,000 % of fresh issue accepted by ld. AO 55% Fresh issue not accepted by ld. AO 1 3,01,600 68,82,799 81,84,399 % of fresh issue not accepted by ld. AO 45% 7.4 It is submitted that section 68 of the IT Act, 1961 has been amended w.e.f. 01.04.2013. Prior to amendment the only onus contained in section 68 was proving the identity, genuineness and creditworthiness of the entities from whom share application money was received. The present case of the assessee Company falls in the pre-amendment period and, therefore, placing on record name, address, PAN, confirmations and providing t....
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....does not entitle the Revenue to add the same to the assessee's income as unexplained cash credit. (f) In the above circumstances and particularly in view of the concurrent finding of fact arrived at by the CIT(A) and the Tribunal, the proposed question of law does not give rise to any substantial question of law." 7.5 Applying the ratio as laid down above, under the law, the assessee Company was not required to know the source of source and, thus, the onus required u/s 68 got duly discharged. Delivery of notices issued by ld. AO during remand proceedings u/s 133(6) to all the 9 parties further adds to the fact that identity stands established. 7.6 Attention is drawn on the table below, from which it is evident that the assessee has discharged its onus with regard to section 68 in establishing identity, creditworthiness and genuineness of the share applicants. Name of Party Address PAN Confirmation Delivery of notice u/s 133(6) Reply to 133(6) Mode Of receipt PB Aravali Enterprises • - • • - Bank 3 Hari Om Trading • &nb....
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....) Ltd [1986] 25 TAXMAN 80F (SC). 7.10 Ld. CIT(A) further confirmed the addition on observing that only one applicant responded back and he also denied having made any investment in the shares of the assessee Company. In this regard it is submitted that Mr. Devendra Grover, who denied to have made any investment, was the share holder of the assessee Company. This fact is evident from the Share Certificate which clearly shows that Mr. Davendra Kumar Grover was issued 5000 shares on 31st August, 2004. During the remand proceedings it was requested by the assessee Company to provide the copy of notice issue u/s 133(6) so as to gather what led Mr. Devendra Kumar Grover to refuse. Ld. AO was duty bound to allow cross examination of Mr. Devendra Kumar Grover whose statement was used against the assessee Company because it is a pragmatic requirement of fair play in action. Reliance is placed on the decision of Hon'ble Supreme Court in the case of Andaman Timber Industries, CIVIL APPEAL NO. 4228 OF 2006, dated 2nd Sept 2015, wherein it was held that where opportunity for cross examination is not given, it is violation of principles of natural justice. Relevant extract is set out here ....
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.... Supreme Court in the case of Daulat Ram Rawatmull (1973) 87 ITR 349 (SC), wherein it was held that the onus of proving that the apparent was not real was on the party who claimed it to be so. 7.15 Attention is drawn towards the judgment of Hon'ble Rajasthan High Court in the case of CIT-I v. Pooja Agarwal ITA 385/20 wherein it was held that no addition can be made if the following conditions are satisfied: • The payments and receipts are through banking channel. • There is no trail which could substantiate that the cash has flown back to the assessee. • The transactions is supported by documents appear to be genuine transaction. 7.16 Without prejudice to above it is submitted that ld. AO rejected the books of account of the assessee Company and the said rejection is also affirmed by ld. CIT(A). It is settled legal proposition that once books are rejected no disallowance is permissible under the law by referring the same set of rejected books of account. Hence, the disallowance made is bad in law. Reliance is placed on the following judicial pronouncements. Relevant extracts have been set out here for the sake of convenience: &n....
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.... Nipun Builders & Developers [2013] 350 ITR 407 and has held as under: "12. The main submission of the learned counsel for the assessee is that once the assessee had been able to show that the shareholder companies were duly incorporated by the Registrar of Companies, their identity stood established, genuineness of the transactions stood established as payments were made through accounts payee cheques/bank account; and mere deposit of cash in the bank accounts prior to issue of cheque/pay orders etc. would only raise suspicion and, it was for the Assessing Officer to conduct further investigation, but it did not follow that the money belonged to the assessee and was their unaccounted money, which had been channelized. 13. As we perceive, there are two sets of judgments and cases, but these judgments and cases proceed on their own facts. In one set of cases, the assessee produced necessary documents/evidence to show and establish identity of the shareholders, bank account from which payment was made, the fact that payments were received thorough banking channels, filed necessary affidavits of the shareholders or confirmations of the directors of the shareholder co....
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....worthiness of the creditor. It would be also incorrect to universally state that an Inspector must be sent to verify the shareholders/subscribers at the available addresses, though this might be required in some cases. Similarly, it would be incorrect to state that the Assessing Officer should ascertain and get addresses from the Registrar of Companies' website or search for the addresses of shareholders themselves. Creditworthiness is not proved by showing issue and receipt of a cheque or by furnishing a copy of statement of bank account, when circumstances requires that there should be some more evidence of positive nature to show that the subscribers had made genuine investment or had, acted as angel investors after due diligence or for personal reasons. The final conclusion must be pragmatic and practical, which takes into account holistic view of the entire evidence including the difficulties, which the assessee may face to unimpeachably establish creditworthiness of the shareholders. 20. Now, when we go to the order of the tribunal in the present case, we notice that the tribunal has merely reproduced the order of the Commissioner of Income Tax (Appeals) and uphe....
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....r: "6. We find it indeed remarkable that the attention of the Sophia Finance Full Bench had not been drawn to the decision of the Supreme Court in CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78, which if cited would really have left no alternative to the Full Bench but to arrive at the conclusion it did. The books of account of the assessee contained three cash credits aggregating Rs. 1,50,000 allegedly received as loans from three individual creditors under hundis. Letters of confirmation as well as the discharged hundis were produced; but notices/summons sent to them remained unserved because they had reportedly 'left' that address. The view of the Tribunal was that merely because the assessee could not produce these three parties, there was nevertheless no justification to draw an adverse inference. This approach as accorded approval by the Supreme Court in these words : "In this case, the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the revenue. The revenue, apart from issuing notices under section 131 at t....
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....ces would not justify an adverse inference being drawn against the assessees. The Court also kept in perspective the fact that the documentation had also been produced by the assessee. It is obvious that the Supreme Court considered that in these circumstances the onus of proof had been discharged by the assessee. It is also palpable that the Supreme Court was of the further opinion that the Department had not discharged the burden of proof that had shifted to it, since it did nothing more than issue notices under section 131 of the Income-tax Act. Therefore, the Department ought to have made efforts to pursue these notices/creditors to determine their creditworthiness. These observations sound the death-knell for the contentions raised on behalf of the Department in the present batch of appeals. 13. There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the revenue. Equally, where the preponderance of evidence indicates absence of culpability and complexity of the assessee it should not be harassed by the Revenu....
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....f Commissioner of Income-tax v. Nova Promoters & Finlease (P) Ltd. [2012] 342 ITR 169 (Delhi), which is again a case of a private limited company and which has been followed in case of Navodaya Castles(supra). In this case, the Hon'ble Delhi High Court has held as under: "38. The ratio of a decision (in case of Lovely Exports) has to be understood and appreciated in the background of the facts of that case. So understood, it will be seen that where the complete particulars of the share applicants such as their names and addresses, income tax file numbers, their creditworthiness, share application forms and share holders' register, share transfer register etc. are furnished to the Assessing Officer and the Assessing Officer has not conducted any enquiry into the same or has no material in his possession to show that those particulars are false and cannot be acted upon, then no addition can be made in the hands of the company under sec. 68 and the remedy open to the revenue is to go after the share applicants in accordance with law. We are afraid that we cannot apply the ratio to a case, such as the present one, where the Assessing Officer is in possession of material th....
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....xman 157 which is again a case of a private limited company and which has been followed in case of Navodaya Castles(supra). In this case, the Hon'ble Delhi High Court has held as under: "18. In the remand report, the Assessing Officer referred to the provisions of Section 68 of the Act and their applicability. This according to us is the correct and true legal position, as identity, creditworthiness and genuineness have to be established. PAN numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertaining active nature of business activity. PAN is a number which is allotted and helps the Revenue keep track of the transactions. PAN number is relevant but cannot be blindly and without considering surrounding circumstances treated as sufficient to discharge the onus, even when payment is through bank account. 19. On the question of creditworthiness and genuineness, it was highlighted that the money no doubt was received through banking channels, but did not reflect actual genuine business activity. The share subscribers did not have their own profit making apparatus and were not involved in business activity. The....
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....ht require that there should be some evidence of positive nature to show that the said subscribers had made a genuine investment, acted as angel investors, after due diligence or for personal reasons. Thus, finding or a conclusion must be practicable, pragmatic and might in a given case take into account that the assessee might find it difficult to unimpeachably establish creditworthiness of the shareholders. 30. What we perceive and regard as correct position of law is that the court or tribunal should be convinced about the identity, creditworthiness and genuineness of the transaction. The onus to prove the three factum is on the assessee as the facts are within the assessee's knowledge. Mere production of incorporation details, PAN Nos. or the fact that third persons or company had filed income tax details in case of a private limited company may not be sufficient when surrounding and attending facts predicate a cover up. These facts indicate and reflect proper paper work or documentation but genuineness, creditworthiness, identity are deeper and obtrusive. Companies no doubt are artificial or juristic persons but they are soulless and are dependent upon the individ....
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.... speak and are obvious. What is unmistakably visible and apparent, cannot be spurred by formal but unreliable pale evidence ignoring the patent and what is plain and writ large." 3.6 We now refer to the decision in case of CIT vs. Shree Barkha Synthetics Ltd. (supra) wherein the Hon'ble Rajasthan High Court has held as under (head notes): "The assessee having been asked to furnish explanation about the receipt of capital money on account of share application, had furnished the details of the identity of persons who had made such investments. The particulars of the receipt and GIR number of the persons, who had made such investments in the matter of companies registered under the Companies Act, 1956, were furnished. Notices of 5 companies out of 7 companies were received unserved with the remark of the postal department that they had shifted their addresses. But no attempt was made by the department to pursue the enquiry thereafter which, notwithstanding the remark about shifting of addresses, prima facie established genuineness of such companies as existing persons. It had come on record that another company did exist and was under liquidation, the existence of wh....
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....remand report'. The purpose of this enabling clause is essentially to ensure that the matter of assessment reaches finality with all the requisite facts found. The assessment proceedings reopened on the basis of preliminary satisfaction that some part of the income has escaped assessment, particularly when some unexplained credit entries have come to the notice (as in section 68), cannot conclude, save and except by reaching satisfaction on the touchstone of the three tests mentioned earlier; viz. the identity of the third party making the payment, its creditworthiness and genuineness of the transaction. Whilst it is true that the assessee cannot be called upon to adduce conclusive proof on all these three questions, it is nonetheless legitimate expectation of the process that he would bring in some proof so as to discharge the initial burden placed on him. Since section 68 itself declares that the credited sum would have to be included in the income of the assessee in the absence of explanation, or in the event of explanation being not satisfactory, it naturally follows that the material submitted by the assessee with his explanation must itself be wholesome or not untrue. It ....
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.... subscribed by the investors, the amounts paid by them, the individuals who paid the amount towards share capital and the gross income reported by each of such investors to the revenue. A look at that chart would show that the investors had, by and large, reported amounts far less as compared to the sums invested by them towards share capital. Furthermore, the Assessing Officer had, during the course of assessment, issued notices under section 133(6) to the investors - 28 of them responded; 2 did not receive the notice and 9 of them received the notices and responded but did not submit any confirmation. [Para 7] Having regard to the circumstances, particularly, the fact that these investors not only did not submit confirmation but had concededly reported far less income than the amounts invested, the assessee could not, under the circumstances, be said to have discharged the burden which was upon it. It is not sufficient for the assessee to merely disclose the addresses or identities of the individuals concerned. The other way of looking at the matter is that having given the addresses, the inability of the noticees who are approached by the Assessing Officer to afford any....
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....umstance which the AO in this case proceeded to draw inferences from. Having regard to the totality of the facts, i.e., that the assessee commenced its business and immediately sought to infuse share capital at a premium ranging between Rs. 90-190 per share and was able to garner a colossal amount of Rs. 4.34 Crores, this Court is of the opinion that the CIT (Appeals) and the ITAT fell into error in holding that AO could not have added back the said amount under Section 68. The question of law consequently is answered in favour of the Revenue and against the assessee." 3.12 In case of M/s Shubh Mines Pvt Ltd, the Hon'ble Rajasthan High Court has held as under: "(7) A bare perusal of the assessment order reveals that the AO has made the addition on suspicion which is based on the statements of third party Shri Asseem Kumar Gupta, admittedly, recorded in the back of the assessee. It has come on record that the share application money of Rs. 50,00,000/- was received from Moderate Credit Corporation ltd., a listed company. It is not disputed before this court that the investment made was received by account payee cheque and the same was refunded by an account payee ch....
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....h cases is identification of the shareholder, creditworthiness of shareholder and the genuineness of the transaction. 4.3 The explanation offered and material submitted by the assessee in support of its explanation should be wholesome, credible and verifiable. These three requirements thereafter have to be tested by the Assessing officer not superficially but in depth having regard to the human probabilities and normal course of human conduct. It is only when the explanation and the material offered by the assessee at this stage passes this muster that the initial onus placed on it would shift leaving it to the Assessing Officer to start inquiring into the affairs of the third party. 4.4 Whilst it is true that the assessee cannot be called upon to adduce conclusive proof on all these three requirements, it is nonetheless legitimate expectation of the process that he would bring in sufficient proof, which is credible and at the same time verifiable, so as to discharge the initial burden placed on him. Whether initial onus stands discharged would depend upon facts and circumstances of each case. 4.5 The degree of burden of proof on the assessee will vary fr....
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....share application documents, bank transactions details and other related KYC documents submitted along with the share application. 4.8 The word "identity" means the condition or fact of a person or thing being that specified unique person or thing. The identification of the person would include the place of work, the staff, the fact that it was actually carrying on business and recognition of the said company in the eyes of public. Merely producing certificate of incorporation, PAN number or assessment particulars did not establish the identity of the person. PAN numbers are allotted on the basis of applications without actual de facto verification of the identity or ascertaining active nature of business activity. The actual and true identity of the person or a company was the business undertaken by them. Further, these documents have their limitation and cannot be relied upon blindly when there are surrounding circumstances to show that the subscriber was a paper company and not a genuine investor. 4.9 In respect of the genuineness of the transaction and creditworthiness of the shareholder, it would be incorrect to state that the onus to prove the same stands di....
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....has no material in his possession, he cannot obdurately adhere to his suspicions and treat the subscribed capital as the undisclosed income of the Company." 11. We have also gone through other legal authorities on the subject as brought to our notice by the ld AR which have been rendered in the context of specific facts and circumstances of the individual cases, however, largely similar proposition emerges, as we have discussed above, and hence, these authorities have not been discussed separately. 12. In light of above legal proposition, if we were to analyse the facts of the present case, the assessee company being a private limited company, the burden of proof is clearly on higher pedestal as compared to public limited company. It is not in dispute that the assessee company has submitted the particulars of the shareholders in terms of their name and address, number of shares allotted and amounting received towards the share capital and share premium. It is also a fact that these persons are initial subscribers to the share capital of the assessee company and the shares have been issued by the assessee company and the necessary filings have been made with the Registrar of C....
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....sufficient enough to establish the creditworthiness of these shareholders. It is not a case of establishing the source of source but atleast basic documentation to establish the creditworthiness of these shareholders should have been brought on record which assessee has failed in the instant case. Whether share subscribers have their own profit making apparatus and were involved in any tangible business activity or were they merely rotated money, which was coming through the bank accounts. These are some of the questions which remain unanswered in the present case. 14. At the same time, we find that the assessee company has submitted that these shareholders have since transferred their shareholding to third persons and are not cooperating with the assessee company and sharing further information. The question is what is the course of action available with the AO in such cases when the fact of shareholding has been transferred to third persons has not been disputed by the Revenue. In our view, in such cases, where the AO has the necessary information in form of name, address and their PAN details, he should reach out to these shareholders directly as well as to the jurisdictional....
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....nstruments. It was submitted that out of the total no. of shareholders, confirmations in respect of 55% of the share application money received during the year, could be filed before the ld. AO and the share capital in respect of these share holders was found genuine and was accepted by the ld. AO. However, confirmations in respect of remaining nine shareholders could not be submitted during the assessment proceedings and during the appellate proceedings, said remaining confirmations were filed as additional evidences which were also accepted by ld. CIT(A). In light of the same, it was submitted that for this sole reason of non submission of confirmations, the ld. AO added the amount pertaining to these shareholders aggregating to Rs. 81,84,399 and before the ld. CIT(A), the same was mitigated by filing the said confirmations. 16. We have given a careful consideration to the aforesaid contentions so raised by the AO. Firstly, it is not clear atleast from the reading of the assessment order and any other material on record that the AO has accepted the share application money in respect of 55% of the share transaction on the basis of confirmation obtained from the shareholders and....
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.... this case the appellate proceedings have been fixed a number of times in the last about six years and only a few scanty details were filed to substantiate the sources of funds. Despite providing a number of opportunities to the appellant no evidence in the form of copy of bank account of the appellant, copy of their ITR filed, proof of identity of the share applicant in the form of voter card/passport etc. could be filed. The appellant was given another opportunity before the AO in the course of remand proceedings to produce the share applicants but the result remained the same. The appellant has rather justified the furnishing of few details to substantiate its contentions. 4.10 On examination of record, I find that no detail could be filed by the appellant to substantiate the identity of the applicant, creditworthiness of the share applicants and genuineness of the transactions. The AO has issued notices on the addresses furnished by the appellant but no one attended the proceedings or furnished any evidence. In fact out of all the share applicants only one applicant responded back and he also denied having made any investment in the shares of the company. The appellant....
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....tlement against demand of previous year and since the same was paid during the year under consideration, it was claimed in the year of payment and settlement. There is no dispute that the year in which the liability has crystallized, the assessee shall be eligible to claim the same. However, from the material available on record, it is not clear whether the assessee has claimed the same in the earlier years to which the said payment originally belongs and whether the same was allowed for tax purposes. If it was already claimed and allowed in the earlier years, the AO is right in disallowing the same. Where it was not claimed and not allowed in the earlier years, the assessee shall be eligible to claim the same in the year under consideration. The matter is accordingly set-aside to the file of the AO to examine the said aspect of the matter and decide the same afresh. In the result, the ground is allowed for statistical purposes. 23. Regarding Ground No. 3 of the assessee's appeal, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that assessee company has declared sales of Rs. 4,34,02,675/- on which gross loss of Rs. 22,34....
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....ns which are reproduced as under: "3.1 It is submitted that after rejection of books of accounts, the only remedy available in law with the ld. AO is best judgment u/s 144. The provisions of section 144 of the Act provide for making the best judgment after taking into account all the material which the AO has gathered. In making a best judgment, the AO must not act dishonestly or vindictively or capriciously because he must exercise judgment in the matter. Therefore, the AO must make what he honestly believes to be a fair estimate of the proper figure of assessment and for this purpose he must be able to take into consideration local knowledge and repute in regard to the assessee's circumstances and it must be honest guess work. In making best judgment assessment, the AO does not possess arbitrary powers to assess at any figure, he likes. He must be guided by rules of justice, equity and good conscience. A best judgment assessment is not a punitive assessment. 3.2 It is submitted that ld. AO is duty bound to provide assessee the opportunity to rebut the material or working on the basis of which the estimation for enhancing the returned income of the assessee was m....