INCOME TAX APPELLATE TRIBUNAL, NEW DELHI
MOTI ADHESIVES P. LTD. vs ITO
25-06-2018
MOTI ADHESIVES P. LTD. vs ITO
25-06-2018
ITA No. 3133/Del/2018
Date: 25-06-2018
The Assessee has filed
this Appeal against the Order dated 26.3.2018 of the Ld. CIT(A)-22, New Delhi
relating to assessment year 2009-10 on the following grounds:-
1. That on the facts and
in the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the
order passed by AO u/s. 147/143(3) without appreciating that assumption of
jurisdiction u/s. 148 was by AO was in violation of mandatory jurisdictional
conditions stipulated under the Act; That on the facts und in the circumstances
of the case and in law, ld CIT-A erred in sustaining the order passed by Ld AO
uls 147/143(3) without appreciating that "rubber stamp" reasons in
present case are based on borrowed satisfaction and are without independent
application of mind; That on the facts and in the circumstances of the case and
in law, ld CIT-A erred in sustaining the order passed by Ld AO uls 147/143(3)
without appreciating that reasons are merely based on purported documents
seized from premises of Mr. SK Jain etc. and same cannot be put against that
assessee unless statement of Mr. Jain on those documents vis a vis assessee
herein is brought on records and the same is duly followed by cross examination
of Mr. Jain which have not happened in present case; That on the facts and in the
circumstances of the case and in law, ld CIT-A erred in sustaining the order
passed by Ld AO uls 147/143(3) without appreciating that documents so relied in
reasons have not evidentiary value qua assessee herein u/s. 292C of the Act and
can only bind the person from whose possession those documents are found;
That on the facts and in
the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the
order passed by the AO us. 147/143(3) without appreciating that on the date
when reasons were recorded (07/03/2016) reliance placed in reasons recorded on
AO and CIT(A) orders in case of Mr. Jain invalidates the entire foundation
(sublato fundamentocaditopus) as those orders were quashed and set aside by
ITAT Delhi bench order dated 3.2.2016. That on the facts and in the
circumstances of the case and in law, Ld. CIT(A) erred in sustaining the order
passed by the AO u/s. 147/143(3) without appreciating that Annexure B which is
not referred in reasons supplied is introduced in the proceedings in incognito
manner which vitiates the entire proceedings as complete reasons were not
furnished to the assessee; That on the facts and in the circumstances of the
case and in law, Ld. CIT(A) erred in sustaining the order passed by AO u/s.
147/143(3) without appreciating that AO issued notice with questionnaire u/s.
142(1) and Section 143(2) on 1.6.2016 when reasons were supplied only on
1.6.2016 which vitiates the entire exercise being done in undue hurry and
haste;
2. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/43(3) without appreciating that on basis of
surfeit and inundated evidences on records burden u/s 68 lying on assessee has
been fully discharged and met so addition made by Ld AO (Rs 25,00,000 & Rs 45,000)
and confirmed by CIT-A in impugned order deserves to be deleted.
That on the facts
and in the circumstances of the case and in law, Ld. CIT-A 'erred in sustaining
the order passed by Ld AO u/s 147/143(3) without appreciating that there is no
basis of any of the addition of (Rs. 25,00,000 & Rs 45,000). That on the
facts and in the circumstances of the case and in law, ld CIT-A erred in
sustaining the order passed by Ld AO uls 147/143(3) without appreciating that
all the additions made are without bringing legally admissible document;
That on the facts and in
the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that enquiry made has
yielded positive confirmation, which is aborted by AO which is sufficient to
strike down the additions made;
That on the facts and in
the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that sole reason for
addition has been non production of director of companies which is held to be
not the valid reasons for addition u/s 68;
That on the facts and in
the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that while making
addition U/S 68 Ld AO has not issued required show cause notice nor Ld AO has
considered detailed reply filed by the assessee;
That on the facts and in
the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that while making
addition u/s 68 position of net worth of companies is suitably ignored; That on
the facts and in the circumstances of the case and in law, ld CIT-A erred in
sustaining the order passed by Ld AO u/s 147/143(3) without appreciating that
none of evidence filed by assessee is overruled in accordance with law.
3. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred in not restoring
the returned income declared by assessee in its return of income.
4. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred In not deleting the
addition made by Ld AO which was also unlawful and made in violation of
principles of natural justice. That the appellant craves leave to add add/alter
any/all grounds of appeal before or at the time of hearing of the appeal.
2. The brief facts of
the case are that the assessee company was incorporated on 19.7.1995 under the
Company Act, 1956. The assessee filed its return of income u/s 139 of the
Income Tax Act,1961 (hereinafter referred as the Act) on 30/09/2009 declaring
loss of Rs. 7,055/-. Later, the return of the assessee was processed u/s 143(1)
of the Act on 29/10/2010. Subsequent to the processing of the return of income
u/s. 143(1) of the Act on 29.10.2010 information was received from the Office
of Director of Income Tax (Investigation-II), New Delhi vide letter dated
12.3.2013 mentioning therein that a search operation was carried out in the
case of Surendera Kumar Jain group of cases therein after known as Entry
Operator wherein after intensive and extensive enquiry and examination of
documents seized during the course of search it has been noticed that the said
group is involved in providing accommodation entries to the persons which were
named in the report. The assessee company also figures in the list as one of
the beneficiaries of the accommodation entries. On the basis of material
available on record and reasons recorded in writing, Notice u/s 148 of the Act
dated 10/03/2016 was issued by the Assessing Officer. In response to the same,
the assessee vide letter dated 18.4.2016 requested that the original return
filed on 30.9.2009 may be treated as return filed in response to notice u/s.
148 of the Act and requested to supply copy of reasons recorded for reopening
of the assessee. A copy of the reasons recorded was supplied to the assessee
alongwith notice dated 01.6.2016 u/s. 142(1) of the Act. The assessee filed its
objections to the initiation of proceedings u/s. 147 of the Act vide its letter
dated 14.6.2016. Objections of the assessee were disposed of vide order dated
23.6.2016. The assessee was also asked to make complete compliance to the
questionnaire already issued alongwith notice u/s. 142(1) of the Act dated
1.6.2016. The assessee has not challenged the assumption of jurisdiction u/s.
148 of the Act either at the beginning of assessment/ re-assessment proceedings
or of during the course of assessment / re-assessment proceedings. The AO on
perusing the return of income observed that assessee has share capital and
share application money fund of Rs.1,15,42,000/- as on 31.3.2009 as compared to
Rs. 89,12,000/- as on 31.3.2008. On further perusal of balance sheet of the
assessee AO observed that the assessee has shown receipt of share application
money amounting to Rs. 26,30,000/- during the year under consideration. The AO
observed that Rs. 25 lacs has been found credited in the books of accounts of
the assessee. The immediate source of this amount has been found to be received
from one of the entities controlled by Jain Brothers. Accordingly, the AO held
that Rs. 25 lacs credited in the books of account of the assessee fails to pass
the test of genuineness within the meaning of Section 68 of the Act and held to
be the income of the assessee u/s. 68 of the Act and was added to the income of
the assessee and also Rs. 45,000/- was added for arranging such accommodation
entry necessary entails payment of commission to entry providers, vide order
dated 31.10.2016 and assessed the income of the assessee at Rs. 25,37,950/-
u/s. 147(143(3) of the I.T. Act, 1961. Against the assessment order, the
assessee appealed before the Ld. CIT(A), who vide his impugned order dated 26.3.2018
has dismissed the appeal of the assessee.
3. Apropos validity of
the reopening action u/s 148 of the Act made by AO, Ld. AR submitted that same
is invalid being mechanical and based on borrowed satisfaction only and no case
specific and transaction specific valid material is brought on records which
may justify the instant reopening action u/s 148 of the Act. Following case
laws are relied by Ld. AR to challenge reopening action u/s 148:
i) Hon’ble Delhi High
Court in G&G Pharma 384 ITR 147
ii) Hon’ble Delhi Hihg
Court in Meenakshi Overseas 395 ITR 677;
iii) Hon’ble Delhi high
court in RMG Polyvinyl 396 ITR 5 ;
iv) Hon’ble Delhi high
court Sabh Infrastructure 398 ITR 198
It was specifically
pleaded that merely reopening on basis of directions of Investigation Wing
cannot justify the reopening action made u/s 148 of the Act which requires
independent application of mind. Further it was highlighted with reference to
reasons that one major weakness in reasons is no where statement of searched
persons is brought on records qua seized papers which vitiate the entire
exercise. Moreover only one sided version of investigation wing on seized
material that too which is not found from assessee’s possession is submitted
that it cannot be made as valid basis to infer income escaping assessment u/s
148 of the Act. Countering this, Ld. Sr. DR. opposed strongly contentions and
stated that reopening made is perfectly in order and she relied on following
case laws:
i) Hon’ble Delhi High
Court in Paramount Communications 250 Taxmann 100;
ii) Hon’ble Supreme
court in Raymond Woollen Silk Mills 236 ITR 34;
iii) Hon’ble Delhi high
court in AGR Investments order dated 7/11/2011;
4. On merits of the case
and on issue of addition u/s 68 of the Act, Ld. AR relying upon the following
decisions and argued that merely non production of a Director without anything
more and where all relevant documents are placed on records which remained
uncontroverted specifically, cannot justify adverse inference u/s 68 of the Act
which is unlawful according to Ld AR. He also filed a separate compilation for
the following cases laws to support this proposition :
i) Hon’ble Bombay high
court in Orchid Industries (397 ITR 136);
ii) Hon’ble Delhi high
court in Softline Creation Pvt Ltd (387 ITR 636);
iii) Hon’ble Delhi high
court in Rakam Money Matters Pvt Ltd (order dated 13/10/2015);
iv) Hon’ble Delhi high
court in Goodview Industries order dated 21//11/2016;
v) Delhi ITAT decision
(on same facts) in case of Aksar wire Products Pvt Ltd (order dated 11/12/2015);
vi) Delhi ITAT decision
in case of Madhusudan Packaging order dated 09/05/2018
On the other hand, Ld.
Sr. DR referring to material shared by investigation wing as extracted and
narrated in detail that orders of AO and Ld CIT(A) are justified and placed
reliance on the following decisions:
i) Hon’ble Delhi high
court decision in case of N.Tarika Properties Pvt Ltd (28/11/2013);
ii) Hon’ble Delhi high
court decision in case of Nipun Builders and Developers Pvt Ltd (07/01/2013);
iii) Hon’ble Delhi high
court decision in case of Nova Promoters and Finlease Pvt Ltd (15/02/2012)
Finally Ld Sr. DR
requested and pleaded for dismissal of assesse’s appeal and confirmation of
action of addition made u/s 68 of the Act by AO as sustained by Ld. CIT(A).
5. I have heard both the
parties and perused the records especially the impugned order as well as the
Paper Books and the decisions referred by both the sides. Before giving my
opinion on the important legal issue raised u/s 68 of the Act, for sake of convenience,
the important issue which requires the adjudication by this Tribunal is framed
as:
Whether once assessee
places before Ld AO all the relevant and best documents in its possession to establish
its burden u/s 68 of the Act qua cash credit (here share capital received) ,
can simply because there is no personal appearance from director of said cash
creditor (share holder) as called for by Ld AO, adverse inference u/s 68 can be
drawn by Ld AO without discharging secondary burden lying on Ld AO u/s 68 of the
Act?
In my view the answer to
this issue as framed, can only be in negative as once all important and crucial
documents are filed by assessee to prove its case qua share capital received
u/s 68 of the Act, then simply harping on non production of director in person before
the AO cannot be justified ground to draw adverse inference without adequate
discharge of secondary burden lying on AO u/s 68 of the Act. Burden u/s 68 of
the Act as it is settled law keeps shifting.
Particularly once
reopening u/s 148 of the Act is resorted being extra-ordinary jurisdiction, on
the basis of aforesaid apprehension and charge of accommodation entry u/s 68 of
the Act for share capital received, firstly in my view AO should discharge the
crucial and critical burden u/s 148 of the Act to bring home the material that
income has escaped assessment without which assessee cannot be asked to prove
negative. For this reference may be made to sagacious observations of Hon’ble
Delhi high court in Pardeep Gupta case 303 ITR 95. If this primary burden u/s
148 lying on AO remains un-discharged then in my considered opinion entire
proceedings shall crumble (refer latin maxim sublato fundamento cadit opus
meaning once foundation fails super structure falls). In present case AO till end
has not brought on records the statement of searched person as recorded by
investigation wing during their search action u/s 132 of the Act much less
offered their cross examination to assessee herein to justify the allegations
leveled in detailed reasons recorded which would in my opinion make the
reopening as invalid (refer Apex court leading decision in case of Andaman
Timber Industries reported at 127 DTR 241 order dated 02/09/2015 and Bombay
high court decision in case of H.R.Mehta reported at 387 ITR 561) This
violation of natural justice in my view is a serious flaw and goes to the root
of the matter and nullifies the entire proceedings.
Be that as it may, once
assesseee places all the reliable and trustworthy documentary evidences to
support the veracity of transaction u/s 68 of the Act, it is the duty of AO to
dispassionately consider the same with objective standards and not to make the
additions simply reproducing at length from the internal report of investigation
wing prepared at the time of search (here on Jain Brothers). That is AO cannot
make addition u/s 68 on mere basis of ifs and buts only and some credible
incriminating material must be brought on records to displace the detailed
evidence filed by the assessee during assessment proceedings. That is if reopening
u/s 148 and addition u/s 68 are allowed to be made on same subjective standards
of prima-facie opinion only which are generally required to reopen/start the
case, and additions are allowed to be made without any credible material which
can validly counter assessee’s evidences in my view same would totally
frustrate the entire object/scheme of the law. In my view, AO is under a
bounden legal duty to discharge his secondary burden u/s 68 of the Act before
making any addition therein, where in present case as evident from facts noted above,
only ground made is non production of director concerned which is plainly
incorrect. For this reliance is placed on decisions which are narrated below.
Moreover it looks from cursory reading from the impugned assessment order
passed by AO that same is passed on merely borrowed satisfaction of
investigation wing without independent application of mind by AO which is
completely wrong and incorrect as AO u/s 148 while passing final order and
before making addition of unexplained income under deeming provisions of
section 68 etc cannot put cart before the horse and cannot pass the final
assessment order just reproducing from investigation wing report which are made
basis to reopen the case. The fact that present order is passed on mere basis
of borrowed satisfaction only is evident if one compares the reasons recorded,
show cause notice issued and final order as impugned before this Tribunal. At
all three stages same and similar allegations are made dehors the evidences
filed by assesssee.
Turning back to facts of
present case, I find from paper book running into 84 pages all the relevant and
necessary documents required to establish the subject transaction of share
capital received are brought on records before AO and Ld CIT(A) and have
totally remained uncontroverted. Specially the fact of positive response made
by share holder in response to enquiry made u/s 131 and confirmation of subject
investment therein by share holder to AO clinches the issue in favor of
assessee. Moreover the share holder company having handsome net worth and
assessed u/s 153C/153A for subject period also supports assessee’s case.
Further AO has remained sited with folded hands and has not made any
independent enquiry from concerned AO of share holder company which itself is
sufficient to knock off the addition made. On basis of this I have no hesitation
to delete the additions of Rs 25,00,000 and Rs 45,000 made u/s 68 by AO in
reopened proceedings u/s 148 of the Act, as alleged accommodation entry
obtained, on sole and mere basis of non production of directors of share holder
company which in my considered view is plainly incorrect and unjustified.
Notably, there is the Assessee has filed this Appeal against the Order dated
26.3.2018 of the Ld. CIT(A)-22, New Delhi relating to assessment year 2009-10
on the following grounds:-
1. That on the facts and
in the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the
order passed by AO u/s. 147/143(3) without appreciating that assumption of
jurisdiction u/s. 148 was by AO was in violation of mandatory jurisdictional
conditions stipulated under the Act; That on the facts und in the circumstances
of the case and in law, ld CIT-A erred in sustaining the order passed by Ld AO
uls 147/143(3) without appreciating that "rubber stamp" reasons in
present case are based on borrowed satisfaction and are without independent
application of mind; That on the facts and in the circumstances of the case and
in law, ld CIT-A erred in sustaining the order passed by Ld AO u/s 147/143(3)
without appreciating that reasons are merely based on purported documents
seized from premises of Mr. SK Jain etc. and same cannot be put against that
assessee unless statement of Mr. Jain on those documents vis a vis assessee
herein is brought on records and the same is duly followed by cross examination
of Mr. Jain which have not happened in present case; That on the facts and in
the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that documents so
relied in reasons have not evidentiary value qua assessee herein u/s. 292C of
the Act and can only bind the person from whose possession those documents are found;
That on the facts and in
the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the
order passed by the AO us. 147/143(3) without appreciating that on the date
when reasons were recorded (07/03/2016) reliance placed in reasons recorded on
AO and CIT(A) orders in case of Mr. Jain invalidates the entire foundation
(sublato fundamentocadit opus) as those orders were quashed and set aside by
ITAT Delhi bench order dated 3.2.2016. That on the facts and in the
circumstances of the case and in law, Ld. CIT(A) erred in sustaining the order
passed by the AO u/s. 147/143(3) without appreciating that Annexure B which is
not referred in reasons supplied is introduced in the proceedings in incognito
manner which vitiates the entire proceedings as complete reasons were not
furnished to the assessee; That on the facts and in the circumstances of the
case and in law, Ld. CIT(A) erred in sustaining the order passed by AO u/s.
147/143(3) without appreciating that AO issued notice with questionnaire u/s.
142(1) and Section 143(2) on 1.6.2016 when reasons were supplied only on
1.6.2016 which vitiates the entire exercise being done in undue hurry and
haste;
2. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO uls 147/43(3) without appreciating that on basis of
surfeit and inundated evidences on records burden uls 68 lying on assessee has
been fully discharged and met so addition made by Ld AO (Rs 25,00,000 & Rs 45,000)
and confirmed by CIT-A in impugned order deserves to be deleted. That on the
facts and in the circumstances of the case and in law, Ld. CIT-A 'erred in
sustaining the order passed by Ld AO uls 147/143(3) without appreciating that
there is no basis of any of the addition of (Rs. 25,00,000 & Rs 45,000).
That on the facts
and in the circumstances of the case and in law, ld CIT-A erred in sustaining the.
order passed by Ld AO uls 147/143(3) without appreciating that all the
additions made are without bringing legally admissible document;
That on the facts
and in the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that enquiry made has
yielded positive confirmation, which is aborted by AO which is sufficient to
strike down the additions made;
That on the facts
and in the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that sole reason for
addition has been non production of director of companies which is held to be
not the valid reasons for addition u/s 68;
That on the facts
and in the circumstances of the case and in law, ld CIT-A erred in sustaining the
order passed by Ld AO u/s 147/143(3) without appreciating that while making
addition U/S 68 Ld AO has not issued required show cause notice nor Ld AO has
considered detailed reply filed by the assessee;
That on the facts
and in the circumstances of the case and in law, Ld. CIT(A) erred in sustaining
the order passed by Ld AO u/s 147/143(3) without appreciating that while making
addition u/s 68 position of net worth of companies is suitably ignored; That on
the facts and in the circumstances of the case and in law, ld CIT-A erred in
sustaining the order passed by Ld AO u/s 147/143(3) without appreciating that
none of evidence filed by assessee is overruled in accordance with law.
3. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred in not restoring
the returned income declared by assessee in its return of income.
4. That on the facts and
in the circumstances of the case and in law, ld CIT-A erred In not deleting the
addition made by Ld AO which was also unlawful and made in violation of
principles of natural justice.That the appellant craves leave to add add/alter
any/all grounds of appeal before or at the time of hearing of the appeal.
2. The brief facts of
the case are that the assessee company was incorporated on 19.7.1995 under the
Company Act, 1956. The assessee filed its return of income u/s 139 of the
Income Tax Act,1961 (hereinafter referred as the Act) on 30/09/2009 declaring
loss of Rs. 7,055/-. Later, the return of the assessee was processed u/s 143(1)
of the Act on 29/10/2010. Subsequent to the processing of the return of income
u/s. 143(1) of the Act on 29.10.2010 information was received from the Office
of Director of Income Tax (Investigation-II), New Delhi vide letter dated
12.3.2013 mentioning therein that a search operation was carried out in the
case of Surendera Kumar Jain group of cases therein after known as Entry
Operator wherein after intensive and extensive enquiry and examination of
documents seized during the course of search it has been noticed that the said
group is involved in providing accommodation entries to the persons which were
named in the report. The assessee company also figures in the list as one of
the beneficiaries of the accommodation entries. On the basis of material
available on record and reasons recorded in writing, Notice u/s 148 of the Act
dated 10/03/2016 was issued by the Assessing Officer. In response to the same,
the assessee vide letter dated 18.4.2016 requested that the original return
filed on 30.9.2009 may be treated as return filed in response to notice u/s.
148 of the Act and requested to supply copy of reasons recorded for reopening
of the assessee. A copy of the reasons recorded was supplied to the assessee
alongwith notice dated 01.6.2016 u/s. 142(1) of the Act. The assessee filed its
objections to the initiation of proceedings u/s. 147 of the Act vide its letter
dated 14.6.2016. Objections of the assessee were disposed of vide order dated 23.6.2016.
The assessee was also asked to make complete compliance to the questionnaire
already issued alongwith notice u/s. 142(1) of the Act dated 1.6.2016. The
assessee has not challenged the assumption of jurisdiction u/s. 148 of the Act
either at the beginning of assessment/ re-assessment proceedings or of during
the course of assessment / re-assessment proceedings. The AO on perusing the
return of income observed that assessee has share capital and share application
money fund of rs. 1,15,42,000/- as on 31.3.2009 as compared to Rs. 89,12,000/-
as on 31.3.2008. On further perusal of balance sheet of the assessee AO
observed that the assessee has shown receipt of share application money
amounting to Rs. 26,30,000/- during the year under consideration. The AO
observed that Rs. 25 lacs has been found credited in the books of accounts of
the assessee. The immediate source of this amount has been found to be received
from one of the entities controlled by Jain Brothers. Accordingly, the AO held
that Rs. 25 lacs credited in the books of account of the assessee fails to pass
the test of genuineness within the meaning of Section 68 of the Act and held to
be the income of the assessee u/s. 68 of the Act and was added to the income of
the assessee and also Rs. 45,000/- was added for arranging such accommodation
entry necessary entails payment of commission to entry providers, vide order
dated 31.10.2016 and assessed the income of the assessee at Rs. 25,37,950/-
u/s. 147(143(3) of the I.T. Act, 1961. Against the assessment order, the
ssessee appealed before the Ld. CIT(A), who vide his impugned order dated 26.3.2018
has dismissed the appeal of the assessee.
3. Apropos validity of
the reopening action u/s 148 of the Act made by AO, Ld. AR submitted that same
is invalid being mechanical and based on borrowed satisfaction only and no case
specific and transaction specific valid material is brought on records which
may justify the instant reopening action u/s 148 of the Act. Following case
laws are relied by Ld. AR to challenge reopening action u/s 148:
i) Hon’ble Delhi High
Court in G&G Pharma 384 ITR 147
ii) Hon’ble Delhi Hihg
Court in Meenakshi Overseas 395 ITR 677;
iii) Hon’ble Delhi high
court in RMG Polyvinyl 396 ITR 5 ;
iv) Hon’ble Delhi high
court Sabh Infrastructure 398 ITR 198
It was specifically
pleaded that merely reopening on basis of directions of Investigation Wing
cannot justify the reopening action made u/s 148 of the Act which requires
independent application of mind. Further it was highlighted with reference to
reasons that one major weakness in reasons is no where statement of searched persons
is brought on records qua seized papers which vitiate the entire exercise.
Moreover only one sided version of investigation wing on seized material that
too which is not found from assessee’s possession is submitted that it cannot
be made as valid basis to infer income escaping assessment u/s 148 of the Act.
Countering this, Ld. Sr. DR. opposed strongly contentions and stated that reopening
made is perfectly in order and she relied on following case laws:
i) Hon’ble Delhi High
Court in Paramount Communications 250 Taxmann 100;
ii) Hon’ble Supreme
court in Raymond Woollen Silk Mills 236 ITR 34;
iii) Hon’ble Delhi high
court in AGR Investments order dated 7/11/2011;
4. On merits of the case
and on issue of addition u/s 68 of the Act, Ld. AR relying upon the following
decisions and argued that merely non production of a Director without anything more
and where all relevant documents are placed on records which remained
uncontroverted specifically, cannot justify adverse inference u/s 68 of the Act
which is unlawful according to Ld AR. He also filed a separate compilation for
the following cases laws to support this proposition :
i) Hon’ble Bombay high
court in Orchid Industries (397 ITR 136);
ii) Hon’ble Delhi high
court in Softline Creation Pvt Ltd (387 ITR 636);
iii) Hon’ble Delhi high
court in Rakam Money Matters Pvt Ltd (order dated 13/10/2015);
iv) Hon’ble Delhi high
court in Goodview Industries order dated 21//11/2016;
v) Delhi ITAT decision
(on same facts) in case of Aksar wire Products Pvt Ltd (order dated
11/12/2015);
vi) Delhi ITAT decision
in case of Madhusudan Packaging order dated 09/05/2018
On the other hand, Ld.
Sr. DR referring to material shared by investigation wing as extracted and
narrated in detail that orders of AO and Ld CIT(A) are justified and placed
reliance on the following decisions:
i) Hon’ble Delhi high
court decision in case of N.Tarika Properties Pvt Ltd (28/11/2013);
ii) Hon’ble Delhi high
court decision in case of Nipun Builders and Developers Pvt Ltd (07/01/2013);
iii) Hon’ble Delhi high
court decision in case of Nova Promoters and Finlease Pvt Ltd (15/02/2012).
Finally Ld Sr. DR
requested and pleaded for dismissal of assesse’s appeal and confirmation of
action of addition made u/s 68 of the Act by AO as sustained by Ld. CIT(A).
5. I have heard both the
parties and perused the records especially the impugned order as well as the
Paper Books and the decisions referred by both the sides. Before giving my
opinion on the important legal issue raised u/s 68 of the Act, for sake of convenience,
the important issue which requires the adjudication by this Tribunal is framed
as:
Whether once assessee
places before Ld AO all the relevant and best documents in its possession to establish
its burden u/s 68 of the Act qua cash credit (here share capital received) ,
can simply because there is no personal appearance from director of said cash
creditor (share holder) as called for by Ld AO, adverse inference u/s 68 can be
drawn by Ld AO without discharging secondary burden lying on Ld AO u/s 68 of the
Act?
In my view the answer to
this issue as framed, can only be in negative as once all important and crucial
documents are filed by assessee to prove its case qua share capital received
u/s 68 of the Act, then simply harping on non production of director in person before
the AO cannot be justified ground to draw adverse inference without adequate
discharge of secondary burden lying on AO u/s 68 of the Act. Burden u/s 68 of
the Act as it is settled law keeps shifting.
Particularly once
reopening u/s 148 of the Act is resorted being extra-ordinary jurisdiction, on
the basis of aforesaid apprehension and charge of accommodation entry u/s 68 of
the Act for share capital received, firstly in my view AO should discharge the
crucial and critical burden u/s 148 of the Act to bring home the material that
income has escaped assessment without which assessee cannot be asked to prove
negative. For this reference may be made to sagacious observations of Hon’ble Delhi
high court in Pardeep Gupta case 303 ITR 95. If this primary burden u/s 148
lying on AO remains un-discharged then in my considered opinion entire
proceedings shall crumble (refer latin maxim sublato fundamento cadit opus
meaning once foundation fails super structure falls). In present case AO till end
has not brought on records the statement of searched person as recorded by
investigation wing during their search action u/s 132 of the Act much less
offered their cross examination to assessee herein to justify the allegations
leveled in detailed reasons recorded which would in my opinion make the
reopening as invalid (refer Apex court leading decision in case of Andaman
Timber Industries reported at 127 DTR 241 order dated 02/09/2015 and Bombay
high court decision in case of H.R.Mehta reported at 387 ITR 561) This
violation of natural justice in my view is a serious flaw and goes to the root
of the matter and nullifies the entire proceedings.
Be that as it may,
once assesseee places all the reliable and trustworthy documentary evidences to
support the veracity of transaction u/s 68 of the Act, it is the duty of AO to
dispassionately consider the same with objective standards and not to make the
additions simply reproducing at length from the internal report of
investigation wing prepared at the time of search (here on Jain Brothers). That
is AO cannot make addition u/s 68 on mere basis of ifs and buts only and some
credible incriminating material must be brought on records to displace the
detailed evidence filed by the assessee during assessment proceedings. That is if
reopening u/s 148 and addition u/s 68 are allowed to be made on same subjective
standards of prima-facie opinion only which are generally required to
reopen/start the case, and additions are allowed to be made without any
credible material which can validly counter assessee’s evidences in my view
same would totally frustrate the entire object/scheme of the law. In my view,
AO is under a bounden legal duty to discharge his secondary burden u/s 68 of
the Act before making any addition therein, where in present case as evident
from facts noted above, only ground made is non production of director
concerned which is plainly incorrect. For this reliance is placed on decisions
which are narrated below. Moreover it looks from cursory reading from the
impugned assessment order passed by AO that same is passed on merely borrowed
satisfaction of investigation wing without independent application of mind by
AO which is completely wrong and incorrect as AO u/s 148 while passing final
order and before making addition of unexplained income under deeming provisions
of section 68 etc cannot put cart before the horse and cannot pass the final
assessment order just reproducing from investigation wing report which are made
basis to reopen the case. The fact that present order is passed on mere basis
of borrowed satisfaction only is evident if one compares the reasons recorded,
show cause notice issued and final order as impugned before this Tribunal. At
all three stages same and similar allegations are made dehors the evidences
filed by assesssee.
Turning back to facts of
present case, I find from paper book running into 84 pages all the relevant and
necessary documents required to establish the subject transaction of share
capital received are brought on records before AO and Ld CIT(A) and have
totally remained uncontroverted. Specially the fact of positive response made
by share holder in response to enquiry made u/s 131 and confirmation of subject
investment therein by share holder to AO clinches the issue in favor of
assessee. Moreover the share holder company having handsome net worth and
assessed u/s 153C/153A for subject period also supports assessee’s case.
Further AO has remained sited with folded hands and has not made any
independent enquiry from concerned AO of share holder company which itself is
sufficient to knock off the addition made. On basis of this I have no
hesitation to delete the additions of Rs 25,00,000 and Rs 45,000 made u/s 68 by
AO in reopened proceedings u/s 148 of the Act, as alleged accommodation entry
obtained, on sole and mere basis of non production of directors of share holder
company which in my considered view is plainly incorrect and unjustified. Notably,
there is no statutory presumption that all cash credits and share capital are
deemed to unexplained unless otherwise proved. My aforesaid view is fortified
by the following decisions –
- Hon’ble Delhi High
Court decision in case of Softline Creations Pvt. Ltd., order dated 31.08.2016
(ITA 504/2016) (387 ITR 636)
Relevant Extract: “The
revenue is aggrieved by the order dated 10.02.2016 of the Income Tax Appellate Tribunal
(ITAT) which confirmed the Commissioner of Income Tax (Appeals)’s order
[hereafter “CIT(A)”]. The CIT(A) had ruled in favor of the assessee, i.e. the
additions under Section 68 of the Income Tax Act, 1961 [hereafter “the Act”]
were unwarranted. It is urged on behalf of the revenue that the AO’s order,
adding the amounts under Section 68 of the Act was justified in the
circumstances. Learned counsel emphasized that to prove the identity,
genuineness of the transaction and the creditworthiness of share applicants, it
was essential for the assessee to produce the Directors as well as the source
of funds of the share applicants since in the absence of these materials, the
assessee could not claim to be aggrieved by the addition. This Court has
considered the concurrent order of the CIT(A) as well as the ITAT. Both these
authorities primarily went by the fact that the assessee had provided
sufficient indication by way of PAN numbers, to highlight the identity of the
share applicants, as well as produced the affidavits of Directors. Furthermore,
the bank details of the share applicants too had been provided. In the
circumstances, it was held that the assessee had established the identity of
the share applicants, the genuineness of transactions and their
creditworthiness. The AO chose to proceed no further but merely added the amounts
because of the absence of the Directors to physically present themselves before
him. We are of the opinion that no question of law arises, having regard to the
concurrent findings of fact. The assessee has, in our opinion, complied with
the law spelt out by the Supreme Court in CIT v. Lovely Exports Pvt. Ltd. 216
CTR (SC) 195. The appeal is meritless and is consequently dismissed.”
- Hon’ble Delhi High Court
decision in case of Rakam Money Matters Pvt. Ltd., order dated 13.10.2015 (ITA
no. 778/2015)
Relevant Extract: “The
question sought to be urged before the Court by the Revenue is whether the ITAT
was correct in law in affirming the order of Commissioner of Income Tax
(Appeals) [‘CIT (A)’] deleting the addition in the sum of Rs.60,00,000/- made
by the Assessing Officer (‘AO’ ) to the income of the Assessee under Section 68
of the Act pertaining to share application/capital money received by the
Assessee. The AO issued notices to the Directors of the aforementioned
companies but none of them appeared. The AO was of the view that the fact that
money had been received through banking channels was not in itself sufficient
to prove the genuineness of the creditors or their credit worthiness. The AO noted
that the balance in the respective bank accounts of the companies demonstrated
a common pattern where the balance would be very low up to a certain date and
then substantial amounts were deposited either by cash or cheque to increase
the balance and thereafter invariably withdrawn within a day or two. Since the
process was shown to be repeated over and over in the P&L Account of the
Assessee, the AO concluded that there was no business activity worthy of
mention. Concluding that the Assessee had failed to discharge the onus to prove
the genuineness or the creditworthiness of the companies which had made the
payments, the AO held that the share application money received from the
companies should be treated as income in the hands of the Assessee. He
accordingly ordered an addition of Rs.60 lakhs. The Court is essentially called
upon to consider whether on the facts of the present case, the view taken by
CIT(A) as confirmed by the ITAT could be said to be plausible or is it so
perverse as to require interference by the Court? A perusal of the order of the
AO shows that its foundation is the report of the DIT (Investigation).
Admittedly, the Assessee was not confronted with that material in the course of
the reassessment proceedings. The Assessee was also not confronted with the statements
recorded in the course of the investigation. Once that material is kept aside
then the scope of enquiry can only be whether the Assessee has produced
documents to discharge the initial onus of proving the genuineness and
creditworthiness of the companies who were stated to have subscribed to the
Assessee’s shares. It is not in dispute that extensive material was produced by
the Assessee in the present case to prove the identity, genuineness and
creditworthiness of the companies who had subscribed to its shares. Among the
materials produced were the Income Tax Returns and the PAN card details of the
eight companies. Even if the Directors of these companies did not respond to
the summons issued by the AO, it was not impossible for the AO to make proper
enquiries to ascertain the genuineness of these entities and satisfy himself of
their creditworthiness. As pointed out by the CIT(A), the AO failed to make any
effort in that direction. He did not take to the logical end the half-hearted
attempt at getting the Directors to appear before him. He did not even seek the
assistance of the AOs of the concerned companies whose ITRs and PAN card copies
had been produced. The view taken by the CIT(A) that the AO failed to come up
with the material to disprove what had been produced by the Assessee is
certainly aplausible view in the facts and circumstances of the case. Likewise,
the view taken by the ITAT concurring with the CIT(A) on facts cannot be said
to be perverse. As far as the broad principles governing the law under Section
68 of the Act is concerned, the Court is satisfied that the order of the CIT(A)
as confirmed by the ITAT suffers from no legal infirmity. No substantial
question of law arises.”
- Hon’ble Bombay High
Court decision in case of M/s Orchid Industries Pvt. Ltd., order dated
05.07.2017 (ITA no. 1433/2014) 397 ITR 136:
Relevant Extract: “3]
The learned counsel for the Assessee supports the order and submits that the
Assessee had discharged its onus. The Assesse had produced the PAN of all the
creditors along with the confirmation, Bank Statement showing payment of share application
money and relevant record is produced with regard to the allotment of shares to
those parties. The share application form, allotment letter, share certificate
are also produced. Even the balance-sheet, profit and loss account, the books
of account of these creditors were produced on record showing that they had
sufficient funds for investing in the shares of the Assessee. The learned
counsel relies on the judgment of the Division Bench of this Court in case of
Commissioner of Income Tax vs. Gagandeep Infrastructure (P.) Ltd., reported in
[2017] 80 Taxmann 272 (Bombay) and the order of the Apex Court in case of
Commissioner of Income Tax vs. Lovely Exports (P.) Ltd., reported in [2008] 216
CTR 195 (SC).
4) We have considered
the submissions.
5) The Assessing Officer
added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the
ground that the parties to whom the share certificates were issued and who had
paid the share money had not appeared before the Assessing Officer and the
summons could not be served on the addresses given as they were not traced and
in respect of some of the parties who had appeared, it was observed that just
before issuance of cheques, the amount was deposited in their account.
6] The Tribunal has considered
that the Assessee has produced on record the documents to establish the
genuineness of the party such as PAN of all the creditors along with the
confirmation, their bank statements showing payment of share application money.
It was also observed by the Tribunal that the Assessee has also produced the
entire record regarding issuance of shares i.e. allotment of shares to these
parties, their share application forms, allotment letters and share
certificates, so also the books of account. The balance sheet and profit and
loss account of these persons discloses that these persons had sufficient funds
in their accounts for investing in the shares of the Assessee. In view of these
voluminous documentary evidence, only because those persons had not appeared
before the Assessing Officer would not negate the case of the Assessee. The
judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be
applicable in the facts and circumstances of the present case.
7] Considering the
above, no substantial question of law arises. The appeal stands dismissed.
However, there is no order as to costs.”
- Hon’ble Delhi ITAT
Bench decision in case of Aksar Wire Products (P) Ltd. order dated: 11.12.2015
(ITA no. 1167/Del/2015)
Relevant observation :
“We have heard the
arguments by both the parties. It is observed that the assessee has not
obtained any share application money from the alleged Shri S. K. Jain
Group. The ld. Assessing Officer, however, has alleged that the company by the
name Victory Software Pvt. Ltd. is one of the group companies of Shri S. K.
Jain and it is pertinent to note that the ld. Assessing Officer has not brought
out materials on record to establish the same. It is further observed that the
assessee has received the share application money from its applicant being
Victory Software P. Ltd. by proper banking channels. The assessee has further submitted
all the details regarding the applicants including PAN numbers, board
resolution, copy of the bank statements, incorporation certificates, memorandum
and articles of association and the acknowledgement of IT returns filed by the
applicants. The ld. Assessing Officer had issued summons to the company by the
name Victory Software P. Ltd. which was received back from the postal
authorities with remark “Refused”. This does not mean that there was nobody who
was present at the said address and further it cannot be inferred that the
company is merely existing on papers.
The assessee counsel
placed reliance on the judgment of the Hon’ble Jurisdictional High Court in the
case of Signature Hotels P. Ltd. vs. ITO reported in (2012) 20 taxman.com 797
(Del.). The Hon’ble High Court has observed that as there is no reference to
any document or statement except the annexure which has been quoted by the
Assessing Officer a prima facie nexus or link cannot be made to have been
established which shows that income has escaped assessment. The Hon’ble High
Court held that from the reasons recorded by the Assessing Officer it does not
appear that the Assessing Officer has applied his mind to the information and
has independently arrived at a belief on the basis of material which he had
before him that the income had escaped assessment. In the facts of the present
case, the assessee had furnished the names and all the relevant details of the
companies, with which it had entered into transaction, and that the Assessing
Officer was made aware of the situation. I observe from the records placed
before me that the Assessing Officer has not disputed the bank accounts and the
payments that were made to the assessee by the applicant companies. Nowhere in
the assessment order the Assessing Officer has brought into existence any
material to show that the company Victory Software P. Ltd. is a non-existing
and a fictitious entity. It is, therefore, incorrect to arrive at a conclusion
that the money received by the assessee by way of share application from
Victory Software is bogus. Merely because the name of one Shri Sukesh Gupta
appears as a mediator in the annexure, it cannot be concluded that Sukesh Gupta
had facilitated so called bogus transaction between the assessee and M/s
Victory Software P. Ltd. The Assessing Officer has not issued any summons u/s
131 of the Act, to Sukesh Gupta to ascertain whether he was involved in the so
called bogus transaction. From the above discussion, I arrived at a conclusion
that the Assessing Officer could not establish that the share application money
received by the assessee from M/s Victory Software P. Ltd. are bogus. I also
hold that the assessee has discharged its burden u/s 68 as it had filed the
enormous details in respect of M/s Victory Software P. Ltd. before the
Assessing Officer for him to investigate upon in detail. The Assessing Officer
has failed to establish that the details filed by the assessee are wrong. He
has also failed to produce sufficient material on record to prove that the receipt
of money by the assessee from M/s Victory Software P. Ltd. is accommodation
entries from the entry operator S.K. Jain Group. In the above circumstances, I
allow grounds filed by the assessee and held that reopening by the Assessing
Officer was met valid.”
- Hon’ble Bombay High
Court at Goa Bench in case of M/s Paradise Inland Shipping Pvt. Ltd., order dated
10.04.2017 (Tax Appeal no. 66/2016) 400 ITR 439 (Bom): (SLP dismissed by
Hon’ble Apex court) Relevant Extract:
“We have given our
thoughtful considerations to the rival contentions of the learned Counsel and
we have also gone through the records. The basic contention of the learned
Counsel appearing for the Appellants revolves upon the stand taken by the
Appellants whether the shareholders who have invested in the shares of the
Respondents are fictitious or not. In this connection, the Respondents in
support of their stand about the genuineness of the transaction entered into
with such Companies has produced voluminous documents which, inter alia, have
been noted at Para 3 of the Judgment of the CIT Appeals which reads thus :
“The assessment is
completed without rebutting the 550 page documents which are unflinching
records of the companies. The list of documents submitted on 09.03.2015 are as
follows :
1. Sony Financial
Services Ltd. – CIN U74899DL1995PLC068362- Date of Registration 09/05/1995
a) Memorandum of
Association and Article of Association
b) Certificate of
Incorporation
c) Certificate of
Commencement of Business
d) Acknowledgment of the
Return of Income AY 08-09
e) Affidavit of the
Director confirming the investment
f) Application for
allotment of shares
g) Photocopy of the
share certificate
h) Audited account and
Directors report thereon including balance sheet, Profit and Loss Account and
schedules for the year ended 31.03.2009.
i) Audited account and
Directors report hereon including balance sheet, Profit and Loss Account and
schedules for the year ended 31.03.2010
j) The Bank Statement
highlighting receipt of the amount by way of RTGS.
k) Banks certificate
certifying the receipt of the amount through Banking channels.”
On going through the
documents which have been produced which are basically from the public offices,
which maintain the records of the Companies. The documents also include assessment
Orders for last three preceding years of such Companies. The Appellants have
failed to explain as to how such Companies have been assessed though according
to them such Companies are not existing and are fictitious companies. Besides
the documents also included the registration of the Company which discloses the
registered address of such Companies. There is no material on record produced
by the Appellants which could rebut the documents produced by the Respondents
herein. In such circumstances, the finding of fact arrived at by the
authorities below which are based on documentary evidence on record cannot be
said to be perverse.
The Appellants have
failed to explain as to how such Companies have been assessed though according
to them such Companies are not existing and are fictitious companies. Besides the
documents also included the registration of the Company which discloses the
registered address of such Companies. There is no material on record produced
by the Appellants which could rebut the documents produced by the Respondents
herein. In such circumstances, the finding of fact arrived at by the
authorities below which are based on documentary evidence on record cannot be
said to be perverse. This Court in the Judgments relied upon by the learned
Counsel appearing for the Respondents, have come to the conclusion that once
the Assessee has produced documentary evidence to establish the existence of
such Companies, the burden would shift on the Revenue-Appellants herein to
establish their case. In the present case, the Appellants are seeking to rely upon
the statements recorded of two persons
who have admittedly not
been subjected to cross examination. In such circumstances, the question of
remanding the matter for re-examination of such persons, would not at all be
justified. The Assessing Officer, if he so desired, ought to have allowed the
Assessee to cross examine such persons in case the statements were to be relied
upon in such proceedings. Apart from that, the voluminous documents produced by
the Respondents cannot be discarded merely on the basis of two individuals who
have given their statements contrary to such public documents.”
- Further that law
relating to section 68 is succinctly analyzed with great clarity in recent
decision of Madras high court in case of Lalitha Jewellery wherein entire
conundrum is explained 399 ITR 425 : SLP dismissed by Apex court recently. That
gist of aforesaid decision is encapsulated below for sake of ready reference:
2. The following
substantial questions of law have been framed while admitting TCA. No. 435 of
2013 on 25.2.2014 :
"(i) Whether the
Appellate Tribunal is correct in confirming the assessment of share capital
contributions as unexplained credit/investment within the scope of Section
68/69 of the Act in spite of the material evidence filed before them and the
lower authorities establishing clearly/discharging of initial burden/onus
statutorily vested on the appellant company to provide the source ?
(ii) Whether the
Appellate Tribunal is correct in law in confirming the assessment of share
capital contributions as the income of the appellant company even though there
were no materials in their possession of the respondent/Assessing Officer
establishing such facts apart from mere suspicion as well as establishing
perversity both on facts and in law in rendering their decision? and
(iii) Whether the
Appellate Tribunal is correct in law in sustaining the assessment of share
capital contributions as the income of the appellant company on the application
of the deeming provisions in Section 68/69 of the Act even though there was no
legal mandate for the appellant company to establish/prove the 'source for
source' ?"
13. Before proceeding
further, it is only appropriate to refer the contents of Section 68 of the Act.
It reads as under……..
14. It is clear from the
above provision that burden, initially, is cast upon the assessee to offer an
explanation about the nature and source of the money found credited in its books
of account and if that explanation is not satisfactory in the opinion of the
Assessing Officer, the sum so credited be charged as the income for the
previous year. Similarly, if the assessee is a company and the sum is credited,
consisting of share application money or share capital or share premium or any
such amount, the assessee is required to offer satisfactory explanation about
the nature and source of the sum credited to its book of account.
15. To understand the
rationale behind this provision, it is only apt to refer to the judgment of the
Hon’ble Supreme Court rendered in the case of Commissioner of Income Tax
(Central), Calcutta v Daulat Ram Rawatmull [reported in (1973) Vol.87 ITR 349],
it has been set out therein as under:
“Before dealing with the
facts of this case, we may advert to the principles which should govern the
decisions of the court in such like cases. Findings on questions of pure fact
arrived at by the Tribunal are not to be disturbed by the High Court on a
reference unless it appears that there was no evidence before the Tribunal upon
which they, as reasonable men, could come to the conclusion to which they have
come; and this is so, even though the High Court would on the evidence have come to a
conclusion entirely different from that of the Tribunal. In other words, such a
finding can be reviewed only on the ground that there is no evidence to support
it or that it is perverse. Further, when a conclusion has been reached on an
appreciation of a number of facts, whether that is sound or not must be
determined, not by considering the weight to be attached to each single fact in
isolation, but by assessing the cumulative effect of all the facts in their
setting as a whole [Sree Meenakshi Mills Ltd. Vs. Commissioner of Income- Tax
[1957] 31 ITR 28 : [1956] SCR 691 (SC)]."
16. When a Court of fact
acts on material partly relevant and partly irrelevant, it is impossible to say
to what extent the mind of the Court was affected by the irrelevant material
used by it in arriving at its finding. Such a finding is vitiated because of
the use of inadmissible material and thereby an issue of law arises. Likewise,
if the Court of fact bases its decision partly on conjectures, surmises and
suspicions and partly on evidence, in such a situation, an issue of law arises
[Dhirajlal Girdharilal Vs. CIT [1954] 26 ITR 736 (SC)]. The Court went on to hold
that a person can still be held to be the owner of a sum of money even though
the explanation furnished by him regarding the source of that money is found to
be not correct. Thus, the explanation regarding the source of money furnished
by the person was not satisfactory does not automatically lead to a conclusion
that that the money does not belong to that particular person, but belongs to
the other automatically.
17. More importantly,
the Supreme Court, in Daulat Ram, has laid down the following principle, which
has a direct bearing upon the controversy at issue and it reads as under: “The
onus to prove that the apparent is not the real is on the party who claims it
to be so. As it was the department which claimed that the amount of fixed
deposit receipt belonged to the respondent firm even though the receipt had
been issued in the name of Biswanath, the burden lay on the department to prove
that the respondent was the owner of the amount despite the fact that the receipt
was in the name of Biswanath. A simple way of discharging the onus and
resolving the controversy was to trace the source and origin of the amount and
find out its ultimate destination…..”
(Emphasis is mine)
18. Similarly, in the
case of CIT, Orissa Vs. Orissa Corporation P. Ltd. [reported in (1986) Vol.159
ITR 78], the Supreme Court has held as under:
“To what extent the
assessee had an obligation to discharge the burden of proving that these were
genuine incomes has been considered by this court in Lalchand Bhagat Ambica Ram
v. CIT [1959] 37 ITR 288. This court was concerned there with the encashment of
high denomination notes. In that case, some unexplained high denomination notes
were treated as the undisclosed income of the assessee. This court held that
when a court of fact arrives at its decision by considering material which is
irrelevant to the enquiry, or acts on material, partly relevant and partly
irrelevant, and it is impossible to say to what extent the mind of the court
was affected by the irrelevant material used by it in arriving at its decision,
a question of law arises, whether the finding of the court is not vitiated by
reason of its having relied upon conjectures, surmises and suspicions not
supported by any evidence on record or partly upon evidence and partly upon
inadmissible material. On no account whatever should the Tribunal base its findings
on suspicions, conjectures or surmises, nor should it act on no evidence at all
or on improper rejection of material and relevant evidence or partly on
evidence and partly on suspicions, conjectures and surmises. In that case, the
so-called hundi racket in which the assessee was alleged to have been involved
was not proved. That was only a suspicion of the Revenue.”
19. It would also be
appropriate to notice the observation of the Supreme Court in the case of
Orissa Corporation P.Ltd., at page 83, as under :
"In Sreelekha
Banerjee Vs. CIT [1963] 49 ITR 112, this Court held that if there was an entry
in the account books of the assessee which showed the receipt of a sum on
conversion of high denomination notes tendered for conversion by the assesssee
himself, it is necessary for the assessee to establish, if asked, what the
source of that money was and to prove that it was not income. The Department
was not at that stage required to prove anything. It could ask the assessee to
produce any books of account or other documents or evidence pertinent to the
explanation if one was furnished and examine the evidence and the explanation.
If the explanation showed that the receipt was not of an income nature, the
Department could not act unreasonably and reject that explanation to hold that
it was income. If, however, the evidence was unconvincing, then such rejection
could be made. The Department cannot by merely rejecting a good explanation
unreasonably, convert good proof into no proof."
20. Again in the case of
Sumati Dayal Vs. CIT [reported in 214ITR 801], at page 805, the Supreme Court
has clearly explained the point of approach to be followed both by the assessee
and the Department, in the context of Section 68 of the Act, in the following
words:
"It is no doubt
true that in all cases, in which, a receipt is sought to be taxed as income, the
burden lies upon the Department to prove that it is within the taxing provision
and if a receipt is in the nature of income, the burden of proving that it is
not taxable because it falls within an exemption provided by the Act lies upon
the assessee [Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536]. But, in
view of Section 68 of the Act, where any sum is found credited in the books of
the assessee for any previous year, the same may be charged to income tax as
the income of the assessee of that previous year if the explanation offered by
the assessee about the nature and source thereof is, in the opinion of the
Assessing
Officer, not satisfactory.
In such a case there is, prima facie, evidence against the assessee viz. the
receipt of money and if he fails to rebut it, the said evidence being
unrebutted, can be used against him by holding that it was a receipt of an
income nature. While considering the explanation of the assessee, the
Department cannot, however, act unreasonably [Sreelekha Banerjee's case (1963)
49 ITR (SC) 112 at page 120]. "
21. A Division Bench of
the Delhi High Court in the case of CIT Vs. Stellar Investment Ltd., [reported
in 192 ITR 2870, has pointed out the approach to be adopted in this type of
matters, as under :
"It is evident that
even if it be assumed that the subscribers to the increased share capital were
not genuine, nevertheless, under no circumstances, can the amount of share
capital be regarded as undisclosed income of the assessee. It may be that there
are some bogus shareholders in whose names shares had been issued and the money
may have been provided by some other persons. If the assessment of the persons
who are alleged to have really advanced the money is sought to be reopened,
that would have made some sense but we fail to understand as to how this amount
of increased share capital can be assessed in the hands of the company
itself."
22. The above view on
the point of approach to the subject has been approved by the Hon’ble Supreme Court
in CIT Vs. Stellar Investment Ltd., on 20.7.2000, in Civil Appeal No.7968 of
1996.
23. Applying the legal
principles noticed supra, let us examine as to how the issue has been handled
by the Assessing Officer at the first instance. By the above observation of the
Assessing Officer, it is clear that he is ooking for proof of resources of the
investors of the assessee and such proof is beyond the realm of possibility of
production by the assessee. The Assessing Officer has adopted a totally
unreasonable attitude and was acting unreasonably. That was exactly what was
frowned upon by the Supreme Court in Sreelekha Banerjea's case, (1963) 49 ITR
(SC) 112. Even when the investor of the assessee demonstrated its resources,
the Assessing Officer still has suspicion.
24. Thus, the assessee
company has completely explained the sources of investments received by it. It
has also disclosed the identity of such investors. The Assessing Officer traced
out and reached all the four investors of the assessee. He also found as a fact
that all the payments have been received through banking channels. Hence, the
burden cast on the assessee stood discharged. But yet, the Assessing Officer
disallowed and added the amount to income of the assessee. In this context, it
is apt to take note of the crisply worded order of the Supreme Court in the
case of CIT Vs. Lovely Exports (P) Ltd. [reported in (2008)
216 CTR 195 (SC)], which
runs as follows :
“Can the amount of share
money be regarded as undisclosed income under Section 68 of IT Act, 1961 ? We
find no merit in this special leave petition for the simple reason that if the
share application money is received by the assessee company from alleged bogus
shareholders, whose names are given to the Assessing Officer, then the
Department is free to proceed to reopen their individual assessments in
accordance with law.”
41. However, the main
theme, upon which, the Assessing Officer as well as the Tribunal proceeded to
discredit the investors of the assessee is completely erroneous. They are both
looking for proof beyond doubt. They are proceeding on an element of suspicion
that the amounts of investments are really those of the assessee, which have been
ploughed back by the assessee, whereas the settled principle of law is that any
amount of suspicion, however strong it might be as well, is no substitute for
proof. Suspicion is not sufficient enough to lead to a conclusion that the
investments received by the assessee company are all manipulated receipts and
on that basis, recorded a finding that the explanation of the assessee is not
satisfactory.
42. On the other hand,
the legal principle enunciated by the Hon’ble Supreme Court, as noticed supra
by us, is that so long as the proof and identity of the investor and the
payment received from him is through a doubtless channel like that of a banking
channel, the receipt in the hands of the assessee towards share capital or
share premium does not change its colour. The money so invested in the assessee
company would still be the money available and belonging to the investors. The
consistent principle followed is that the investors’ sources and credit
worthiness cannot be explained by the assessee. If the Department has a doubt
about the genuineness of the investors capacity, it is open to it to proceed
against those investors. Without taking such a course of action, the Assessing
Officer and the Tribunal are proceeding on conjectures that the assessee has,
in fact, ploughed back the money. The very approach of the Assessing Officer
and the Tribunal are completely opposed to settled legal principles enunciated
and they have arrived at conclusions contrary to the legal principles on the
subject. Further, they are finding fault with the assessee for the alleged
failure of it's investors in proving beyond doubt that they have the capacity
to invest at the moment they did in the assessee company. That is clearly a
perverse view, as the assessing officer is not expected to perform a near
impossibility. The assessee cannot call upon its investors to disclose all such
business transactions that carried on in the immediate past and as to how much
they made from their respective business enterprises. The assessee cannot also
call upon its investors to prove their good business sense in investing in the
assessee company, as such investors cannot gain any controlling stake.
43. In the result, the
questions of law framed in TCA.No.435 of 2013 are answered in favour of the
assessee and against the Revenue. Hence, TCA.No.435 of 2013 is allowed.
Consequently, MP.No.1 of 2014 is closed.” In a case where the issue was whether
the assessee availed cash credit as against future sale of product, the AO
issued summons to the creditors who did not turn up before him, so AO
disbelieved the existence of creditors and saddled the addition, which was
overturned by Ld. CIT(A). However, the Tribunal reversed the decision of the
Ld. CIT(A) and upheld the AO’s decision, which action of Tribunal was
challenged by the Hon'ble High Court, Calcutta in the case of Crystal Networks
(P.) Ltd. v. Commissioner of Income-tax 353 ITR 171 wherein the Tribunal’s
decision was overturned and decision of Ld. CIT(A) upheld and the Hon’ble High
Court has held that when the basic evidences are on record the mere failure of
the creditor to appear cannot be basis to make addition. The court held as
follows:
“8. Assailing the said
judgment of the learned Tribunal learned counsel for the appellant submits that
Income-tax Officer did not consider the material evidence showing the
creditworthiness and also other documents, viz., confirmatory statements of the
persons, of having advanced cash amount as against the supply of bidis. These
evidence were duly considered by the Commissioner of Income- tax (Appeals).
Therefore, the failure of the person to turn up pursuant to the summons issued
to any witness is immaterial when the material documents made available, should
have been accepted and indeed in subsequent year the same explanation was
accepted by the Income-tax Officer. He further contended that when the Tribunal
has relied on the entire judgment of the Commissioner of Income-tax (Appeals),
therefore, it was not proper to take up some portion of the judgment of the
Commissioner of Income-tax (Appeals) and to ignore the other portion of the
same. The judicial propriety and fairness demands that the entire judgment both
favourable and unfavourable should have been considered. By not doing so the
Tribunal committed grave error in law in upsetting the judgment in the order of
the Commissioner of Income-tax (Appeals).
9. In this connection,
he has drawn our attention to a decision of the Hon’ble Supreme Court in the
case of Udhavdas Kewalram v. CIT [19671 66 ITR 462. In this judgment it is
noticed that the Supreme Court as proposition of law held that the Tribunal
must in deciding an appeal, consider with due care, all the material facts and record
its finding on all the contentions raised by the assessee and the Commissioner
in the light of the evidence and the relevant law.
10. We find considerable
force of the submissions of the learned counsel for the appellant that the
Tribunal has merely noticed that since the summons issued before assessment
returned unserved and no one came forward to prove. Therefore, it shall be
assumed that the assessee failed to prove the existence of the creditors or for
that matter the creditworthiness. As rightly pointed out by the learned counsel
that the Commissioner of Income-tax (Appeals) has taken the trouble of
examining of all other materials and documents, viz., confirmatory
statements, invoices,
challans and vouchers showing supply of bidis as against the advance.
Therefore, the attendance of the witnesses pursuant to the summons issued, in
our view, is not important. The important is to prove as to whether the said
cash credit was received as against the future sale of the product of the
assessee or not. When it was found by the Commissioner of Income tax (Appeals)
on facts having examined the documents that the advance given by the creditors
have been established the Tribunal should not have ignored this -fact finding.
Indeed the Tribunal did not really touch the aforesaid fact finding of the
Commissioner of Income-tax (Appeals) as rightly pointed out by the learned
counsel. The Supreme Court has already stated as to what should be the duty of
the learned Tribunal to decide in this situation. In the said judgment noted by
us at page 464, the Supreme Court has observed as follows:
"The Income-tax
Appellate Tribunal performs a judicial function under the
Indian Income-tax Act;
it is invested with authority to determine finally all questions of fact. The
Tribunal must, in deciding an appeal, consider with due care all the material
facts and record its finding on all the contentions raised by the assessee and
the Commissioner, in the light of the evidence and the relevant law. "
11. The Tribunal must,
in deciding an appeal, consider with due care all the material facts and record
its finding on all contentions raised by the assessee and the Commissioner, in
the light of the evidence and the relevant law. It is also ruled in the said
judgment at page 465 that if the Tribunal does not discharge the duty in the
manner as above then it shall be assumed the judgment of the Tribunal suffers
from manifest infirmity.
12. Taking inspiration
from the Hon’ble Supreme Court observations we are constrained to hold in this
matter that the Tribunal has not adjudicated upon the case of the assessee in
the light of the evidence as found by the Commissioner of Income-tax (Appeals).
We also found no single word has been spared to upset the fact finding of the
Commissioner of Income-tax (Appeals) that there are materials to show the cash
credit was received from various persons and supply as against cash credit also
made.
13. Hence, the judgment
and order of the Tribunal is not sustainable. Accordingly, the same is set
aside. I restore the judgment and order of the Commissioner of Income-tax
(Appeals). The appeal is allowed. When a question as to the creditworthiness of
a creditor is to be adjudicated and if the creditor is an Income Tax assessee,
it is now well settled by the decision of the Calcutta High Court that the
creditworthiness of the creditor cannot be disputed by the AO of the assessee
but the AO of the creditor. In this regards our attention was drawn to the
decision of the Hon'ble High Court, Calcutta in the OMMISSIONER OF INCOME TAX,
KOLKA TA-Ill Versus DATAWARE PRIVATE LIMITED ITAT No. 263 of 2011 Date: 21st
September, 2011 wherein the Court held as follows:
“In our opinion, in such
circumstances, the Assessing officer of the assessee cannot take the burden of
assessing the profit and loss account of the creditor when admittedly the
creditor himself is an income tax assessee. After getting the PAN number and
getting the information that the creditor is assessed under the Act, the
Assessing officer should enquire from the Assessing Officer of the creditor as
to the genuineness" of the transaction and whether such transaction has
been accepted by the Assessing officer of the creditor but instead of adopting
such course, the Assessing officer himself could not enter into the return of
the creditor and brand the same as unworthy of credence. So long it is not
established that the return submitted by the creditor has been rejected by its
Assessing Officer, the Assessing officer of the assessee is bound to accept the
same as genuine when the identity of the creditor and the genuineness" of
transaction through account payee cheque has been established. We find that
both the Commissioner of Income Tax (Appeal) and the Tribunal below followed
the well-accepted principle which are required to be followed in considering
the effect of Section 68 of the Act and we thus find no reason to interfere
with the concurrent findings of fact recorded by both the authorities.”
6. Keeping in view of
the facts and circumstances of the case and respectfully following the
aforesaid decisions, I held that mere non production of Director of said share
holder company cannot justify adverse inference u/s 68 of the Act. Even if
there was any doubt if any regarding the creditworthiness of the share
applicants was still subsisting, then AO should have made enquiries from the AO
of the share subscribers as held by Hon’ble High Court in CIT vs DATAWARE
(supra) which has not been done, so no adverse view could have been drawn. In
this case on hand, the assessee had discharged its onus to prove the identity,
creditworthiness and genuineness of the share applicants, thereafter the onus
shifted to AO to disprove the documents furnished by assessee and in my view it
cannot be brushed aside by the AO to draw the adverse view which here in
present facts cannot be countenanced. Therefore addition of Rs. 25,45,000 made
by AO and sustained by Ld CIT(A) are hereby deleted.
7. In the result, the
appeal of the assessee is allowed.
Order pronounced on
25-06-2018.
Sd/- (H.S. SIDHU)
JUDICIAL MEMBER
Dated : 25-06-2018 SR
BHATANGAR no statutory presumption that all cash credits and share capital are
deemed to unexplained unless otherwise proved. My aforesaid view is fortified
by the following decisions- Hon’ble Delhi High Court decision in case of
Softline Creations Pvt. Ltd., order dated 31.08.2016 (ITA 504/2016) (387 ITR
636)
Relevant Extract: “The
revenue is aggrieved by the order dated 10.02.2016 of the Income Tax Appellate Tribunal
(ITAT) which confirmed the Commissioner of Income Tax (Appeals)’s order
[hereafter “CIT(A)”]. The CIT(A) had ruled in favor of the assessee, i.e. the
additions under Section 68 of the Income Tax Act, 1961 [hereafter “the Act”]
were unwarranted. It is urged on behalf of the revenue that the AO’s order,
adding the amounts under Section 68 of the Act was justified in the
circumstances. Learned counsel emphasized that to prove the identity,
genuineness of the transaction and the creditworthiness of share applicants, it
was essential for the assessee to produce the Directors as well as the source
of funds of the share applicants since in the absence of these materials, the
assessee could not claim to be aggrieved by the addition. This Court has
considered the concurrent order of the CIT(A) as well as the ITAT. Both these
authorities primarily went by the fact that the assessee had provided
sufficient indication by way of PAN numbers, to highlight the identity of the
share applicants, as well as produced the affidavits of Directors. Furthermore,
the bank details of the share applicants too had been provided. In the
circumstances, it was held that the assessee had established the identity of
the share applicants, the genuineness of transactions and their
creditworthiness. The AO chose to proceed no further but merely added the
amounts because of the absence of the Directors to physically present
themselves before him. We are of the opinion that no question of law arises,
having regard to the concurrent findings of fact. The assessee has, in our
opinion, complied with the law spelt out by the Supreme Court in CIT v. Lovely
Exports Pvt. Ltd. 216 CTR (SC) 195. The appeal is meritless and is consequently
dismissed.”
- Hon’ble Delhi High Court
decision in case of Rakam Money Matters Pvt. Ltd., order dated 13.10.2015 (ITA
no. 778/2015)
Relevant Extract: “The
question sought to be urged before the Court by the Revenue is whether the ITAT
was correct in law in affirming the order of Commissioner of Income Tax
(Appeals) [‘CIT (A)’] deleting the addition in the sum of Rs.60,00,000/- made
by the Assessing Officer (‘AO’ ) to the income of the Assessee under Section 68
of the Act pertaining to share application/capital money received by the
Assessee. The AO issued notices to the Directors of the aforementioned
companies but none of them appeared. The AO was of the view that the fact that
money had been received through banking channels was not in itself sufficient
to prove the genuineness of the creditors or their credit worthiness. The AO noted
that the balance in the respective bank accounts of the companies demonstrated
a common pattern where the balance would be very low up to a certain date and
then substantial amounts were deposited either by cash or cheque to increase
the balance and thereafter invariably withdrawn within a day or two. Since the
process was shown to be repeated over and over in the P&L Account of the
Assessee, the AO concluded that there was no business activity worthy of
mention. Concluding that the Assessee had failed to discharge the onus to prove
the genuineness or the creditworthiness of the companies which had made the
payments, the AO held that the share application money received from the
companies should be treated as income in the hands of the Assessee. He
accordingly ordered an addition of Rs.60 lakhs. The Court is essentially called
upon to consider whether on the facts of the present case, the view taken by
CIT(A) as confirmed by the ITAT could be said to be plausible or is it so
perverse as to require interference by the Court? A perusal of the order of the
AO shows that its foundation is the report of the DIT (Investigation).
Admittedly, the Assessee was not confronted with that material in the course of
the reassessment proceedings. The Assessee was also not confronted with the statements
recorded in the course of the investigation. Once that material is kept aside
then the scope of enquiry can only be whether the Assessee has produced
documents to discharge the initial onus of proving the genuineness and
creditworthiness of the companies who were stated to have subscribed to the
Assessee’s shares. It is not in dispute that extensive material was produced by
the Assessee in the present case to prove the identity, genuineness and
creditworthiness of the companies who had subscribed to its shares. Among the
materials produced were the Income Tax Returns and the PAN card details of the
eight companies. Even if the Directors of these companies did not respond to
the summons issued by the AO, it was not impossible for the AO to make proper
enquiries to ascertain the genuineness of these entities and satisfy himself of
their creditworthiness. As pointed out by the CIT(A), the AO failed to make any
effort in that direction. He did not take to the logical end the half-hearted
attempt at getting the Directors to appear before him. He did not even seek the
assistance of the AOs of the concerned companies whose ITRs and PAN card copies
had been produced. The view taken by the CIT(A) that the AO failed to come up
with the material to disprove what had been produced by the Assessee is
certainly aplausible view in the facts and circumstances of the case. Likewise,
the view taken by the ITAT concurring with the CIT(A) on facts cannot be said
to be perverse. As far as the broad principles governing the law under Section
68 of the Act is concerned, the Court is satisfied that the order of the CIT(A)
as confirmed by the ITAT suffers from no legal infirmity. No substantial
question of law arises.”
- Hon’ble Bombay High
Court decision in case of M/s Orchid Industries Pvt. Ltd., order dated
05.07.2017 (ITA no. 1433/2014) 397 ITR 136
Relevant Extract: “3]
The learned counsel for the Assessee supports the order and submits that the
Assessee had discharged its onus. The Assesse had produced the PAN of all the
creditors along with the confirmation, Bank Statement showing payment of share
application money and relevant record is produced with regard to the allotment of
shares to those parties. The share application form, allotment letter, share
certificate are also produced. Even the balance-sheet, profit and loss account,
the books of account of these creditors were produced on record showing that
they had sufficient funds for investing in the shares of the Assessee. The
learned counsel relies on the judgment of the Division Bench of this Court in
case of Commissioner of Income Tax vs. Gagandeep Infrastructure (P.) Ltd.,
reported in [2017] 80 Taxmann 272 (Bombay) and the order of the Apex Court in
case of Commissioner of Income Tax vs. Lovely Exports (P.) Ltd., reported in
[2008] 216 CTR 195 (SC).
4) We have considered
the submissions.
5) The Assessing Officer
added Rs.95 lakhs as income under Section 68 of the Income Tax Act only on the
ground that the parties to whom the share certificates were issued and who had
paid the share money had not appeared before the Assessing Officer and the
summons could not be served on the addresses given as they were not traced and
in respect of some of the parties who had appeared, it was observed that just
before issuance of cheques, the amount was deposited in their account.
6] The Tribunal has considered
that the Assessee has produced on record the documents to establish the
genuineness of the party such as PAN of all the creditors along with the
confirmation, their bank statements showing payment of share application money.
It was also observed by the Tribunal that the Assessee has also produced the
entire record regarding issuance of shares i.e. allotment of shares to these
parties, their share application forms, allotment letters and share
certificates, so also the books of account. The balance sheet and profit and
loss account of these persons discloses that these persons had sufficient funds
in their accounts for investing in the shares of the Assessee. In view of these
voluminous documentary evidence, only because those persons had not appeared
before the Assessing Officer would not negate the case of the Assessee. The
judgment in case of Gagandeep Infrastructure (P.) Ltd. (supra) would be
applicable in the facts and circumstances of the present case.
7] Considering the
above, no substantial question of law arises. The appeal stands dismissed.
However, there is no order as to costs.”
- Hon’ble Delhi ITAT
Bench decision in case of Aksar Wire Products (P) Ltd. order dated: 11.12.2015
(ITA no. 1167/Del/2015)
Relevant observation :
“We have heard the
arguments by both the parties. It is observed that the assessee has not
obtained any share application money from the alleged Shri S. K. Jain Group.
The ld. Assessing Officer, however, has alleged that the company by the name
Victory Software Pvt. Ltd. is one of the group companies of Shri S.K. Jain and
it is pertinent to note that the ld. Assessing Officer has not brought out
materials on record to establish the same. It is further observed that the
assessee has received the share application money from its applicant being
Victory Software P. Ltd. by proper banking channels. The assessee has further submitted
all the details regarding the applicants including PAN numbers, board
resolution, copy of the bank statements, incorporation certificates, memorandum
and articles of association and the acknowledgement of IT returns filed by the
applicants. The ld. Assessing Officer had issued summons to the company by the
name Victory Software P. Ltd. which was received back from the postal
authorities with remark “Refused”. This does not mean that there was nobody who
was present at the said address and further it cannot be inferred that the
company is merely existing on papers.
The assessee counsel
placed reliance on the judgment of the Hon’ble Jurisdictional High Court in the
case of Signature Hotels P. Ltd. vs. ITO reported in (2012) 20 taxman.com 797
(Del.). The Hon’ble High Court has observed that as there is no reference to
any document or statement except the annexure which has been quoted by the
Assessing Officer a prima facie nexus or link cannot be made to have been
established which shows that income has escaped assessment. The Hon’ble High
Court held that from the reasons recorded by the Assessing Officer it does not
appear that the Assessing Officer has applied his mind to the information and
has independently arrived at a belief on the basis of material which he had
before him that the income had escaped assessment. In the facts of the present
case, the assessee had furnished the names and all the relevant details of the
companies, with which it had entered into transaction, and that the Assessing
Officer was made aware of the situation. I observe from the records placed
before me that the Assessing Officer has not disputed the bank accounts and the
payments that were made to the assessee by the applicant companies. Nowhere in
the assessment order the Assessing Officer has brought into existence any
material to show that the company Victory Software P. Ltd. is a non-existing
and a fictitious entity. It is, therefore, incorrect to arrive at a conclusion
that the money received by the assessee by way of share application from
Victory Software is bogus. Merely because the name of one Shri Sukesh Gupta
appears as a mediator in the annexure, it cannot be concluded that Sukesh Gupta
had facilitated so called bogus transaction between the assessee and M/s
Victory Software P. Ltd. The Assessing Officer has not issued any summons u/s
131 of the Act, to Sukesh Gupta to ascertain whether he was involved in the so
called bogus transaction. From the above discussion, I arrived at a conclusion
that the Assessing Officer could not establish that the share application money
received by the assessee from M/s Victory Software P. Ltd. are bogus. I also
hold that the assessee has discharged its burden u/s 68 as it had filed the
enormous details in respect of M/s Victory Software P. Ltd. before the
Assessing Officer for him to investigate upon in detail. The Assessing Officer
has failed to establish that the details filed by the assessee are wrong. He
has also failed to produce sufficient material on record to prove that the receipt
of money by the assessee from M/s Victory Software P. Ltd. is accommodation
entries from the entry operator S.K. Jain Group. In the above circumstances, I
allow grounds filed by the assessee and held that reopening by the Assessing
Officer was met valid.”
- Hon’ble Bombay High
Court at Goa Bench in case of M/s Paradise Inland Shipping Pvt. Ltd., order
dated 10.04.2017 (Tax Appeal no. 66/2016) 400 ITR 439 (Bom): (SLP dismissed by
Hon’ble Apex court) Relevant Extract:
“We have given our
thoughtful considerations to the rival contentions of the learned Counsel and
we have also gone through the records. The basic contention of the learned
Counsel appearing for the Appellants revolves upon the stand taken by the
Appellants whether the shareholders who have invested in the shares of the
Respondents are fictitious or not. In this connection, the Respondents in
support of their stand about the genuineness of the transaction entered into
with such Companies has produced voluminous documents which, inter alia, have
been noted at Para 3 of the Judgment of the CIT Appeals which reads thus :
“The assessment is
completed without rebutting the 550 page documents which are unflinching
records of the companies. The list of documents submitted on 09.03.2015 are as
follows :
1. Sony Financial
Services Ltd.-CIN U74899DL1995PLC068362- Date of Registration 09/05/1995
a) Memorandum of
Association and Article of Association
b) Certificate of
Incorporation
c) Certificate of
Commencement of Business
d) Acknowledgment of the
Return of Income AY 08-09
e) Affidavit of the
Director confirming the investment
f) Application for
allotment of shares
g) Photocopy of the
share certificate
h) Audited account and
Directors report thereon including balance sheet, Profit and Loss Account and
schedules for the year ended 31.03.2009.
i) Audited account and
Directors report hereon including balance sheet, Profit and Loss Account and
schedules for the year ended 31.03.2010
j) The Bank Statement
highlighting receipt of the amount by way of RTGS.
k) Banks certificate
certifying the receipt of the amount through Banking channels.”
On going through the
documents which have been produced which are basically from the public offices,
which maintain the records of the Companies. The documents also include
assessment Orders for last three preceding years of such Companies. The
Appellants have failed to explain as to how such Companies have been assessed
though according to them such Companies are not existing and are fictitious
companies. Besides the documents also included the registration of the Company
which discloses the registered address of such Companies. There is no material
on record produced by the Appellants which could rebut the documents produced
by the Respondents herein. In such circumstances, the finding of fact arrived
at by the authorities below which are based on documentary evidence on record
cannot be said to be perverse.
The Appellants have
failed to explain as to how such Companies have been assessed though according
to them such Companies are not existing and are fictitious companies. Besides
the documents also included the registration of the Company which discloses the
registered address of such Companies. There is no material on record produced
by the Appellants which could rebut the documents produced by the Respondents
herein. In such circumstances, the finding of fact arrived at by the
authorities below which are based on documentary evidence on record cannot be
said to be perverse. This Court in the Judgments relied upon by the learned
Counsel appearing for the Respondents, have come to the conclusion that once
the Assessee has produced documentary evidence to establish the existence of
such Companies, the burden would shift on the Revenue-Appellants herein to
establish their case. In the present case, the Appellants are seeking to rely
upon the statements recorded of two persons who have admittedly not been
subjected to cross examination. In such circumstances, the question of
remanding the matter for re-examination of such persons, would not at all be
justified. The Assessing Officer, if he so desired, ought to have allowed the
Assessee to cross examine such persons in case the statements were to be relied
upon in such proceedings. Apart from that, the voluminous documents produced by
the Respondents cannot be discarded merely on the basis of two individuals who
have given their statements contrary to such public documents. ”
- Further that law
relating to section 68 is succinctly analyzed with great clarity in recent
decision of Madras high court in case of Lalitha Jewellery wherein entire
conundrum is explained 399 ITR 425 : SLP dismissed by Apex court recently. That
gist of aforesaid decision is encapsulated below for sake of ready reference:
2. The following
substantial questions of law have been framed while admitting TCA.No.435 of
2013 on 25.2.2014 :
(i) Whether the
Appellate Tribunal is correct in confirming the assessment of share capital
contributions as unexplained credit/investment within the scope of Section
68/69 of the Act in spite of the material evidence filed before them and the
lower authorities establishing clearly/discharging of initial burden/onus
statutorily vested on the appellant company to provide the source ?
(ii) Whether the
Appellate Tribunal is correct in law in confirming the assessment of share
capital contributions as the income of the appellant company even though there
were no materials in their possession of the respondent/Assessing Officer
establishing such facts apart from mere suspicion as well as establishing
perversity both on facts and in law in rendering their decision? and
(iii) Whether the
Appellate Tribunal is correct in law in sustaining the assessment of share
capital contributions as the income of the appellant company on the application
of the deeming provisions in Section 68/69 of the Act even though there was no legal
mandate for the appellant company to establish/prove the 'source for source'
?"
13. Before proceeding
further, it is only appropriate to refer the contents of Section 68 of the Act.
It reads as under……
14. It is clear from the
above provision that burden, initially, is cast upon the assessee to offer an
explanation about the nature and source of the money found credited in its
books of account and if that explanation is not satisfactory in the opinion of
the Assessing Officer, the sum so credited be charged as the income for the
previous year. Similarly, if the assessee is a company and the sum is credited,
consisting of share application money or share capital or share premium or any
such amount, the assessee is required to offer satisfactory explanation about
the nature and source of the sum credited to its book of account.
15. To understand the
rationale behind this provision, it is only apt to refer to the judgment of the
Hon’ble Supreme Court rendered in the case of Commissioner of Income Tax
(Central), Calcutta v Daulat Ram Rawatmull [reported in (1973) Vol.87 ITR 349],
it has been set out therein as under:
“Before dealing with the
facts of this case, we may advert to the principles which should govern the
decisions of the court in such like cases. Findings on questions of pure fact
arrived at by the Tribunal are not to be disturbed by the High Court on a
reference unless it appears that there was no evidence before the Tribunal upon
which they, as reasonable men, could come to the conclusion to which they have
come; and this is so, even though the High Court would on the evidence have
come to a conclusion entirely different from that of the Tribunal. In other
words, such a finding can be reviewed only on the ground that there is no
evidence to support it or that it is perverse. Further, when a conclusion has
been reached on an appreciation of a number of facts, whether that is sound or
not must be determined, not by considering the weight to be attached to each single
fact in isolation, but by assessing the cumulative effect of all the facts in
their setting as a whole [Sree Meenakshi Mills Ltd. Vs. Commissioner of Income-
Tax [1957] 31 ITR 28 : [1956] SCR 691 (SC)]."
16. When a Court of fact
acts on material partly relevant and partly irrelevant, it is impossible to say
to what extent the mind of the Court was affected by the irrelevant material
used by it in arriving at its finding. Such a finding is vitiated because of
the use of inadmissible material and thereby an issue of law arises. Likewise,
if the Court of fact bases its decision partly on conjectures, surmises and
suspicions and partly on evidence, in such a situation, an issue of law arises
[Dhirajlal Girdharilal Vs. CIT [1954] 26 ITR 736 (SC)]. The Court went on to hold
that a person can still be held to be the owner of a sum of money even though
the explanation furnished by him regarding the source of that money is found to
be not correct. Thus, the explanation regarding the source of money furnished
by the person was not satisfactory does not automatically lead to a conclusion
that that the money does not belong to that particular person, but belongs to
the other automatically.
17. More importantly, the
Supreme Court, in Daulat Ram, has laid down the following principle, which has
a direct bearing upon the controversy at issue and it reads as under: “The onus
to prove that the apparent is not the real is on the party who claims it to be so.
As it was the department which claimed that the amount of fixed deposit receipt
belonged to the respondent firm even though the receipt had been issued in the
name of Biswanath, the burden lay on the department to prove that the
respondent was the owner of the amount despite the fact that the receipt was in
the name of Biswanath. A simple way of discharging the onus and resolving the
controversy was to trace the source and origin of the amount and find out its
ultimate destination…..”
(Emphasis is mine)
18. Similarly, in the
case of CIT, Orissa Vs. Orissa Corporation P. Ltd. [reported in (1986) Vol.159
ITR 78], the Supreme Court has held as under:
“To what extent the
assessee had an obligation to discharge the burden of proving that these were
genuine incomes has been considered by this court in Lalchand Bhagat Ambica Ram
v. CIT [1959] 37 ITR 288. This court was concerned there with the encashment of
high denomination notes. In that case, some unexplained high denomination notes
were treated as the undisclosed income of the assessee. This court held that
when a court of fact arrives at its decision by considering material which is
irrelevant to the enquiry, or acts on material, partly relevant and partly
irrelevant, and it is impossible to say to what extent the mind of the court
was affected by the irrelevant material used by it in arriving at its decision,
a question of law arises, whether the finding of the court is not vitiated by
reason of its having relied upon conjectures, surmises and suspicions not supported
by any evidence on record or partly upon evidence and partly upon inadmissible
material. On no account whatever should the Tribunal base its findings on
suspicions, conjectures or surmises, nor should it act on no evidence at all or
on improper rejection of material and relevant evidence or partly on evidence
and partly on suspicions, conjectures and surmises. In that case, the so-called
hundi racket in which the assessee was alleged to have been involved was not
proved. That was only a suspicion of the Revenue.”
19. It would also be
appropriate to notice the observation of the Supreme Court in the case of
Orissa Corporation P.Ltd., at page 83, as under :
"In Sreelekha
Banerjee Vs. CIT [1963] 49 ITR 112, this Court held that if there was an entry
in the account books of the assessee which showed the receipt of a sum on
conversion of high denomination notes tendered for conversion by the assesssee
himself, it is necessary for the assessee to establish, if asked, what the
source of that money was and to prove that it was not income. The Department
was not at that stage required to prove anything. It could ask the assessee to
produce any books of account or other documents or evidence pertinent to the
explanation if one was furnished and examine the evidence and the explanation.
If the explanation showed that the receipt was not of an income nature, the
Department could not act unreasonably and reject that explanation to hold that
it was income. If, however, the evidence was unconvincing, then such rejection
could be made. The Department cannot by merely rejecting a good explanation
unreasonably, convert good proof into no proof."
20. Again in the case of
Sumati Dayal Vs. CIT [reported in 214ITR 801], at page 805, the Supreme Court has
clearly explained the point of approach to be followed both by the assessee and
the Department, in the context of Section 68 of the Act, in the following
words:
"It is no doubt
true that in all cases, in which, a receipt is sought to be taxed as income, the
burden lies upon the Department to prove that it is within the taxing provision
and if a receipt is in the nature of income, the burden of proving that it is
not taxable because it falls within an exemption provided by the Act lies upon
the assessee [Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536]. But, in
view of Section 68 of the Act, where any sum is found credited in the books of
the assessee for any previous year, the same may be charged to income tax as
the income of the assessee of that previous year if the explanation offered by
the assessee about the nature and source thereof is, in the opinion of the
Assessing Officer, not satisfactory. In such a case there is, prima facie,
evidence against the assessee viz. the receipt of money and if he fails to
rebut it, the said evidence being unrebutted, can be used against him by
holding that it was a receipt of an income nature. While considering the
explanation of the assessee, the Department cannot, however, act unreasonably [Sreelekha
Banerjee's case (1963) 49 ITR (SC) 112 at page 120]. "
21. A Division Bench of
the Delhi High Court in the case of CIT Vs. Stellar Investment Ltd., [reported
in 192 ITR 2870, has pointed out the approach to be adopted in this type of
matters, as under :
"It is evident that
even if it be assumed that the subscribers to the increased share capital were
not genuine, nevertheless, under no circumstances, can the amount of share
capital be regarded as undisclosed income of the assessee. It may be that there
are some bogus shareholders in whose names shares had been issued and the money
may have been provided by some other persons. If the assessment of the persons
who are alleged to have really advanced the money is sought to be reopened,
that would have made some sense but we fail to understand as to how this amount
of increased share capital can be assessed in the hands of the company
itself."
22. The above view on
the point of approach to the subject has been approved by the Hon’ble Supreme Court
in CIT Vs. Stellar Investment Ltd., on 20.7.2000, in Civil Appeal No.7968 of
1996.
23. Applying the legal
principles noticed supra, let us examine as to how the issue has been handled
by the Assessing Officer at the first instance. By the above observation of the
Assessing Officer, it is clear that he is ooking for proof of resources of the
investors of the assessee and such proof is beyond the realm of possibility of
production by the assessee. The Assessing Officer has adopted a totally
unreasonable attitude and was acting unreasonably. That was exactly what was
frowned upon by the Supreme Court in Sreelekha Banerjea's case, (1963) 49 ITR
(SC) 112. Even when the investor of the assessee demonstrated its resources,
the Assessing Officer still has suspicion.
24. Thus, the assessee
company has completely explained the sources of investments received by it. It
has also disclosed the identity of such investors. The Assessing Officer traced
out and reached all the four investors of the assessee. He also found as a fact
that all the payments have been received through banking channels. Hence, the
burden cast on the assessee stood discharged. But yet, the Assessing Officer
disallowed and added the amount to income of the assessee. In this context, it
is apt to take note of the crisply worded order of the Supreme Court in the
case of CIT Vs. Lovely Exports (P) Ltd. [reported in (2008)
216 CTR 195 (SC)], which
runs as follows :
“Can the amount of share
money be regarded as undisclosed income under Section 68 of IT Act, 1961 ? We
find no merit in this special leave petition for the simple reason that if the
share application money is received by the assessee company from alleged bogus shareholders,
whose names are given to the Assessing Officer, then the Department is free to
proceed to reopen their individual assessments in accordance with law.”
41. However, the main
theme, upon which, the Assessing Officer as well as the Tribunal proceeded to
discredit the investors of the assessee is completely erroneous. They are both
looking for proof beyond doubt. They are proceeding on an element of suspicion
that the amounts of investments are really those of the assessee, which have
been ploughed back by the assessee, whereas the settled principle of law is
that any amount of suspicion, however strong it might be as well, is no
substitute for proof. Suspicion is not sufficient enough to lead to a conclusion
that the investments received by the assessee company are all manipulated
receipts and on that basis, recorded a finding that the explanation of the
assessee is not satisfactory.
42. On the other
hand, the legal principle enunciated by the Hon’ble Supreme Court, as noticed
supra by us, is that so long as the proof and identity of the investor and the
payment received from him is through a doubtless channel like that of a banking
channel, the receipt in the hands of the assessee towards share capital or
share premium does not change its colour. The money so invested in the assessee
company would still be the money available and belonging to the investors. The
consistent principle followed is that the investors’ sources and credit
worthiness cannot be explained by the assessee. If the Department has a doubt
about the genuineness of the investors capacity, it is open to it to proceed
against those investors. Without taking such a course of action, the Assessing
Officer and the Tribunal are proceeding on conjectures that the assessee has,
in fact, ploughed back the money. The very approach of the Assessing Officer
and the Tribunal are completely opposed to settled legal principles enunciated
and they have arrived at conclusions contrary to the legal principles on the subject.
Further, they are finding fault with the assessee for the alleged failure of
it's investors in proving beyond doubt that they have the capacity to invest at
the moment they did in the assessee company. That is clearly a perverse view,
as the assessing officer is not expected to perform a near impossibility. The
assessee cannot call upon its investors to disclose all such business transactions
that carried on in the immediate past and as to how much they made from their
respective business enterprises. The assessee cannot also call upon its
investors to prove their good business sense in investing in the assessee
company, as such investors cannot gain any controlling stake.
43. In the result, the
questions of law framed in TCA.No.435 of 2013 are answered in favour of the
assessee and against the Revenue. Hence, TCA.No.435 of 2013 is allowed.
Consequently, MP.No.1 of 2014 is closed.” In a case where the issue was whether
the assessee availed cash credit as against future sale of product, the AO
issued summons to the creditors who did not turn up before him, so AO
disbelieved the existence of creditors and saddled the addition, which was
overturned by Ld. CIT(A). However, the Tribunal reversed the decision of the
Ld. CIT(A) and upheld the AO’s decision, which action of Tribunal was
challenged by the Hon'ble High Court, Calcutta in the case of Crystal Networks
(P.) Ltd. v. Commissioner of Income-tax 353 ITR 171 wherein the Tribunal’s
decision was overturned and decision of Ld. CIT(A) upheld and the Hon’ble High
Court has held that when the basic evidences are on record the mere failure of
the creditor to appear cannot be basis to make addition. The court held as
follows:
“8. Assailing the said
judgment of the learned Tribunal learned counsel for the appellant submits that
Income-tax Officer did not consider the material evidence showing the
creditworthiness and also other documents, viz., confirmatory statements of the
persons, of having advanced cash amount as against the supply of bidis. These evidence
were duly considered by the Commissioner of Income- tax (Appeals). Therefore,
the failure of the person to turn up pursuant to the summons issued to any
witness is immaterial when the material documents made available, should have
been accepted and indeed in subsequent year the same explanation was accepted
by the Income-tax Officer. He further contended that when the Tribunal has
relied on the entire judgment of the Commissioner of Income-tax (Appeals),
therefore, it was not proper to take up some portion of the judgment of the
Commissioner of Income-tax (Appeals) and to ignore the other portion of the
same. The judicial propriety and fairness demands that the entire judgment both
favourable and unfavourable should have been considered. By not doing so the
Tribunal committed grave error in law in upsetting the judgment in the order of
the Commissioner of Income-tax (Appeals).
9. In this connection,
he has drawn our attention to a decision of the Hon’ble Supreme Court in the
case of Udhavdas Kewalram v. CIT [19671 66 ITR 462. In this judgment it is
noticed that the Supreme Court as proposition of law held that the Tribunal
must in deciding an appeal, consider with due care, all the material facts and record
its finding on all the contentions raised by the assessee and the Commissioner
in the light of the evidence and the relevant law.
10. We find considerable
force of the submissions of the learned counsel for the appellant that the
Tribunal has merely noticed that since the summons issued before assessment
returned unserved and no one came forward to prove. Therefore, it shall be
assumed that the assessee failed to prove the existence of the creditors or for
that matter the creditworthiness. As rightly pointed out by the learned counsel
that the Commissioner of Income-tax (Appeals) has taken the trouble of
examining of all other materials and documents, viz., confirmatory statements,
invoices, challans and vouchers showing supply of bidis as against the advance.
Therefore, the attendance of the witnesses pursuant to the summons issued, in
our view, is not important. The important is to prove as to whether the said
cash credit was received as against the future sale of the product of the
assessee or not. When it was found by the Commissioner of Income tax (Appeals)
on facts having examined the documents that the advance given by the creditors
have been established the Tribunal should not have ignored this -fact finding.
Indeed the Tribunal did not really touch the aforesaid fact finding of the
Commissioner of Income-tax (Appeals) as rightly pointed out by the learned
counsel. The Supreme Court has already stated as to what should be the duty of
the learned Tribunal to decide in this situation. In the said judgment noted by
us at page 464, the Supreme Court has observed as follows:
"The Income-tax
Appellate Tribunal performs a judicial function under the Indian Income-tax
Act; it is invested with authority to determine finally all questions of fact.
The Tribunal must, in deciding an appeal, consider with due care all the
material facts and record its finding on all the contentions raised by the
assessee and the Commissioner, in the light of the evidence and the relevant
law. "
11. The Tribunal must,
in deciding an appeal, consider with due care all the material facts and record
its finding on all contentions raised by the assessee and the Commissioner, in
the light of the evidence and the relevant law. It is also ruled in the said
judgment at page 465 that if the Tribunal does not discharge the duty in the
manner as above then it shall be assumed the judgment of the Tribunal suffers
from manifest infirmity.
12. Taking inspiration
from the Hon’ble Supreme Court observations we are constrained to hold in this
matter that the Tribunal has not adjudicated upon the case of the assessee in
the light of the evidence as found by the Commissioner of Income-tax (Appeals).
We also found no single word has been spared to upset the fact finding of the
Commissioner of Income-tax (Appeals) that there are materials to show the cash
credit was received from various persons and supply as against cash credit also
made.
13. Hence, the judgment
and order of the Tribunal is not sustainable. Accordingly, the same is set
aside. I restore the judgment and order of the Commissioner of Income-tax
(Appeals). The appeal is allowed. When a question as to the creditworthiness of
a creditor is to be adjudicated and if the creditor is an Income Tax assessee,
it is now well settled by the decision of the Calcutta High Court that the
creditworthiness of the creditor cannot be disputed by the AO of the assessee
but the AO of the creditor. In this regards our attention was drawn to the
decision of the Hon'ble High Court, Calcutta in the OMMISSIONER OF INCOME TAX,
KOLKA TA-Ill Versus DATAWARE PRIVATE LIMITED ITAT No. 263 of 2011 Date: 21st
September, 2011 wherein the Court held as follows:
“In our opinion, in such
circumstances, the Assessing officer of the assessee cannot take the burden of
assessing the profit and loss account of the creditor when admittedly the
creditor himself is an income tax assessee. After getting the PAN number and
getting the information that the creditor is assessed under the Act, the
Assessing officer should enquire from the Assessing Officer of the creditor as
to the genuineness" of the transaction and whether such transaction has
been accepted by the Assessing officer of the creditor but instead of adopting
such course, the Assessing officer himself could not enter into the return of
the creditor and brand the same as unworthy of credence. So long it is not
established that the return submitted by the creditor has been rejected by its
Assessing Officer, the Assessing officer of the assessee is bound to accept the
same as genuine when the identity of the creditor and the genuineness" of
transaction through account payee cheque has been established. We find that
both the Commissioner of Income Tax (Appeal) and the Tribunal below followed
the well-accepted principle which are required to be followed in considering
the effect of Section 68 of the Act and we thus find no reason to interfere
with the concurrent findings of fact recorded by both the authorities.”
6. Keeping in view of
the facts and circumstances of the case and respectfully following the
aforesaid decisions, I held that mere non production of Director of said share
holder company cannot justify adverse inference u/s 68 of the Act. Even if
there was any doubt if any regarding the creditworthiness of the share
applicants was still subsisting, then AO should have made enquiries from the AO
of the share subscribers as held by Hon’ble High Court in CIT vs DATAWARE
(supra) which has not been done, so no adverse view could have been drawn. In
this case on hand, the assessee had discharged its onus to prove the identity,
creditworthiness and genuineness of the share applicants, thereafter the onus
shifted to AO to disprove the documents furnished by assessee and in my view it
cannot be brushed aside by the AO to draw the adverse view which here in
present facts cannot be countenanced. Therefore addition of Rs. 25,45,000 made
by AO and sustained by Ld CIT(A) are hereby deleted.
7. In the result, the
appeal of the assessee is allowed.
Order pronounced on
25-06-2018.
Sd/- (H.S. SIDHU)
JUDICIAL MEMBER
Dated : 25-06-2018 SR
BHATANGAR
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