* IN THE HIGH COURT OF DELHI AT NEW DELHI
RESERVED ON : 03.12.2012
PRONOUNCED ON: 21.12.2012
+ ITA NOS. 134/2012
COMMISSIONER OF INCOME TAX
DELHI-V ..............Appellant
Through : Ms. Suruchi Aggarwal, Sr. Standing
Counsel.
Vs.
M/S. N.R. PORTFOLIO PVT. LTD. ............ Respondent
Through : Dr. Rakesh Gupta, Ms. Rani Kiyala, Sh.
Piyush Singh and Ms. Ayushi Pareek, Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
MR. JUSTICE S.RAVINDRA BHAT
%
1. The revenue claims to be aggrieved by the order of the Income Tax
Appellate Tribunal (IT AT) dated 22-07-2011 in IT a No. 2177/DEL/2010
by which its appeal was dismissed. The following question of law arises for
consideration:
"Did the Tribunal fall into error in directing the deletion of
the sum brought to tax by the AO as unexplained income
under Section 68 of the Income Tax Act?"
ITA 134/2012 Page 1
2. Briefly the facts are that the assessee filed its return for AY 2004-05
declaring a loss to the extent of ` 42793/-. It's case was later reopened when
the AO issued notice under Section 148. Eventually the AO framed the
assessment under Sections 147/144 and added back the sum of ` 35,00,000/-
under Section 68. The assessee felt aggrieved and appealed to the
Commissioner of appeals. In the appellate proceedings, the Commissioner
sought for a remand report which was furnished to him. The remand report
dated 06-11-2009 - a fairly elaborate document which analyzed in
meticulous detail the contentions of the assessee and the materials on the
record, to the extent it is relevant for disposal of the present appeal reads as
follows:
"Vide the said summons u/s 131 the said parties were
required to furnish the following details/information on
07.11.2009;
1. personal deposition
2. To produce books of account alongwith complete bills
& vouchers for the period 01.04.2003 to 31.03.2004.
3. Statement of all the bank accounts related to your
company for the period 1.1.2003 to 31.3.2004.
4. Please explain whether you still in possession of the
shares allotted by M/s N.R. Portfolio Pvt. Ltd. If not
then to whom the said shares have been sold and the
date and details thereof alongwith the supporting
document.
On 23.10.09 the A.R. of the assessee appeared but
Shri Chaurasia did not attend. On 30.10.09 Shri Prakash
Gupta, A.R. attened and sought adjournment to file reply
and he was asked to produce Shri Vicky Chaurasia on
05.11.09 along with all the details as asked for. On 5.11.09
the A.R. of the assessee appeared along with Shri Vicky
Chaurasia and a letter dated 3.11.09 but no books of
ITA 134/2012 Page 2
accounts as asked for were produced. Statement of Shri
Vicky Chaurasia was recorded, copy of which is enclosed
herewith as annexure-A for your kind perusal.
It is brought to your kind notice that the summons u/s
131 so sent to the parties, summons have come back
unserved on 27.10.09 in respect of 4 parties mostly with the
postal remarks "NO SUCH FIRM/COMPANY/PERSON",
OR A FEW `LEFT WITHOUT ADDRESS". Out of the
remaining 3 parties, neither anybody attended in person, nor
filed any application for adjournment nor filed the details
asked for in the summons u/s 131. Thus, these parties have
not discharged their duty to the department as required u/s
131 of the I.T. Act and these persons will never come before
any Income-tax Authority as already discussed in details that
they are only entry operators and either absconding or
evading service of any kind of notice from the Income tax
Department or avoiding appearance before any Income-tax
Authority because they do not have any real identity,
creditworthiness and business.
As regards compliance of letter dated 12.10.2009 sent
to the assessee, the A.R. of the assessee has filed a letter
dated 29.10.2009 on 30.10.2009 seeking adjournment upto
04.11.2009.
The assessee company filed its reply dated 03.11.2009
on 04.11.2009 in support of its contention and the same are
discussed as under"
In para 2 of its letter dated 3.11.2009 the assessee
stated that "vide letter dated 10.10.2006 it informed t he
Department about the change of address from A-46, Mohan
Co-op Industrial Estte, Mathura Road, New Delhi to A-15,
B-1 Extn. Mohan Co-op Industrial Estate, Mathura Road,
New Delhi and enclosed a copy of the said letter.
In this connection it is pointed out that the assessee
has not filed any evidence that this letter was filed in the
office of the Income-tax Officer Ward 13(1), New Delhi. On
the one hand it is saying that it has changed its corporate
office from A-46, Mohan Co-op, Industrial Estate to A-15, B-
1 Extn., Mohan Co-op Industrial Estate on 10.10.2006 and
ITA 134/2012 Page 3
on the other hand it has stated in its submissions before the
learned CIT(A) that "Admittedly, the appellant company on
18.4.2007 had shifted its Regd. Office from A-46 Mohan Co-
op Industrial Estate to A-15, B-1 Extn. Mohan Co-op
Industrial Estate. These contradictory versions are not
reliable and the contention of the assessee made before the
CIT(A) that it had shifted its corporate office from A-46
Mohan Co-op during the period when the proceedings u/s
147/148 were initiated is not acceptable at all.
....................... ..............................
......................................
From a perusal of these shares allotment letters it is seen
that these letters of allotment of shares are dated 18.2.2004
but the same have been sent to these parties only on
15.6.2004 i.e. after a period of about 4 months from the
alleged date of allotment of shares to these parties
In para 4(g) the assessee has stated that "it has not
paid any dividends to the shareholders".
It is quite interesting to note that the assessee
company is receiving interest and dividends on investment
and loans made by it but it has not paid any dividends to the
alleged shareholders.
In para 4(h) the assessee has stated that "in support
of identity of Corporate share applicants, it has already
furnished master details as available on MCA site of Govt. of
India which proves without any doubt existence and identity
of the share applicants all being corporate bodies..."
....................... ..............................
The above submission is also not reasonable for the
detailed discussion made in earlier paras of this report and
the assessee has not given any substantiating evidence to
ITA 134/2012 Page 4
prove the identity, creditworthiness and genuineness of the
transactions with them. It is pointed out that the summons
issued u/s 131 to the said 7 parties, summons have been
received back unserved in respect of four parties and in
respect of remaining three parties neither any application
for adjournment has been received not any reply has been
received till date.
The bank statement of the assessee shows major
amounts as Funds transferred (Dr) and (Cr) and cash
deposits. In view of the above facts can it be said that
i) Identify of the above said
company/firm/individuals has been proved,
whereas their identities are proved only on
papers. It is noticed that all the documents
obtained by the entry operator like PAN, ITR,
ROC, No independent verification is undertaken
is to provide accommodation entries and
nothing else.
ii) These entry operators do not have any business
of its own. All the monies appearing in its Bank
account originate from some other accounts
down the line in which cash is deposited. The
entities in which cash is deposited are obviously
only paper entities and there could be no
justification of deposit in cash in the said
account. These entities are not into any activity
or business in which cash is deposited other
than the activity of being accomplice in
providing accommodation entries.
....................... ..............................
......................................
In view of the above, it is thus clear that the above said
entities in which cash was deposited, of which assessee is
one of the beneficiaries, are absconding and were never into
a business in which so much cash can be legally generated."
ITA 134/2012 Page 5
3. The Commissioner of Appeals was of the opinion that the assessee
had furnished all the relevant particulars of the share applicants who had
invested in its company. These particulars included PAN details which
revealed that the investors were filing income tax returns. The
Commissioner also concluded that during the course of remand proceedings
the AO could not prove with certainty that the investors were entry providers
and that the transactions entered by the assessee with them were bogus. They
Commissioner also was of the opinion that they are assessing officer had not
made any enquiries to establish that the investors had given accommodation
entries to the assessee and that the money received from them was the
assessee's own undisclosed income, rooted back to it in the guise of share
application amounts. Furthermore, the Commissioner was of the opinion that
no opportunity to cross-examine the deponents who had made statements
during the course of investigation proceedings had been furnished. On
account of these perceived infirmities in the approach and order of the AO,
the adding back under Section 68 was directed to be set aside. The revenue
appealed to the ITAT; the assessee also filed across objections on the ground
that the reopening of assessment was unwarranted. The revenue's appeal was
rejected by the impugned order; the cross objections were held to be
infructuous and dismissed. The relevant discussion by the tribunal in its
impugned order directed itself towards application of the Supreme Court
ruling in Commissioner of Income Tax v Lovely Exports 216 CTR 195 and
held as follows:
"5. We have heard the rival contentions in the light of
materials produced and precedents relied upon. We find that
the assessee in this case has duly filed copies of share
ITA 134/2012 Page 6
application forms. The names and addresses, PAN, bank
details and confirmations of the investors have been filed,
therefore, the assessee has discharged its onus. Hence, we
find considerable justification in the CIT(A)'s order in
holding that the assessee has provided the PAN and other
documentary evidence to prove the identity and
creditworthiness of the share applicants and the addition u/s
68 is not warranted.
------------------------------ ----
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9. From the above paragraphs of the Hon'ble Jurisdictional
High Court decision, it is seen that it has been held by the
Hon'ble High Court that when assessee has proved the
identity of the share applicants by either furnishing their
PAN number or income tax assessment number and shown
the genuineness of transaction by showing money either by
account payee cheque or by draft or by any other mode, then
the onus of proof would shift to the revenue. In the present
case, assessee has discharged its onus to prove the identity
of the share applicants."
4. Learned Counsel for the revenue argued that the Tribunal fell into
error in not appreciating that corroborative evidence furnished and relied
upon by the assessee was worthless. In this regard particular reliance was
placed upon the remand report called for by the Commissioner (Appeals). It
was highlighted that summons under Section 131 was sent to the seven
parties whose particulars had been furnished but all of them were received
back un-served on 27-10-2009 and 03-11-2009 in respect of six parties with
the remark that no such firm or company existed and that in the case of the
others the remark was that they had left without any forwarding address.
Learned counsel also argued that the remand report had clearly brought out
ITA 134/2012 Page 7
that the assessee, a stock in share broker had not traded in any stocks and
shares but shown interest income and dividend income on investments made
by it and the loans and advances given by it to other parties. In such event,
there was no necessity of raising such huge amount of share capital and year
after year. Another important aspect, submitted Counsel, was that the
assessee continued to receive dividends upon its investments but did not pay
dividends to the so-called shareholders from whom it received capital.
Counsel relied on Commissioner of Income Tax v Divine Leasing and
Finance Ltd 2008 (299) ITR 268, especially the following observations:
"13. There cannot be two opinions on the aspect that the
pernicious practice of conversion of unaccounted money
through the masquerade or channel of investment in the
share capital of a company must be firmly excoriated by the
Revenue. Equally, where the preponderance of evidence
indicates absence of culpability and complexity of the
assessed it should not be harassed by the Revenues
insistence that it should prove the negative. In the case of a
public issue, the Company concerned cannot be expected to
know every detail pertaining to the identity as well as
financial worth of each of its subscribers. The Company
must, however, maintain and make available to the AO for
his perusal, all the information contained in the statutory
share application documents. In the case of private
placement the legal regime would not be the same. A
delicate balance must be maintained while walking the
tightrope of Section 68 and 69 of the IT Act. The burden of
proof can seldom be discharged to the hilt by the assessed; if
the AO harbours doubts of the legitimacy of any subscription
he is empowered, nay duty-bound, to carry out thorough
investigations. But if the AO fails to unearth any wrong or
illegal dealings, he cannot obdurately adhere to his
suspicions and treat the subscribed capital as the
undisclosed income of the Company."
ITA 134/2012 Page 8
5. Resisting the submissions of the revenue, it was contended on behalf
of the assessee that the Commissioner (Appeals) and the ITAT correctly
deduced that the findings of the AO regarding unexplained income were
unsustainable. It was emphasized that Lovely Exports had declared the law,
which is that the initial onus lies on the assessee to discharge its source of
income, which in this case was done, by furnishing the addresses and other
details such as PAN particulars, list of directors, bank account particulars,
etc of the share applicants, who were income tax payees. The burden of
proving that the amounts received were unexplained income, or unaccounted
money of the assessee, lay upon the revenue, which it did not discharge. In
these circumstances, the appellate authorities acted within their rights and
jurisdiction in directing the addition to be set aside.
6. Before a discussion on the merits, it would be worthwhile to notice
the relevant discussion by this Court, in its judgment in Lovely Exports,
which was carried in appeal to the Supreme Court. The relevant extracts are
produced below:
"There cannot be two opinions on the aspect that the
pernicious practice of conversion of unaccounted money
through the masquerade or channel of investment in the
share capital of a company must be firmly excoriated by the
revenue. Equally, where the preponderance of evidence
indicates absence of culpability and complexity of the
assessed it should not be harassed by the revenues insistence
that it should prove the negative. In the case of a public
issue, the company concerned cannot be expected to know
every detail pertaining to the identity as well as financial
worth of each of its subscribers. The company must,
however, maintain and make available to the AO for his
ITA 134/2012 Page 9
perusal, all the information contained in the statutory share
application documents. In the case of private placement the
legal regime would not be the same. A delicate balance must
be maintained while walking the tightrope of Sections 68 and
69 of the IT Act. The burden of proof can seldom be
discharged to the hilt by the assessed; if the AO harbours
doubts of the legitimacy of any subscription he is
empowered, nay duty bound, to carryout thorough
investigations. But if the AO fails to unearth any wrong or
illegal dealings, he cannot obdurately adhere to his
suspicions and treat the subscribed capital as the
undisclosed income of the company."
Several judgments on applicability of Section 68 to Share Application
amounts, were adverted to, and the position was summed up as follows:
"In this analysis, a distillation of the precedents yields the
following propositions of law in the context of Section 68 of
the IT Act. The assessed has to prima facie prove (1) the
identity of the creditor/subscriber; (2) the genuineness of the
transaction, namely, whether it has been transmitted through
banking or other indisputable channels; (3) the
creditworthiness or financial strength of the
creditor/subscriber. (4) If relevant details of the address or
PAN identity of the creditor/subscriber are furnished to the
Department along with copies of the Shareholders Register,
Share Application Forms, Share Transfer Register etc. it
would constitute acceptable proof or acceptable Explanation
by the assessed. (5) The Department would not be justified in
drawing an adverse inference only because the
creditor/subscriber fails or neglects to respond to its notices;
(6) the onus would not stand discharged if the
creditor/subscriber denies or repudiates the transaction set
up by the assessed nor should the AO take such repudiation
at face value and construe it, without more, against the
assessed. (7) The Assessing Officer is duty-bound to
investigate the creditworthiness of the creditor/subscriber
ITA 134/2012 Page 10
the genuineness of the transaction and the veracity of the
repudiation."
The judgment of this Court was affirmed in a brief order, by the Supreme
Court; it reads as follows:
"Delay condoned.
Can the amount of share money be regarded as undisclosed
income under s.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
AO, then the Department is free to proceed to reopen their
individual assessments in accordance with law. Hence, we
find no infirmity with the impugned judgment.
Subject to the above, Special Leave Petition is dismissed."
7. In the present case, the assessee claimed that it received ` 35 lakhs
from seven share applicants. Its assessment was reopened. The assessee did
not attend the reassessment proceedings, and suffered an adverse order. On
its moving an appeal, the Commissioner sought a remand report. The
remand report, an exhaustive 41 page document, discusses threadbare the
opportunities granted to the assessee, to establish the identity and
creditworthiness of the share applicants. The report highlights, among other
facts, the following salient features:
(1) Share applications were received on 18.2.2004 but the shares were
sent to the parties only on 15.6.2004;
(2) The share applicants did not attend the proceedings despite summons
under Section 131; most of the notices were received unserved;
ITA 134/2012 Page 11
(3) The assessee, which was a stock broker, did not show any transactions
in that activity, but was receiving dividends. However, it did not declare any
dividend, to its investors. Its financial condition was such that there was no
need to infuse fresh share capital;
(4) The assessee's bank accounts showed large amounts of cash debits
and credit entries.
8. This court is conscious of a view taken in some of the previous
decisions that the assessee cannot be faulted if the share applicants do not
respond to summons, and that the state or revenue authorities have the
wherewithal to compel anyone to attend legal proceedings. However, that is
merely one aspect. An assessee's duty to establish that the amounts which
the AO proposes to add back, under Section 68 are properly sourced, does
not cease by merely furnishing the names, addresses and PAN particulars, or
relying on entries in a Registrar of Companies website. One must remember
that in all such cases, more often than not, the company is a private one, and
share applicants are known to it, since they are issued on private placement,
or even request basis. If the assessee has access to the share applicant's PAN
particulars, or bank account statement, surely its relationship is closer than
arm's length. Its request to such concerns to participate in income tax
proceedings, would, viewed from a pragmatic perspective, be quite strong,
because the next possible step for the tax administrators could well be re-
opening of such investor's proceedings. That apart, the concept of "shifting
onus" does not mean that once certain facts are provided, the assesse's duties
are over. If on verification, or during proceedings, the AO cannot contact the
share applicants, or that the information becomes unverifiable, or there are
ITA 134/2012 Page 12
further doubts in the pursuit of such details, the onus shifts back to the
assessee. At that stage, if it falters, the consequence may well be an addition
under Section 68. This court recollects the robustness with which the issue
was dealt with, in A. Govindarajulu Mudaliar v CIT, (1958) 34 ITR 807, in
the following terms: -
"Now the contention of the appellant is that assuming that he
had failed to establish the case put forward by him, it does
not follow as a matter of law that the amounts in question
were income received or accrued during the previous year,
that it was the duty of the Department to adduce evidence to
show from what source the income was derived and why it
should be treated as concealed income. In the absence of
such evidence, it is argued, the finding is erroneous. We are
unable to agree. Whether a receipt is to be treated as income
or not, must depend very largely on the facts and
circumstances of each case. In the present case the receipts
are shown in the account books of a firm of which the
appellant and Govindaswamy Mudaliar were partners.
When he was called upon to give explanation he put forward
two explanations, one being a gift of Rs. 80,000 and the
other being receipt of Rs. 42,000 from business of which he
claimed to be the real owner. When both these explanations
were rejected, as they have been it was clearly upon to the
Income-tax Officer to hold that the income must be
concealed income. There is ample authority for the position
that where an assessee fails to prove satisfactorily the source
and nature of certain amount of cash received during the
accounting year, the Income-tax Officer is entitled to draw
the inference that the receipt are of an assessable nature.
The conclusion to which the Appellate Tribunal came
appears to us to be amply warranted by the facts of the case.
There is no ground for interfering with that finding, and
these appeals are accordingly dismissed with costs."
ITA 134/2012 Page 13
9. Having regard to the totality of facts and circumstances, particularly
the remand report, which was not considered by the Commissioner
(Appeals) and the ITAT in its proper perspective, this Court is of the opinion
that the question of law requires to be answered in favour of the revenue,
and against the assessee. The appeal is therefore, allowed, but without any
order as to costs.
S. RAVINDRA BHAT
(JUDGE)
R.V. EASWAR
(JUDGE)
December 21, 2012
ITA 134/2012 Page 14
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