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January, 31st 2013

                                          Reserved on: 18th December, 2012
%                                        Date of Decision: 7th January, 2013

+      ITA 120/2012

       CIT                                                 ..... Appellant
                              Through:   Mr. Sanjeev Rajpal, Sr. Standing

       NIPUN BUILDERS & DEVELPERS PVT. LTD.       ..... Respondent
                     Through:  Mr. Ajay Vohra with Ms. Kavita Jha
                               and    Mr.    Somnath        Shukla,



       This is an appeal by the revenue filed u/s. 260A of the Income Tax
Act. It relates to the assessment year 2004-05. The assessee is a private
limited company which filed its return on a figure of loss which was accepted
u/s. 143(1). On the basis of a report of the investigation wing of the income-
tax department, the assessment was reopened u/s.147 on the ground that
income chargeable to tax had escaped assessment, in as much as the share
capital shown to have been received by the company was alleged to represent
mere accommodation entries.

2.     In the course of the reassessment proceedings, enquiries were sought to
be made by the Assessing Officer (AO); summons u/s. 131 were issued on
14.09.2007 to the companies from whom the share capital was stated to be
received and they were returned unserved with the remarks "no such

ITA 120/2012                                                     Page 1 of 13
company"; the inspector sent to the addresses for verification confirmed the
fact. In view of this, the assessee was asked to produce the principal officer of
the companies who had subscribed to the shares along with the relevant
details. In response, the assessee filed a letter dated 21.11.2007 at the "dak"
counter of the office of the AO stating that all the notices of the annual
general meeting and call notices for shares were being sent to the same
addresses of the share subscribers under certificate of posting and they have
not come back unserved, implying that the share subscribers did exist at the
addresses given to the AO. It was also submitted that the capital was
subscribed through account payee cheques with valid share application forms,
copies of the memorandum of association and board resolutions. It was
pointed out that the registered offices of the companies could be found in the
website and the AO may visit the site for further

3.     These submissions were not accepted by the AO as constituting
satisfactory explanation of the nature and source of the monies as required by
Section 68 of the Act. He held that the genuineness of the transactions was
not proved by the assessee and brought to tax the share application money of
`1,47,00,000/- to tax; commission of 2.5% on the amount, which worked to
`3,94,500/- was also added on the ground that the assessee would have paid
the same to get the accommodation entries of share capital.

4.     The assessee does not appear to have questioned the reassessment on
the ground of lack of jurisdiction and the appeal before the CIT (A) was
confined to the merits of the addition. The CIT (A) accepted the submissions
of the assessee that enough documentary evidence had been adduced before
the AO to prove the identity and creditworthiness of the share subscribers and
the genuineness of the transactions and applying the ruling of the Supreme

ITA 120/2012                                                        Page 2 of 13
Court in CIT v. Lovely Exports (P) Ltd., (2008) 216 CTR 195: (2009) 319 ITR
(St.) 5 held that the addition was not justified. He deleted it.

5.     The revenue carried the matter in appeal before the Income Tax
Appellate Tribunal in ITA No.557/Del/2010. The Tribunal agreed with the
CIT (A) and dismissed the appeal.

6.     The revenue has filed the present appeal impugning the aforesaid order
of the Tribunal. The following substantial question of law is framed: -

       "Whether the Tribunal was right in law in upholding the order
       of the CIT(A) deleting the addition made u/s. 68 of the Act on
       the ground that the assessee has proved the nature and source
       of the share subscription amounting to `1,47,00,000/- and has
       established the identity and creditworthiness of the share
       subscribers and the genuineness of the transactions?"
The revenue contends that the Tribunal failed to appreciate that the assessee
could not establish satisfactorily the nature and source of the monies received
as share capital nor could it discharge the onus of proving the identity and
creditworthiness of the share subscribers and the genuineness of the
transactions which are the fundamental requirements of section 68.

7.     We are in agreement with the contention of the revenue. Under Section
68 the onus is upon the assessee to prove the three ingredients, i.e., identity
and creditworthiness of the person from whom the monies were taken and the
genuineness of the transaction. As to how the onus can be discharged would
depend on the facts and circumstances of each case. It is expected of both the
sides ­ the assessee and the Assessing authority ­ to adopt a reasonable
approach. The assessee here is a private limited company. It cannot issue
shares in the same manner in which a public limited company does. It has to
generally depend on persons known to its directors or shareholders directly or
indirectly to buy its shares. Once the monies are received and shares are

ITA 120/2012                                                       Page 3 of 13
issued, it is not as if the share-subscribers and the assessee-company lose
touch with each other and become incommunicado. Calls due on the shares
have to be paid; if dividends are declared, the warrants have to be sent to the
shareholders. It is a continuing relationship, even granting that it may not be
of the same degree in which it exists between a debtor and creditor. The share-
subscribers in the present case have each invested substantial amounts in the
assessee's shares, as the chart at pages 2-3 of the assessment order would
show. Most of them, barring two or three, are themselves private limited
companies. It cannot therefore be contended, as was contended before us on
behalf of the assessee, that if the summons issued u/s. 131 to the subscribing
companies at the addresses furnished by the assessee returned unserved, the
AO is duty-bound to enforce their attendance with all the powers vested in
him. The unreasonableness of such a general proposition is writ large in the
face of the contention. The assessee-company received the share monies; it
even says that the communications sent by it at the addresses did not return
unserved, yet when the AO requested it ­ that too only after trying to serve the
summons unsuccessfully ­ to produce the principal officer of the subscribing
companies, the assessee developed cold feet and said it cannot help if those
companies did not appear and that it was for the assessing officer to enforce
their attendance. It needs to be remembered that the AO did not merely stop
with issuing summons; he followed it up with a visit by the inspector who
confirmed that no such companies functioned from the addresses furnished by
the assessee. Let us see the attitude of the assessee towards discharging its
onus in such circumstances. It says that the AO may get the addresses from
the ROC's website.     We do not think that an assessee can take such an
unreasonable attitude towards his onus u/s. 68, little realising that when the
finding is that the subscribing companies have not been found existing at the
addresses given by the assessee, it is open to the AO to even hold that the

ITA 120/2012                                                       Page 4 of 13
identity of the share-subscribers has not been proved, let alone their
creditworthiness and the genuineness of the transactions. It was not open to
the assessee, given the facts of this case, to direct the AO to go to the website
of the company law department/ROC and search for the addresses of the
share-subscribers and then communicate with them for proof of the
genuineness of the share subscription. That is the onus of the assessee, not of
the AO.

8.     So far as the creditworthiness of the share subscribers is concerned, the
contention of the assessee before us is that it was proved by the bank
statements of those subscribers submitted before the AO. The AO has not
referred to them in the assessment order but it is not in dispute that the copies
of the bank statements were furnished before him. Even assuming that the
bank statements were filed before the AO, that by itself may not be sufficient
to prove the creditworthiness without any explanation for the deposits in the
accounts and their source. The usual argument in all such cases, including the
present case, is that it is not for the assessee to prove the source of source and
origin of origin of the receipts. We are alive to the difficulty that may be
faced by an assessee to unimpeachably establish the creditworthiness of the
share subscribers but at the same time we are of the opinion that mere
furnishing of the copies of the bank accounts of the subscribers is not
sufficient to prove their creditworthiness. There must be, in our opinion, some
positive evidence to show the nature and source of the resources of the share
subscriber himself and therefore it is necessary for him to come before the AO
and confirm his sources from which he subscribed to the capital. In the
present case the assessee did not produce the principal officer of the
companies who subscribed to the shares; it merely filed a letter at the "dak"
counter of the AO, stating that the communications sent by it to the share
subscribers have not come back unserved. This is not compliance with the

ITA 120/2012                                                        Page 5 of 13
direction of the AO who had issued notice to the assessee to produce the
principal officers of the subscribing companies. As is well known, in the case
of private limited companies, it cannot be denied that there is a continuing
contact and relationship with the share holders and if the assessee was serious
enough to establish its case, it ought to have produced the principal officers of
the subscribing companies before the AO so that they can explain the sources
from which the share subscription was made. That would also have taken care
of the difficulty of the assessee in proving the creditworthiness of the
subscriber companies. It was, therefore, in the assessee's own interest to have
actively participated and cooperated in the assessment proceedings and
complied with the direction of the AO to produce the principal officers of the
subscribing companies. Instead, the assessee took an adamant, if we may use
that expression, attitude and failed to comply with the direction of the AO; not
only that, it challenged the AO's finding that the summons sent to the
companies came back unserved with the remark "no such company", which
was also supported by the report of the inspector who made a visit to the
addresses. The assessee thus took a very extreme stand which was in our
opinion not justified; certainly it did nothing worthwhile to discharge the onus
to prove the creditworthiness of the subscribing companies.

9.     We referred to the argument of the assessee that it is not part of its onus
to prove the source of source and origin and origin of the share subscriptions.
In addition to what we had said with reference to that argument in the
preceding paragraph we cannot also help observing that the basis of the
argument is perhaps the judgment of the Madras High Court in S. Hastimal vs.
Commissioner of Income Tax, Madras, (1963) 49 ITR 273. That was a case of
reassessment commenced in the year 1957 calling upon the assessee to explain
a credit in his favour in the books of account of the firm, made in the year
1947. The assessee explained that he had borrowed the amount from one V in

ITA 120/2012                                                        Page 6 of 13
order to provide the monies to the firm. The explanation was not accepted
right up to the Tribunal. Commenting on the order of the Tribunal, a Division
Bench of the Madras High Court observed as under:-

       "The Tribunal however has not chosen to accept the assessee's
       case on grounds which we are unable to appreciate. The
       Tribunal commenting upon the fact that the books of account of
       the assessee were kept only at Phalodi, that pakka and katcha
       roker of the assessee at Phalodi had not been produced, and
       that the necessary link between the borrowing of Vijayaram
       and the money brought to Coonoor had not been established.
       As stated already, with regard to the sum of `15,000, the
       assessee produced indisputable documentary evidence to show
       that the amount came out of his borrowing at Jodhpur whether
       it was from Vijayaram Ganeshdas or from Gowri Shankar
       Bagdy. The assessee has been able to point out a source for
       this sum of `15,000 and this cannot be refuted by a mere steady
       disability on the part of the department or the Tribunal. After
       the lapse of ten years the assessee should not be placed upon
       the rack and called upon to explain not merely the origin and
       source of his capital contribution but the origin of origin and
       the source of source as well."

The quoted observations will clearly explain the context and setting in which
they were made. They cannot, therefore, be understood as placing an embargo
on the power of the AO to ask the assessee to prove the creditworthiness of
the creditor/share holder for the purpose of Section 68. In an appropriate case,
if the facts and circumstances justify, it would be open to the AO to seek
information from the assessee as to the creditworthiness of the creditor/share
subscriber which may include information as to the sources of the
creditor/share   subscriber.    If   proving   the   creditworthiness    of       the
creditor/subscriber is now judicially accepted as one of the ingredients of the
onus cast on the assessee under Section 68, we do not see how proof of the
resources of the creditor/share subscriber can be completely excluded from the
sweep of the burden. It may not be required of the assessee to give in-depth

ITA 120/2012                                                       Page 7 of 13
particulars and details about the resources of the creditor or the share
subscriber, but the minimum required of him would be, in our opinion,
information that will prima face satisfy the AO about the creditworthiness.
Mere furnishing of the bank statements of the share subscribers without any
explanation for the deposits in the accounts may not meet the requirements of
Section 68. It may be necessary to know the business activities of the share-
subscribers in order to ascertain whether they are financially sound and are
able to purchase shares for substantial amounts; if they have borrowed monies
for making the investment, whether they were capable of repaying them
having regard to the nature of their business, volume of the business, etc.
These are very relevant, in our opinion, to establish the creditworthiness of the
investors.     It is for this purpose that it is necessary for the assessee, in
appropriate cases where the facts and surrounding circumstances justify, to
seek the assistance of the principal officer of the subscribing companies and
present him before the AO so that he will be in a position to explain in detail
the source from which the shares were subscribed. A curious aspect of the
matter which cannot be lost sight of is that the record reveals the assessee's
ability to procure the share applicant's bank statement. This spea ks volume
about its conduct, and belies the argument about its inability to ensure the
presence of such company's principal officers.

10.    It was further argued for the assessee that the investigation report on
the basis of which the assessment was reopened and which allegedly
contained information that the share subscriptions received by the assessee
were in fact accommodation entries was not put to the assessee for rebuttal in
the course of the reassessment proceedings and so the assessee did not have
any opportunity to rebut the findings therein. It is true that the assessment
order does not show that the investigation report was placed before the
assessee for rebuttal.    But the addition cannot be deleted merely on that

ITA 120/2012                                                       Page 8 of 13
ground.    The investigation report which permitted the reopening of the
assessment was only a starting point for the enquiry. It was not the sole basis
for making the addition. Based on the material contained in the investigation
wing's report, the AO had initiated an enquiry into the genuineness of the
share subscription. It is because of the suspicion justifiably based on the fact
that the investigation wing's report contained information as to the complicity
of the companies from whom the assessee received share subscription in the
racket of providing accommodation entries for commission, that the AO
wanted to enquire into the matter since it is from those companies that the
assessee had shown receipt of monies as share capital.              In making
assessments, including reassessments, the AO has to act on information or
material in his possession.    If he wants to make use of the material or
information, it is certainly necessary according to the principles of natural
justice that the information be put to the assessee for rebuttal. There is no
requirement that the report of the investigation wing itself should have been
put to the assessee because the report only contained material which
implicated the companies from whom the assessee claimed to have received
share monies in the business of providing accommodation entries for
commission. It was, therefore, necessary for the AO to have the information
verified because the assessee also has shown receipt of share monies from
those companies.    The AO had issued summons to the companies in an
attempt to verify their identity, existence and the genuineness of the
transaction. It was only when he failed to find the companies at the addresses
furnished, that he called upon the assessee to produce the principal officers of
those companies so that he can elicit the truth behind the assessee's claim. In
these circumstances, it was not necessary to have put the report of the
investigation wing to the assessee for rebuttal. The assessee can hardly raise
the issue, having itself failed to comply with the direction of the AO and

ITA 120/2012                                                       Page 9 of 13
having taken an unreasonable attitude towards the discharge of its onus. We,
therefore, hold that the non-furnishing of the report of the investigation wing
to the assessee was not fatal to the validity of the addition.

11.      It was then contended on behalf of the assessee with considerable
vehemence that there was nothing to show that the monies represented the
undisclosed income of the assessee brought in under the guise of share
subscription. It was submitted that it was incumbent upon the AO to show
that the monies emanated from the coffers of the assessee in order to sustain
the addition under Section 68.        We are afraid that these are untenable
propositions and were rejected at least on three occasions by the Supreme
Court.     In A. Govindarajulu Mudaliar v. Commissioner of Income Tax,
Hyderabad, (1958) 34 ITR 807 such a contention was rejected in the
following words:-

         "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 `80,000 and the
         other being receipt of `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 open 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

ITA 120/2012                                                       Page 10 of 13
       Income-tax Officer is entitled to draw the inference that the
       receipts 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."
Again in CIT v. M. Ganapathi Mudaliar, (1964) 53 ITR 623 the Supreme
Court held as follows: -

        "Once it is held that an amount credited in the account books
        of the assessee is the income of the assessee it is not necessary
        for the department to locate its exact source."
This principle was reiterated by the Supreme Court in Commissioner of
Income Tax v. Devi Prasad Vishwanath Prasad, (1969) 72 ITR 194 wherein
Shah, J. (as His Lordship then was) held as follows: -

       "The question again assumes that it was for the Income-tax
       Officer to indicate the source of the income before the income
       could be held taxable and unless he did so, the assessee was
       entitled to succeed. That is not, in our judgment, the correct
       legal position. Where there is an explained cash credit, it is
       open to the Income-tax Officer to hold that it is income of the
       assessee and no further burden lies on the Income-tax Officer
       to show that that income is from any particular source. It is for
       the assessee to prove that even if the cash credit represents
       income it is income from a source which has already been

The law as stated above has not undergone any change because of the
introduction of Section 68 in the Income Tax Act, 1961. As observed by
S.Ranganathan J in Yadu Hari Dalmia v. Commissioner of Income Tax, Delhi
(Central), (1980) 126 ITR 48, a decision of a Division Bench of this Court: -

       "It is well known that the whole catena of sections starting
       from s. 68 have been introduced into the taxing enactments step
       by step in order to plug loopholes and in order to place certain
       situations beyond doubt even though there were judicial

ITA 120/2012                                                        Page 11 of 13
       decisions covering some of the aspects. For example, even
       long prior to the introduction of s. 68 in the statute book, courts
       had held that where any amounts were found credited in the
       books of the assessee in the previous year and the assessee
       offered no explanation about the nature and source thereof or
       the explanation offered was, in the opinion of the ITO, not
       satisfactory, the sums so credited could be charged to income-
       tax as income of the assessee of a relevant previous year.
       Section 68 was inserted in the I.T. Act, 1961, only to provide
       statutory recognition to a principle which had been clearly
       adumbrated in judicial decisions."

Section 68 thus only codified the law as it existed before 1.4.1962 and did not
introduce any new principle or rule. Therefore the ratio laid down in the three
Supreme Court Judgments is equally applicable to the interpretation of Section
68 of the 1961 Act. We may also state that the learned counsel for the
assessee vaguely referred to some decisions taking the view that it was
necessary for the AO, before making the addition under Section 68, to prove
that the share application monies actually emanated from the assessee and
represented undisclosed income of the assessee. He, however, did not cite any
of those decisions. In any case the law having been laid down by the Supreme
Court in the judgments cited above, we do not think that there is any merit in
his submission.

12.    A perusal of the order of the Tribunal shows that it has gone on the
basis of the documents submitted by the assessee before the AO and has held
that in the light of those documents, it can be said that the assessee has
established the identity of the parties. It has further been observed that the
report of the investigation wing cannot conclusively prove that the assessee's
own monies were brought back in the form of share application money. As
noted in the earlier paragraph, it is not the burden of the AO to prove that
connection. There has been no examination by the Tribunal of the assessment

ITA 120/2012                                                         Page 12 of 13
proceedings in any detail in order to demonstrate that the assessee has
discharged its onus to prove not only the identity of the share applicants, but
also their creditworthiness and the genuineness of the transactions.         No
attempt was made by the Tribunal to scratch the surface and probe the
documentary evidence in some depth, in the light of the conduct of the
assessee and other surrounding circumstances in order to see whether the
assessee has discharged its onus under Section 68. With respect, it appears to
us that there has only been a mechanical reference to the case-law on the
subject without any serious appraisal of the facts and circumstances of the

13.     We, therefore, answer the substantial question of law framed by us in
the negative, in favour of the revenue and against the assessee. The appeal of
the revenue is allowed with no order as to costs.

                                                       (R.V. EASWAR)

                                                    (S. RAVINDRA BHAT)
JANUARY 7, 2013

ITA 120/2012                                                      Page 13 of 13
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