$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ INCOME TAX APPEAL NO. 1018/2011
Reserved on: 14th August, 2013
% Date of Decision : 22nd November, 2013
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. Sanjeev Sabharwal, Sr. Standing Counsel.
versus
NR PORTFOLIO PVT LTD. ..... Respondent
Through Dr. Rakesh Gupta and Mr. Rishabh Kapoor,
Advocates.
+ INCOME TAX APPEAL NO. 1019/2011
COMMISSIONER OF INCOME TAX ..... Appellant
Through Mr. Sanjeev Sabharwal, Sr. Standing Counsel.
versus
NR PORTFOLIO PVT LTD. ..... Respondent
Through Dr. Rakesh Gupta and Mr. RishabhKapoor,
Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J.
These two appeals by the Revenue relate to a common assessee
i.e., N.R. Portfolio Pvt. Ltd. and the questions raised relating to
assessment years 2002-03 and 2003-04 are similar. They pertain to the
additions made by the Assessing Officer under Section 68 of the
Income Tax Act, 1961 (Act, for short) of Rs.1,2,34,100/- and
ITA Nos. 1018/2011 & 1019/2011 Page 1 of 24
Rs.75,60,200/- for the assessment years 2002-03 and 2003-04 on
account of share application money.
2. The contention of the Revenue is that the Income Tax Appellate
Tribunal (tribunal) has dealt with the issue superficially and has failed
to notice the money laundering indulged into and the clandestine
manner in which unaccounted and black money had been brought into
books by this dubious method. It is contended that the decision in the
case of CIT Vs. Lovely Exports Ltd. 299 ITR 268 (Del) is being
misunderstood and misinterpreted resulting in a spate of matters
wherein assessees have adopted this surreptitious method to convert
unaccounted for money into share application money.
3. Revenue has relied upon the decision of this Court in the case of
CIT vs. Nova Promoters and Finlease (P) Ltd. [2012] 342 ITR 169
(Del).
4. By order dated 13th August, 2013, the following substantial
question of law was framed in the two appeals:-
"Whether the Income Tax Appellate Tribunal
was right in deleting the additions of
Rs.63,80,100/- and Rs.75,60,200/- in respect of
Assessment Years 2002-03 and 2003-04 under
Section 68 of the Income Tax Act, 1961 and
whether the decision of the Tribunal is perverse?"
5. The respondent-assessee is a private limited company and for
the assessment years 2002-03 and 2003-04 had filed returns declaring
income of Rs.11,566/- and 18,720/-, respectively. These returns were
processed under Section 143(1) of the Act. Subsequently,
reassessment proceedings were initiated under Section 147/148 of the
Act on the basis of information received from the Investigation Wing
that the assessee was one of the beneficiaries, who had procured share
ITA Nos. 1018/2011 & 1019/2011 Page 2 of 24
application money from entry providers. Assessment proceedings
under Section 147/148 of the Act in the two years were initiated by
issue of notices on 28th November, 2006. The notices were received
back unserved and subsequently were served by affixture at the last
known address i.e., the address given in the returns. The assessee,
however, did not appear in response to the said notices. The Assessing
Officer thereupon on 8th October, 2007 issued show cause notice under
Section 144 read with Section 147 of the Act, which was sent through
Speed Post, but was returned unserved with the remark "no such firm".
Respondent-assessee again was served through affixture on 25th
October, 2007. On examining the return for the assessment year 2004-
05, it was noticed that M/s Prakash K. Prakash Chartered Accountants
had certified the accounts of the respondent-assessee. Office of M/s
Prakash K. Prakash Chartered Accountants was contacted and
thereupon they filed their power of attorney on 1st November, 2007.
The said Chartered Accountants also filed a letter that the respondent
company had not received any notice and had been regularly filing
their returns mentioning the correct address and after that there was
change in address, the same was informed. Along with this letter, no
detail of new address was filed. They had not mentioned the
present/current address.
6. Another show cause notice was issued and sent at the last known
address of the respondent-assessee and the address of the Chartered
Accountants fixing the hearing on 4th December, 2007. The letter
referred to the notice under Section 147/148 of the Act, show cause
notice under Section 144 dated 8th October, 2007 and the fact that the
reasons could be provided only after return of income was filed but yet
in the interest of justice and for the purpose of proceedings it was
ITA Nos. 1018/2011 & 1019/2011 Page 3 of 24
stated that as per information available, the share capital was received
during the years from the persons who had been identified as entry
operators. Thus, the respondent-assessee had received accommodation
entries which were likely to be hit under Section 68 as unexplained
cash credit. Details and manner in which entries were made in the
books of account and the clandestine manner of circulation, was stated
in detail in the show cause notice.
7. On 4th December, 2007, no one appeared at the time of hearing.
Subsequently, a request for adjournment was received by way of
courier from M/s Prakash K. Prakash Chartered Accountants and they
were allowed time up to 10th December, 2007, but on the said date
also, no one appeared and no written request was received.
Accordingly, ex-parte or best judgment assessment orders both dated
17th December, 2007 were passed for the two assessment years.We
shall be referring to the details/contents of the assessment orders
subsequently.
8. The respondent-assessee, however, preferred appeals and
substantially succeeded on merits before the Commissioner of Income
Tax (Appeals) but did not succeed in their challenge to reopening
under Section 147/148 of the Act or on the question of service of
notice.
9. Two cross appeals were preferred before the tribunal by the
Revenue and the respondent-assessee for the two assessment years but
the same have been dismissed by the impugned order dated 29 th
October, 2010. The reasoning given by the tribunal is that the
respondent-assessee had furnished Permanent Account Number (PAN)
of the share applicants except with regard to the share capital of
Rs.4,50,000/- and before the Commissioner (Appeals), the assessee
ITA Nos. 1018/2011 & 1019/2011 Page 4 of 24
had also submitted various details and documents to establish identity
of the investors/share applicants. The impugned order in paragraph 6
refers to and quotes several paragraphs from the order passed by the
Commissioner (Appeals) and in paragraph 7 refers to the observations
made by the Commissioner (Appeals). Thereafter, in paragraph 8 it is
recorded that the tribunal had gone through various reasons and
principles on which Commissioner (Appeals) had deleted the addition.
Commissioner (Appeals) had given a finding that verification of PAN
was made and found to be correct except with regard to the share
application money of Rs.4,50,000/- and, therefore, in the light of the
judgments of Delhi High Court in CIT v. Lovely Exports Private
Ltd.[2008] 299 ITR 268, Winstral Petrochemicals Pvt. Ltd. [2011] 330
ITR 603 and CIT Vs. Dwarkadhish Investment (P) Ltd. [2011] 330
ITR 298 and other cases, addition was not justified and not in
accordance with law.
10. Cross objections filed by the assessee were not pressed and in
paragraph 20 of the impugned order it is specifically recorded that the
validity of notice under Section 148 was not argued by the respondent-
assessee and it was fairly accepted that the assessees appeals had no
merit. The tribunal thereafter held that they had gone through the order
of the Commissioner (Appeals) and the findings recorded on the said
issue were right. At this stage, we would like to reproduce the
findings recorded by the Commissioner (Appeals) on this issue:-
"3.6.2 Similar is the position with regard to service of
show- cause notice for completing the impugned
assessment u/s 144 of the Act as it is an established fact
that in absence of any intimation with regard to change
of registered office address from the appellant company,
the assessing officer has left with very little option
except getting the same served through affixture. It is
beyond doubt that the assessing officer took pains to
locate the authorized representative M/s Prakash K.
ITA Nos. 1018/2011 & 1019/2011 Page 5 of 24
Prakash, CAs and served show- cause notice on them
meaning thereby that the appellant was fully in known of
the things that the assessment proceedings are going on
and it is required to file information with regard to the
various points on the basis which the case was reopened
u/s 147/148 of the Act. It is matter of record that after
the authorized AR could be located by the assessing
officer, the AR filed a letter dated ,,nil along with POA
dated 1-11-2007 but still the appellant chose not to
intimate the address to the assessing officer except
vaguely stating that the Department have been informed
about the change of address from time to time. In these
circumstances, I do not see any justification on the part
of the appellant to either raise the issue of non- service
of notices or improper procedure of substituted service
and accordingly, I hold that the impugned assessment is
in order.
The contentions of the appellant company that the
impugned assessment has been framed without looking
into the contentions of the appellant has also not found
favour with me as despite knowing fully well that the
assessment shall be time barred as on 31-12-2007, the
AR chose to sent the details through post which were
received by the assessing officer on 18-12-2007 whereas
the impugned order us passed on 17-12-2008. Otherwise
too, during the present proceedings, the assessing officer
submitted a remand report wherein the appellant has not
been given an opportunity to put forth its view points
and on which rejoinder has also been filed which means
that the principle of natural justice has been adhered to
and hence contention of the Ld. AR needs rejection."
11. Other findings recorded by the Commissioner (Appeals) refers
to the remand report which was called from the Assessing Officer
stating that notice under Section 148 was sent at the last known address
i.e., F-280, New Rajinder Nagar, New Delhi, which was also
mentioned in the return of income, but was received unserved with the
remark "no such assessee", but subsequently served through affixtur e
at A-46, Mohan Co-op. Industrial Estate, Mathura Road, New Delhi,
the address which was shown in the return of income for the
assessment year 2004-05. The Assessing Officer in the remand report
ITA Nos. 1018/2011 & 1019/2011 Page 6 of 24
has mentioned that the assessees registered office was located at A-46,
Mohan Co-op. Industrial Estate, Mathura Road, New Delhi on the date
of affixture of notice. Subsequently, on 18th April, 2007, they shifted
their registered office to A-15, B-1 Extension, Mohan Co-op. Industrial
Estate, Mathura Road, New Delhi. We have already quoted the
observation of the Assessing Officer after M/s Prakash K. Prakash
Chartered Accountants were served and they in their letter dated 1 st
November, 2007 had not furnished the new address, though the
respondent-assessee have stated that they had shifted their registered
office address from A-46, Mohan Co-op. Industrial Estate, Mathura
Road, New Delhi to A-15, B-1 Extension, Mohan Co-op. Industrial
Estate, Mathura Road, New Delhi. The respondent-assessee had also
stated that they had "misplaced" the intimation filed with the
department on change of address. The Commissioner (Appeals) has
recorded a finding that the respondent-assessee had wrongly claimed
that they had informed the department about change of their registered
office address, as not even a single intimation was presented before the
Assessing Officer or him.
12. The contention of the Ld. AR for the appellant, that they had
intimated change of address to Registrar of Companies, and the
Assessing Officer should have ascertained the said address, it was
rightly observed could not cut any ice in the facts of the present case.
It was the obligation and responsibility of the respondent- assessee to
intimate change of address to the Assessing Officer as no return with
the new address was furnished or even filed. Further, the conduct of
the respondent, when they did not give the latest address in spite of the
fact that M/s Prakash K. Prakash, Chartered Accountants were served
and informed about the proceedings, speaks for itself. Their conduct in
ITA Nos. 1018/2011 & 1019/2011 Page 7 of 24
not responding and appearing before the Assessing Officer was
adversely commented upon by the Commissioner (Appeals) and the
said finding has not been disturbed by the tribunal. However, this fact
and the conduct of the respondent before the Assessing Officer was not
noticed and given adequate reference while dealing with the question
of deletion of addition on merits.
13. The Assessing Officer is both an investigator and an adjudicator.
When a fact is alleged and stated before the Assessing Officer by an
assessee, he must and should examine and verify, when in doubt or
when the assertion is debatable. Normally a factual assertion made
should be accepted by the Assessing Officer unless for justification and
reasons the assessing officer feels that he needs/requires a deeper and
detailed verification of the facts alleged. The assessee in such
circumstances should cooperate and furnish papers, details and
particulars. This may entail issue of notices to third parties to furnish
and supply information or confirm facts or even attend as witnesses.
The Assessing Officer can also refer to incriminating material or
evidence available with him and call upon the assessee to file their
response. We cannot lay down or state a general or universal procedure
or method which should be adopted by the assessing officer when
verification of facts is required. The manner and mode of conducting
assessment proceedings has to be left to the discretion of the assessing
officer, and the same should be just, fair and should not cause any
harassment to the assessee or third persons from whom confirmation or
verification is required. The verification and investigation should be
done with the least amount of intrusion, inconvenience or harassment
especially to third parties, who may have entered into transactions with
the assessee. The ultimate finding of the assessing officer should
ITA Nos. 1018/2011 & 1019/2011 Page 8 of 24
reflect due application of mind on the relevant facts and the decision
should take into consideration the entire material, which is germane
and which should not be ignored and exclude that which is irrelevant.
Certain facts or aspects may be neutral and should be noted. These
should not be ignored but they cannot become the bedrock or
substratum of the conclusion. The provisions of Evidence Act are not
applicable, but the assessing officer being a quasi judicial authority,
must take care and caution to ensure that the decision is reasonable and
satisfies the canons of equity, fairness and justice. The evidence
should be impartially and objectively analyzed to ensure that the
adverse findings against the assessee when recorded are adequately and
duly supported by material and evidence and can withstand the
challenge in appellate proceedings. Principle of preponderance of
probabilities applies. What is stated and the said standard, equally
apply to the Tribunal and indeed this Court. The reasoning and the
grounds given in any decision or pronouncement while dealing with
the contentions and issues should reflect application of mind on the
relevant aspects.
14. When an assessee does not produce evidence or tries to avoid
appearance before the Assessing Officer, it necessarily creates
difficulties and prevents ascertainment of true and correct facts as the
Assessing officer is denied advantage of the contention or factual
assertion by the assessee before him. In case an assessee deliberately
and intentionally fails to produce evidence before the Assessing
Officer with the desire to prevent inquiry or investigation, an adverse
view should be taken. We shall now come to the merits and the
findings recorded by the Commissioner (Appeals), which as noted
above, have been simply affirmed by the tribunal without verifying or
ITA Nos. 1018/2011 & 1019/2011 Page 9 of 24
referring to the facts.
15. In the present case, the undisputed position is that the respondent
had received share application money of Rs.68,30,100/- and
Rs.75,60,200/- in the Assessment Years 2002-03 and 2003-04
respectively. For the Assessment Year 2002-03, the Assessing Officer
had taken the share application money received in the year as
Rs.1,20,34,100/-, which included Rs.32,80,000/- and Rs.19,24,000/-
related to previous years or was the opening share capital. As noted
above, addition of Rs.4,50,000/- has been sustained in the Assessment
Year 2002-03. Thus, the Commissioner (Appeals) and the tribunal
have deleted additions of Rs.63,80,100/- and Rs.75,60,200/- in the two
assessment years. Before the Commissioner (Appeals), the
respondent-assessee had furnished name of the share applicants which
mostly consisted of companies. It was accordingly submitted that the
respondent had been able to establish identity of the shareholders, their
creditworthiness and also genuineness of the transaction as the
payments were received through banking channels. Thus, the
respondent had discharged the primary onus and there was no evidence
or material to show that unaccounted for money was recycled and
introduced in the books as share application money. The
Commissioner (Appeals) has recorded that verification of PAN
numbers was done in the present case and was found to be correct
except in the case of Technochem Associates Private Limited and M/s
Yogesh Gupta from whom share application money of Rs.1,50,000/-
each was raised but no PAN details were furnished. Regarding Ganga
Infin Private Limited, PAN number furnished was found to be
incorrect and accordingly addition of Rs.1,50,000/- was justified. With
regard to others, the Commissioner (Appeals) has recorded that the
assessing officer had not affected inquiries to bring on record and
ITA Nos. 1018/2011 & 1019/2011 Page 10 of 24
establish that the other parties had given accommodation entries and
the money, i.e., the share application money was assessees own
undisclosed income. It was further recorded that the respondent had
not been provided an opportunity to cross-examine the so-called entry
providers and the assessing officer simply relied upon the investigation
reports/information provided by the Information Wing of the
Department.
16. The aforesaid finding of the Commissioner (Appeals), which
have been affirmed by the tribunal, ignores the finding of the
Assessing Officer that the Assessee had failed to attend the assessment
proceedings,explain and put forward their stand and stance. To this
extent, there is contradiction in the order passed by the Commissioner
(Appeals), which was ignored and not taken note of by the tribunal.
17. The Commissioner (Appeals) thereafter proceeded on the basis
that even if the subscribers to the share capital were not genuine, the
amount received cannot be regarded as undisclosed income of the
respondent-assessee. Reference was made to the decision of the Delhi
High Court in Lovely Exports Private Limited and Divine Leasing and
Finance Limited (supra). Reference was made to some decision of the
tribunal. It would be here relevant to highlight and note what was
recorded by the Assessing Officer in the assessment order. The
Assessing Officer has mentioned that the subscribers belonged to
Mahesh Garg group of entry operators, which included 51 companies/
persons, who were operating more than 100 bank accounts in different
banks/branches. Their modus operandi was to provide accommodation
entries to different persons/beneficiaries. Reference was made to the
bank statements of the entry operators that showed substantial deposit
of cash in the bank accounts and subsequent issue of cheques to the
ITA Nos. 1018/2011 & 1019/2011 Page 11 of 24
beneficiaries. This was the only activity of these companies/persons.
The said companies/persons were not carrying on any other business
activity i.e., manufacturing or trading activity. The assessment order
has quoted and referred to the bank account statements in support of
the said assertion and finding. The Assessing Officer has mentioned
that the respondent-assessee was a private limited company, closely
held and there should be proximate relationship between the promoter
directors and the shareholders. Closely held companies usually receive
share capital subscriptions from friends, relatives and not from
unrelated/ unknown third parties/ general public. There was no
relationship or connection between the subscribers and the respondent-
assessee, for subscribers to become investors. Assessment order
records that to establish identity and availability of funds, it was
necessary to have at least some idea if not complete details of the
actual business undertaken and engaged in by the respondent-assessee
and explained how and why these unrelated and unconnected third
parties decided to become investors in the absence of public issue or
advertisement.
18. In the remand report, the Assessing Officer referred to the
provisions of Section 68 of the Act and their applicability. The word
"identity" as defined, it was observed meant the condition or fact of a
person or thing being that specified unique person or thing. The
identification of the person would include the place of work, the staff,
the fact that it was actually carrying on business and recognition of the
said company in the eyes of public. Merely producing PAN number or
assessment particulars did not establish the identity of the person. The
actual and true identity of the person or a company was the business
undertaken by them. This according to us is the correct and true legal
ITA Nos. 1018/2011 & 1019/2011 Page 12 of 24
position, as identity, creditworthiness and genuineness have to be
established. PAN numbers are allotted on the basis of applications
without actual de facto verification of the identity or ascertaining
active nature of business activity. PAN is a number which is allotted
and helps the Revenue keep track of the transactions. PAN number is
relevant but cannot be blindly and without considering surrounding
circumstances treated as sufficient to discharge the onus, even when
payment is through bank account.
19. On the question of creditworthiness and genuineness, it was
highlighted that the money no doubt was received through banking
channels, but did not reflect actual genuine business activity. The
share subscribers did not have their own profit making apparatus and
were not involved in business activity. They merely rotated money,
which was coming through the bank accounts, which means deposits
by way of cash and issue of cheques. The bank accounts, therefore,
did not reflect their creditworthiness or even genuineness of the
transaction. The beneficiaries, including the respondent-assessee, did
not give any share-dividend or interest to the said entry
operators/subscribers. The profit motive normal in case of investment,
was entirely absent. In the present case, no profit or dividend was
declared on the shares. Any person, who would invest money or give
loan would certainly seek return or income as consideration. These
facts are not adverted to and as noticed below are true and correct.
They are undoubtedly relevant and material facts for ascertaining
creditworthiness and genuineness of the transactions.
20. Vicky Chaurasia, additional director of the respondent company
was asked to appear before the Assessing Officer pursuant to the letter
by the Commissioner (Appeals) directing the Assessing Officer to go
ITA Nos. 1018/2011 & 1019/2011 Page 13 of 24
through the submissions and submit a report after carrying out
necessary inquiries. He was asked to produce books of accounts and
evidence in support. By letter dated 12th October, 2009, the
respondent-assessee was asked to furnish details/information. These
included details of dividend paid to the shareholders and to show and
establish creditworthiness of the parties. Statement of Vicky Chaurasia
recorded under Section 131 of the Act dated 5th November, 2009 has
been placed on record by the respondent in ITA No. 1019/2011. He
has stated that he along with Sandeep Chaurasia had been directors of
the company since June, 2003 and the company was engaged in
investment and finance, but he could not give details of the subscribed
share capital of Rs.2 crores as it was stated that this was before he
became the director. He could not also give details of how share
capital got subscribed in a private limited company. Specific question
was put to him regarding verification of the shareholders as the
summons issued to them had by and large remained uncomplied for
want of correct addresses. In response, he had stated that the company
had supplied addresses of shareholders as per share application forms
and in the absence of dividend or any form of return on the investment,
the company was not in a position to call the subscribers for cross-
examination. The company had not received any letter for change of
address etc. Vicky Chaurasia stated that according to him the
subscribers, who were allotted shares, continued and had not ceased to
be shareholders. With regard to the past directors, he had stated that
they had resigned and he was not in a position to produce the same. In
the remand report, it was specifically mentioned that books of accounts
were neither produced on 5th November, 2009 nor during the course of
remand proceedings.
ITA Nos. 1018/2011 & 1019/2011 Page 14 of 24
21. The Assessing Officer had issued notices by speed post to 31
parties as per addresses given by the respondent-assessee requiring
them to appear for personal deposition, produce books of accounts with
complete vouchers and bills and statement of bank accounts for the
relevant period. In respect of 22 parties, the notice summons were
received back with postal remarks "No such firm/company/person" or
a few "Left without address" and a very few "Refused to accept".
Remaining 9 parties neither attended and filed any application for
adjournments nor filed details. Thus, it was observed that the identities
had been only proved on paper, i.e., in form of neutral documents like
PAN number, ITR, Registrar of Companies registration, but without
full details as to the actual business activities undertaken by these
companies, the reason why these companies had made investment in a
private limited company etc. This coupled with the fact that there was
cash deposits in their bank accounts and withdrawals were highlighted.
22. In the rejoinder filed to the remand report, it was stated that the
share applicants were required to appear in person on 17 th November,
2008 in response to summons under Section 131 dated 23 rd October,
2009. Subsequently, fresh summons dated 30th October, 2009 were
issued requiring compliance by 7th November, 2009, but the Assessing
Officer had sent the remand report on 6th November, 2009 without
waiting for compliance of summons. The said submission is without
merit as we notice that the order of the Commissioner (Appeals) is
dated 1st October, 2010, i.e., much after the date 17th November, 2009
and 7th November, 2009. A wrong year was mentioned in the earlier
summons dated 23rd October, 2009. It was only a typographical error
and a response or reply from the shareholder would have been
sufficient. Further, in the case of 22 parties, the summons were
ITA Nos. 1018/2011 & 1019/2011 Page 15 of 24
received back undelivered/unserved.
23. The contention that the Revenue must have evidence to show
circulation of money from the assessee to the third party is fallacious
and has been repeatedly rejected, even when Section 68 of the Act was
not in the statute. In A. Govindarajulu Mudaliar v. CIT [1958] 34
ITR 807, Supreme Court observed that it was not the duty of the
Revenue to adduce evidence to show from what source, income was
derived and why it should be treated as concealed income. The
assessee must prove satisfactorily the source and nature of cash
received during the accounting year. Similarly observations were
made in CIT vs. M. Ganapathi Mudaliar [1964] 53 ITR 623 (SC),
inter alia holding that it was not necessary for the Revenue to locate the
exact source. This principle was reiterated in CIT vs. Devi Prasad
Vishwanath Prasad [1969] 72 ITR 194 (SC), wherein the contention
that the Assessing Officer should indicate the source of income before
it was taxable, was described as an incorrect legal position. Thus when
there is an unexplained cash credit, it is open to the Assessing Officer
to hold that it was income of the assessee and no further burden lies on
him to show the source. In Yadu Hari Dalmia vs. CIT [1980] 126 ITR
48, a Division Bench of Delhi High Court has observed:-
"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 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,
ITA Nos. 1018/2011 & 1019/2011 Page 16 of 24
1961, only to provide statutory recognition to a principle
which had been clearly adumbrated in judicial decisions."
24. We are conscious of the doctrine of ,,source of source or ,,origin
of origin and also possible difficulty which an assessee may be faced
with when asked to establish unimpeachable creditworthiness of the
share subscribers. But this aspect has to be decided on factual matrix
of each case and strict or stringent test may not be applied to arms
length angel investors or normal public issues. Doctrine of ,,source of
source or ,,origin of origin cannot be applied universally, without
reference to the factual matrix and facts of each case. The said test in
case of normal business transactions may be light and not vigorous.
The said doctrine is applied when there is evidence to show that
assessee may not be aware, could not have knowledge or was
unconcerned as to the source of money paid or belonging to the third
party. This may be due to the nature and character of the
commercial/business transaction relationship between the parties,
statutory postulates etc. However, when there is surrounding evidence
and material manifesting and revealing involvement of the assessee in
the "transaction" and that it was not entirely an arms length
transaction, resort or reliance to the said doctrine may be counter-
productive and contrary to equity and justice. The doctrine is not an
eldritch or a camouflage to circulate ill gotten and unrecorded money.
Without being oblivious to the constraints of the assessee, an objective
and fair approach/determination is required. Thus, no assessee should
be harassed and harried but any dishonest façade and smokescreens
which masquerade as pretence should be exposed and not accepted.
25. In Lovely Exports (supra), a Division Bench examined two earlier
decisions of this court in CIT vs. Steller Investment Ltd. [1991] 192
ITA Nos. 1018/2011 & 1019/2011 Page 17 of 24
ITR 287 (Delhi) and CIT vs. Sophia finance Ltd. [1994] 205 ITR 98
(FB) (Delhi). The decision in Steller Investment's case (supra) was
affirmed by the Supreme court but, by observing that the conclusion
was on the facts and no interference was called for. Lovely Exports
(supra) was a case of public limited company where shares were
subscribed by public and it was accordingly observed:-
"This reasoning must apply a fortiori to large scale
subscriptions to the shares of a public Company where
the latter may have no material other than the application
forms and bank transaction details to give some
indication of the identity of these subscribers. It may not
apply in circumstances where the shares are allotted
directly by the Company/assessee or to creditors of the
assessee. This is why this court has adopted a very strict
approach to the burden being laid almost entirely on an
assessee which receives a gift."
26. Thereafter reference was made to Full Bench decision in the
case of Sophia Finance Ltd.'s case (supra) wherein it has been
observed that if the shareholders exists then, "possibly", no further
enquiry needs to be made and that the Full Bench had not reflected
upon the question of whether the burden of proof rested entirely on the
assessee and at which point this burden justifiably shifted to the
assessing officer. The Full Bench has observed that they were not
deciding as to on whom and to what extent was the onus to show that
the amount credited in the books of accounts was share capital and
when the onus was discharged, was not decided. The standard of proof
might be rigorous and stringent and was dependent upon nature of the
transaction and where there was evidence that the source of investment
cannot be manipulated, it was material. Similarly, it was observed that
assessee could scarcely be heard to say that he did not know the
particulars of a donor in case of a gift. It was held:-
ITA Nos. 1018/2011 & 1019/2011 Page 18 of 24
"There cannot be two opinions on the aspect that the
pernicious practice of conversion of unaccounted money
through the masquerade or channel of investment in the
share capital of a company must be firmly excoriated by
the Revenue. Equally, where the preponderance of
evidence indicates absence of culpability and complexity
of the assessee it should not be harassed by the
Revenuess 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 Assessing Officer 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 Income Tax Act. The burden
of proof can seldom be discharged to the hilt by the
assessee; 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 Assessing
Officer 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.....................
xxxx
..........Once material to prove these ingredients are
produced it is for the Assessing Officer to find out as to
whether, on these materials, the assessed has succeeded
in establishing the ingredients mentioned above. The
Assessing Officer `lift the veil and enquire into the real
nature of the transaction. C.I.T. v. Ruby Traders and
Exporters Ltd. : [2003]263ITR300(Cal) , C.I.T.
v. Nivedan Vanijya Niyojan Ltd. [2003]263ITR623(Cal)
and C.I.T. v. Kundan Investment Ltd.
[2003]263ITR626(Cal.) are the other three.
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 assessee 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
ITA Nos. 1018/2011 & 1019/2011 Page 19 of 24
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 assessee nor
should the Assessing Officer take such repudiation at
face value and construe it, without more, against the
assessee; and (7) The Assessing Officer is duty-bound to
investigate the creditworthiness of the creditor/
subscriber the genuineness of the transaction and the
veracity of the repudiation."
27. The decision in the case of Lovely Exports (supra) was
considered in CIT vs. Nova Promoters and Finlease (P) Ltd. (supra)
and it was elucidated:-
"38. The ratio of a decision is to be understood and
appreciated in the background of the facts of that case. So
understood, it will be seen that where the complete
particulars of the share applicants such as their names and
addresses, income tax file numbers, their
creditworthiness, share application forms and share
holders register, share transfer register etc. are furnished
to the Assessing Officer and the Assessing Officer has
not conducted any enquiry into the same or has no
material in his possession to show that those particulars
are false and cannot be acted upon, then no addition can
be made in the hands of the company under sec.68 and
the remedy open to the revenue is to go after the share
applicants in accordance with law. We are afraid that we
cannot apply the ratio to a case, such as the present one,
where the Assessing Officer is in possession of material
that discredits and impeaches the particulars furnished by
the assessee and also establishes the link between self-
confessed "accommodation entry providers", whose
business it is to help assessees bring into their books of
account their unaccounted monies through the medium of
share subscription, and the assessee. The ratio is
inapplicable to a case, again such as the present one,
where the involvement of the assessee in such modus
operandi is clearly indicated by valid material made
available to the Assessing Officer as a result of
investigations carried out by the revenue authorities into
the activities of such "entry providers". The existence
ITA Nos. 1018/2011 & 1019/2011 Page 20 of 24
with the Assessing Officer of material showing that the
share subscriptions were collected as part of a pre-
meditated plan a smokescreen conceived and
executed with the connivance or involvement of the
assessee excludes the applicability of the ratio. In our
understanding, the ratio is attracted to a case where it is a
simple question of whether the assessee has discharged
the burden placed upon him under sec.68 to prove and
establish the identity and creditworthiness of the share
applicant and the genuineness of the transaction. In such
a case, the Assessing Officer cannot sit back with folded
hands till the assessee exhausts all the evidence or
material in his possession and then come forward to
merely reject the same, without carrying out any
verification or enquiry into the material placed before
him. The case before us does not fall under this category
and it would be a travesty of truth and justice to express a
view to the contrary."
28. In Nova Promoters & Finlease (supra), it was held that in view
of the link between the entry providers and incriminating evidence,
mere filing of PAN number, acknowledgement of income tax returns
of the entry provider, bank account statements etc. was not sufficient to
discharge the onus.
29. In CIT v. Nipun Builders and Developers [2013] 350 ITR 407
(Del) , this principle has been reiterated holding that the assessee and
the Assessing Officer have to adopt a reasonable approach and when
the initial onus on the assessee would stand discharged depends upon
facts and circumstances of each case. In case of private limited
companies, generally persons known to directors or shareholders,
directly or indirectly, buy or subscribe to shares. Upon receipt of
money, the share subscribers do not lose touch and become
incommunicado. Call monies, dividends, warrants etc. have to be sent
and the relationship is/was a continuing one. In such cases, therefore,
the assessee cannot simply furnish details and remain quiet even when
summons issued to shareholders under Section 131 return unserved
ITA Nos. 1018/2011 & 1019/2011 Page 21 of 24
and uncomplied. This approach would be unreasonable as a general
proposition as the assessee cannot plead that they had received money,
but could do nothing more and it was for the assessing officer to
enforce share holders attendance. Some cases might require or justify
visit by the Inspector to ascertain whether the shareholders/subscribers
were functioning or available at the addresses, but it would be
incorrect to state that the assessing officer should get the addresses
from Registrar of Companies website or search for the addresses of
shareholders and communicate with them. Similarly, creditworthiness
was not proved by mere issue of a cheque or by furnishing a copy of
statement of bank account. Circumstances might require that there
should be some evidence of positive nature to show that the said
subscribers had made a genuine investment, acted as angel investors,
after due diligence or for personal reasons. Thus, finding or a
conclusion must be practicable, pragmatic and might in a given case
take into account that the assessee might find it difficult to
unimpeachably establish creditworthiness of the shareholders.
30. What we perceive and regard as correct position of law is that
the court or tribunal should be convinced about the identity,
creditworthiness and genuineness of the transaction. The onus to prove
the three factum is on the assessee as the facts are within the assessees
knowledge. Mere production of incorporation details, PAN Nos. or the
fact that third persons or company had filed income tax details in case
of a private limited company may not be sufficient when surrounding
and attending facts predicate a cover up. These facts indicate and
reflect proper paper work or documentation but genuineness,
creditworthiness, identity are deeper and obtrusive. Companies no
doubt are artificial or juristic persons but they are soulless and are
ITA Nos. 1018/2011 & 1019/2011 Page 22 of 24
dependent upon the individuals behind them who run and manage the
said companies. It is the persons behind the company who take the
decisions, controls and manage them.
31. The respondent herein is a Private Limited Company. It is not
the case of the respondent that the Directors or persons behind the
companies making the investment in their shares were related or
known to them. It is highly implausible that an unknown person had
made substantial investment in a private limited company to the tune of
Rs.63,80,100/- and Rs.75,60,200/- in two consecutive assessment years
2002-03 and 2003-04 respectively without adequately protecting the
investment and ensuring appropriate returns. Other than the share
application forms, no other agreement between the respondent and
third companies had been placed on record. The persons behind these
companies were not produced by the respondent. On the other hand
respondent adopted prevaricate and non- cooperation attitude before
the Assessing Officer once they came to know about the directed
enquiry and the investigation being made. Evasive and transient
approach before the Assessing Officer is limpid and perspicuous.
Identity, creditworthiness or genuineness of the transaction is not
established by merely showing that the transaction was through
banking channels or by account payee instrument. It may, as in the
present case required entail a deeper scrutiny. It would be incorrect to
state that the onus to prove the genuineness of the transaction and
creditworthiness of the creditor stands discharged in all cases if
payment is made through banking channels. Whether or not onus is
discharged depends upon facts of each case. It depends on whether the
two parties are related or known to each; the manner or mode by which
the parties approached each other, whether the transaction was entered
ITA Nos. 1018/2011 & 1019/2011 Page 23 of 24
into through written documentation to protect the investment, whether
the investor professes and was an angel investor, the quantum of
money, creditworthiness of the recipient, the object and purpose for
which payment/investment was made etc. These facts are basically and
primarily in knowledge of the assessee and it is difficult for revenue to
prove and establish the negative. Certificate of incorporation of
company, payment by banking channel, etc. cannot in all cases
tantamount to satisfactory discharge of onus. The facts of the present
case noticed above speak and are obvious. What is unmistakably
visible and apparent, cannot be spurred by formal but unreliable pale
evidence ignoring the patent and what is plain and writ large.
32. In view of the aforesaid discussion the substantial question of
law framed in the two appeals is answered in favour of Appellant-
Revenue and against the Respondent- assessee. The appeal is
accordingly allowed to the extent indicated above. The Appellant is
also entitled to costs which is assessed at Rs.20,000/-
(SANJIV KHANNA)
JUDGE
(SANJEEV SACHDEVA)
JUDGE
NOVEMBER 22nd, 2013
NA/kkb
ITA Nos. 1018/2011 & 1019/2011 Page 24 of 24
|
