* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 18th December, 2012
% Date of Decision: 28th February 2013
+ ITA 263/2012
CIT ..... Appellant
Through: Ms. Suruchi Aggarwal, Sr. Standing
Counsel.
versus
TITAN SECURITIES LTD. ..... Respondent
Through: Mr. S. Krishnan, Advocate.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.
This is an appeal by the revenue under section 260A of the Income Tax
Act, 1961 (hereinafter referred to as ,,the said Act). It is directed against the
order dated 14.06.2011 passed by the Income Tax Appellate Tribunal
(,,Tribunal, for short) in ITA No.2654/Del/2009 for the assessment year
2001-02. The following questions, stated to be the substantial questions of
law have been proposed by the revenue: -
"I. Whether Honble ITAT was correct in deleting the
addition of Share Application Money u/s 68 of Income Tax
Act, 1961 when the Assessing Officer had comprehensively
proved that the applicants had no creditworthiness and their
genuineness & identity was also doubtful?
II. In light of cash deposits in accounts of applicants, their
own admittance of providing accommodation entries & in light
ITA 263/2012 Page 1 of 15
of observation in Para 13 of Honble High Court in case of
Oasis Hospitalities whether Honble ITAT was correct in
holding that genuineness of the transactions was established?
III. Whether in view of report of Investigation Wing, the
onus of assessee gets discharged in normal course by merely
paper documents like PAN card, ROC documents, IT returns
etc.?
IV. Whether on the facts and circumstances of the case,
findings of the ITAT are perverse?"
2. The assessee is a company. We are concerned with the assessment
year 2001-02. A return of income was filed declaring income of `26,440/-
which was first accepted under section 143(1). The return was later taken up
for scrutiny and an assessment order under section 143(3) was passed on
30.03.2002 on an income of `41,290/-. Subsequently, the assessment was
reopened on the basis of information received from the investigation wing of
the income tax department and a notice on 28.03.2008 under section 148, was
issued after duly recording the reasons and obtaining the sanction of the CIT
as required by section 151 of the said Act. Though the notice was issued in
March, 2008, there was no response from the assessee and, therefore, a notice
under section 142(1) of the said Act was issued on 16.10.2008. There was no
response to this notice nor to the subsequent show-cause notice issued on
03.11.2008. Finally the assessee contended before the assessing officer on
02.12.2008 and asked for the reasons for reopening the assessment. The
reasons were provided to the assessee who filed its objections which were
rejected by an order which was served on the assessee on 10.12.2008. On
20.12.2008, barely 10 days before the assessment was going to be barred by
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limitation, the assessee furnished the new addresses of the persons who
subscribed to the share capital of the assessee-company. On account of the
fact that hardly any time was left for the completion of the assessment, the
assessing officer requested the assessee to produce the principal officers of
the companies which allegedly subscribed to the share capital of the assessee-
company to the extent of `35 lakhs. The assessee, however, did not produce
those persons but on 24.12.2008 sought to make its final submissions against
the proposed additions of `35 lakhs.
3. The assessing officer thereafter noted that the companies who
subscribed to the share capital were established entry operators who gave
accommodation entries to several persons and this fact was also admitted by
them in a sworn statement filed before the investigation wing. In letters
written to their respective assessing officers in connection with the assessment
proceedings for the assessment year 2001-02, these companies admitted to
have provided accommodation entries to persons requiring the same in
consideration of a commission. These letters are reproduced in the re-
assessment order. A specimen letter would suffice: -
"Letter by Director of Ethnic Creations
27.11.2008
To,
The Income Tax Officer
Ward 11(2), New Delhi
Sir,
Sub: - Assessment Proceedings in the case of M/s Ethnic
Creations (P) Ltd. Assessing Year 2001-02-regarding.
Reference above and in response to your show cause
notice dated 17.11.2008. It may be submitted that your
proposal as to why commission on accommodation entries
given by the assessee company for the year under consideration
@ 0.8% i.e. 80 Paisa per hundred should not be treated as
income from undisclosed sources. That the proposal for
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application of 0.8% i.e. 80 paisa per hundred on the
accommodation entries given by the assessee company appears
to be on the higher side and the this cannot be treated as
income from undisclosed sources as the assessee company
earned commission on providing accommodation entries
during the course of its business activities and it earned
commission ranging from 0.25% to 0.30%. It may also be
mentioned that in case like that of the assessee the commission
rate had been applied at 0.45%. That in the case of the
assessee for the assessment year 2000-2001 the net rate of 70
paisa per hundred was applied on the accommodation entries
provided to various parties.
Thanking you
Yours faithfully
(Surender Pal Singh)
Director"
4. Nevertheless the assessing officer, apparently in compliance with the
rules of natural justice and the need to give a fair opportunity, issued notices
to the above companies which evoked no response; some of the letters issued
were returned unserved. It was only after this that the assessee appeared
before the assessing officer on 20.12.2008 and gave the new addresses of
subscriber-companies. It was in these circumstances, and considering the fact
that the assessment was shortly going to be time barred, that the assessing
officer asked the assessee to produce the shareholders along with their bank
accounts so that the applicability of the provisions of section 68 could be
examined. The assessing officer has reproduced the bank accounts of the
subscriber-companies in the assessment order covering about 13 pages. He
attempted to trace the source of the monies and found, for instance, that in the
case of M/s. Polo Leasing & Finance P. Ltd., the amount received by the
assessee-company as share subscription was transferred to the account of the
share subscriber by another company by name M. V. Marketing P. Ltd. in
whose account cash was deposited on the same day. Similarly, amounts were
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transferred into the account of M/s. Polo Leasing & Finance P. Ltd. from
another company by name FNS Consultancy Ltd. Since there was no
standing balance in this account, money was received by clearing cheque and
then the proceeds were transferred to M/s. Polo Leasing & Finance P. Ltd. to
be further transferred to the assessee as share subscription. Monies were also
transferred from the account of one Satwant Singh Sodhi to M/s. Polo Leasing
& Finance P. Ltd. to the assessee.
5. The assessing officer has brought out similarly the trail of money
flowing into the bank accounts of the subscriber companies and sought to
establish that the first transfer of monies was always preceded by an
equivalent amount of cash deposited in the account of the transferor. He has
also sought to establish that there are series of money transfers before the
money goes into the bank account of the subscriber-company making it rather
cumbersome for the income tax authorities to follow the trail. Ultimately his
inferences from an examination of the bank account details were as under: -
"a) The person giving the money could not even maintain
minimum balance in its account. The status, creditworthiness
and nature of the transaction are amply reflected from all the
bank accounts mentioned above none of the account would
show a credit balance of even `10000 for a period.
b) All the accounts have huge cash deposits during the
year. With no business being done by them. The source of
cash deposit is not explainable at all by the person in whose
accounts the same is deposited. It is reiterated that these
persons do not have any business or profit making apparatus
other than by providing services to interested persons like the
assessee to deposit their unaccounted cash and to give it back
through banking channel in the garb of share capital etc. Thus
the source of the said cash deposit which found destination in
the account of the assessee remained unexplained.
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c) The money found its destination from the source in cash
to the account of the assessee on the same day. This proves
that the all such accounts are controlled by same persons.
d) It is interesting to note that such persons are playing
with these accounts to baffle the authorities to track the source.
If the ultimate source was to be cash only and such cash was
explainable then why would a person route it through number
of accounts."
6. In view of the above facts and in order to verify the genuineness of
the transaction and the identity and creditworthiness of the subscriber-
companies, the assessing officer issued summons under section 131 of the
said Act which were not complied with. In the course of the assessment
proceedings the assessee would appear to have filed written submissions
stating that the share subscription was confirmed by the shareholders and their
income tax returns, statement of affairs, balance sheets, share application
forms, etc. have been filed which discharged the onus placed on the assessee
to establish the ingredients of the section 68 of the said Act i.e. the identity
and creditworthiness of the shareholders and the genuineness of the
transactions. The assessing officer did not accept these materials as having
discharged the onus placed on the assessee by section 68 of the said Act. He
reiterated that the shareholders did not appear before him despite a specific
direction, that they did not respond to the summons issued under section 131
of the said Act and in these circumstances he could not accept the
genuineness of the share subscriptions.
7. The assessee would appear to have questioned the sworn statement of
the directors of the subscriber-companies submitted to the investigation wing
of the income tax department and wanted to know whether such statements
actually implicated the assessee. The response of the assessing officer to this,
in the assessment order, was that these statements corroborated the
ITA 263/2012 Page 6 of 15
accommodation entry business carried on by those companies and that when
they have stated in the sworn statement as well as in the letters written to the
respective assessing officer and that in this background it was not necessary
that those companies should have implicated the assessee-company by name.
For these reasons the assessing officer added the amount of `35 lakhs under
section 68 of the said Act as income from undisclosed sources.
On appeal the CIT (Appeals), after noticing the facts, held that the
assessing officer has not carried out any verification of the details furnished
and the income tax records of the share applicants, that the assessee has
discharged its burden and that therefore the case fell within the ratio of the
judgment of the Supreme Court in the case of CIT v. Lovely Exports (P) Ltd.,
(2008) 216 CTR 195. According to him the assessee has produced the best
evidence that was available with it. He accordingly deleted the addition.
8. The revenue carried the matter in appeal before the Tribunal. The
Tribunal after referring to the facts in brief, agreed with the CIT (Appeals) by
observing as under: -
"6. We have heard the rival contentions in light of the
material produced and precedent relied upon. We find that
assessee has received share application money from Private
Limited companies. The assessee has also submitted copy of
application for shares, income tax return, acknowledgement,
profit and loss account, balance sheet and confirmation letter,
date of incorporation and PAN numbers. Thus, it is clear that
assessee has provided necessary details to establish the identity
of the share applicants. However, Assessing Officer has not
verified these details and he has also not disputed these details.
Thus, we are in agreement with the finding of the Ld.
Commissioner of Income Tax (Appeals) that the assessee has
provided necessary details including the Ward/ Circle where
the share applicants were assessed to income tax and
discharged the onus cast on it. We find that Hon'ble Apex
Court in the case of C.I.T. vs. Lovely Exports P. Ltd. (216 CTR
ITA 263/2012 Page 7 of 15
195) held that if the share application money is received by the
assessee company from alleged bogus shareholders, whose
names are given to reopen their individual assessments in
accordance with law, but cannot be regarded as undisclosed
income of the assessee."
9. We have carefully considered the facts and the rival contentions. The
following substantial questions of law are framed: -
(a) Whether the Tribunal was right in law in agreeing with the CIT
(Appeals) that the assessee has discharged its onus under
section 68 of the Income Tax Act, 1961?
(b) Whether the order of the Tribunal confirming the deletion of the
addition of `35 lakhs made under section 68 of the said Act is
based on any evidence or material or reflects an unreasonable or
perverse view?
10. We are satisfied that the Tribunal has not disposed of the appeal in the
meanwhile required of it. It failed to note that this is not a case which would
fall within the parameters laid down by the Supreme Court in Lovely Exports
(P) Ltd. (supra). In the case of Nova Promoters and Finlease P. Ltd. (2012)
342 ITR 169, a Division Bench of this Court made a distinction between the
cases where the assessing officer makes no inquiry into the evidence/ material
adduced by the assessee in support of the share subscription received by it and
cases where an inquiry is made into the evidence/ material adduced by the
assessee, in the course of which he finds that the assessee has no satisfactory
explanation regarding the nature and source of the share capital. The former
type of cases have also to be distinguished from cases where the department is
in possession of some evidence and requires the assessee to explain the share
capital in the light of such evidence and also carries out further inquiries and
ITA 263/2012 Page 8 of 15
investigation which are sought to be blocked by the assessee. The following
passage from Nova Promotors (supra) makes the distinction in the following
manner: -
"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 section 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 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 section 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
ITA 263/2012 Page 9 of 15
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.
The case of CIT v. Orissa Corporation [1986] 159 ITR 78
(SC) exemplifies the category of cases where no action is taken
by the Assessing Officer to verify or conduct an enquiry into the
particulars about the creditors furnished by the assessee,
including their income-tax file numbers. In the same category fall
cases decided by this court in CIT v. Dolphin Canpack [2006]
283 ITR 190 (Delhi), CIT v. Makhni and Tyagi P. Ltd. [2004]
267 ITR 433 (Delhi), CIT v. Antartica Investment P. Ltd. [2003]
262 ITR 493 (Delhi) and CIT v. Achal Investment Ltd. [2004]
268 ITR 211 (Delhi). To put it simply, in these cases the
decision was based on the fundamental rule of law that evidence
or material adduced by the assessee cannot be thrown out
without any enquiry. The ratio does not extend beyond that. The
boundaries of the ratio cannot be, and should not be, widened
to include therein cases where there exists material to implicate
the assessee in a collusive arrangement with persons who are
selfconfessed "accommodation entry providers".
Reference was also made on behalf of the assessee to the
recent judgment of a Division Bench of this court in CIT v. Oasis
Hospitalities P. Ltd. [2011] 333 ITR 119 (Delhi). We have given
utmost consideration to the judgment. It disposes of several
appeals in the case of different assessees. Except the case of
CIT v. Oasis Hospitalities P. Ltd. (I. T. A. Nos. 2093 and 2095
of 2010) since reported in [2011] 333 ITR 119 (Delhi), the other
cases fall under the category of Orissa Corporation [1986] 159
ITR 78 (SC). However, in the case of Oasis Hospitalities P. Ltd.
[2011] 333 ITR 119 (Delhi), there is reference to information
received by the Assessing Officer from the Investigation Wing of
the Revenue on the basis of which it was found that six investors
belong to one Mahesh Garg group who were not carrying on
any real business activity and were engaged in the business of
providing accommodation entries. They were entry operators
and the assessee in that case was alleged to be a beneficiary.
While disposing of these appeals, this court observed (page
133):
"The assessees filed copies of PAN,
acknowledgment of filing income-tax returns of
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the companies, their bank account statements for
the relevant period, i.e., for the period when the
cheques were cleared. However, the parties were
not produced in spite of specific direction of the
Assessing Officer instead of taking opportunities in
this behalf. Since the so-called directors of these
companies were not produced on this ground
coupled with the outcome of the detailed inquiry
made by the Investigating Wing of the Department,
the Assessing Officer made the addition. This
addition could not be sustained as the primary
onus was discharged by the assessee by producing
PAN number, bank account, copies of income-tax
returns of the share applicants, etc. We also find
that the Assessing Officer was influenced by the
information received by the Investigating Wing and
on that basis generally modus operandi by such
entry operators is discussed in detail. However,
whether such modus operandi existed in the present
case or not was not investigated by the Assessing
Officer. The assessee was not confronted with the
investigation carried out by the Investigating Wing
or was given an opportunity to cross-examine the
persons whose statements were recorded by the
Investigating Wing."
These quoted observations clearly distinguish the present
case from CIT v. Oasis Hospitalities P. Ltd. [2011] 333 ITR 119
(Delhi). Except for discussing the modus operandi of the entry
operators generally, the Assessing Officer in that case had not
shown whether any link between them and the assessee existed.
No enquiry had been made in this regard. Further, the assessee
had not been confronted with the material collected by the
investigation wing or was given an opportunity to cross-examine
the persons whose statements were recorded by the investigation
wing."
11. Again in a Division Bench judgment of this Court in CIT v. Fair
Finvest Ltd., in ITA No.232/2012 dated 22.11.2012, has held as follows: -
ITA 263/2012 Page 11 of 15
"8. The decision in this case is based on the peculiar facts
which attract the ratio of Lovely Exports (supra). Where the
assessee adduces evidence in support of the share application
monies, it is open to the assessing officer to examine it and
reject it on tenable grounds. In case he wishes to rely on the
report of the investigation authorities, some meaningful enquiry
ought to be conducted by him to establish a link between the
assessee and the alleged hawala operators; such a link was
shown to be present in the case of Nova Promoters & Finlease
(P) Ltd. (supra) relied upon by the revenue. We are therefore
not to be understood to convey that in all cases of share capital
added under section 68, the ratio of Lovely Exports (supra) is
attracted, irrespective of the facts, evidence and material. "
12. In another judgment of a Division Bench of this Court in CIT vs.
Nipun Builders and Developers Pvt. Ltd., ITA 120/2012, this Bench brought
out the distinction between two types of the cases as follows: -
"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
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
ITA 263/2012 Page 12 of 15
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 speaks
volume about its conduct, and belies the argument about its
inability to ensure the presence of such company's principal
officers."
13. In the aforesaid judgment this Court has brought out the reasons why it
is necessary in certain circumstances for the assessee to ensure the attendance
of the share subscriber-companies and these circumstances exist in the present
case too.
14. In the present case the Tribunal, with respect, appears to have
approached the matter rather superficially and mechanically. It ought to have
adverted to the attempts made by the assessing officer to probe into the matter
deeper by issuing notices/ summons to the subscriber-companies which
evoked no response. It also failed to note that the assessee started
participating in the assessment proceedings only from 02.12.2008, though the
reassessment notice was issued in March, 2008. The conduct of the assessee
is a matter to be taken note of in such cases. The assessee no doubt submitted
documentary evidence to show that the companies which subscribed to its
shares were income tax assesses and they had also prepared profit and loss
account, balance sheet, etc. but the evidentiary value of these on which the
Tribunal has relied, ought to have been examined in the light of the stand
taken by those companies in their assessment proceedings for the same
assessment year. We have extracted a specimen letter written by the Director
of Ethnic Creations Pvt. Ltd. wherein it has been admitted that the company
ITA 263/2012 Page 13 of 15
carries on the business of providing accommodation entries for commission.
Identically worded letters were written by the other companies to their
respective assessing officer, which are all reproduced in the assessment order.
The money trail which the assessing officer has sought to trace and the
definite pattern which he has termed as a pattern typically as that of entry
operators has not been adverted to at all by the Tribunal. It seems to us that
the Tribunal has looked at only the evidence adduced by the assessee and has
not adverted to the attempts made by the assessing officer in the course of the
assessment proceedings to examine the evidence and discredit the same in
CIT v. Walchand And Co. Private Ltd., (1967) 65 ITR 381 the Supreme
Court held as under: -
"It is necessary to emphasize that, though the Tribunal is not a
court, it is invested with judicial power to be exercised in
manner similar to the exercise of power of an appellate court
acting under the Code of Civil Procedure. Authority to "pass
such orders thereon as it thinks fit" in section 33(4) of the
Income-tax Act, 1922, is not arbitrary: the expression is
intended to define the jurisdiction of the Tribunal to deal with
and determine questions which arise out of the subject-matter
of the appeal in the light of the evidence, and consistently with
the justice of the case. In the hierarchy of authorities the
Appellate Tribunal is the final fact-finding body : its decisions
on questions of fact are not liable to be questioned before the
High Court. The nature of the jurisdiction predicates that the
Tribunal will approach and decide the case in a judicial spirit
and for that purpose it must indicate the disputed questions
before it with evidence pro and con and record its reasons in
support of the decision. The practice of recording a decision
without reasons in support cannot but be severely deprecated".
The same Bench of three learned Judges reiterated the aforesaid
observations in Udhavdas Kewalram v. CIT, (1967) 66 ITR 462 in the
following words: -
"The Income-tax Appellate Tribunal performs a judicial
function under the Indian Income-tax Act: it is invested with
ITA 263/2012 Page 14 of 15
authority to determine finally all questions of fact. The
Tribunal must, in deciding an appeal, consider with due care
all the material facts and record its finding on all the
contentions raised by the assessee and the Commissioner in the
light of the evidence and the relevant law.....................The
Tribunal was undoubtedly competent to disagree with the view
of the Appellate Assistant Commissioner. But in proceeding to
do so, the Tribunal had to act judicially, i.e., to consider all the
evidence in favour of and against the assessee. An order
recorded on a review of only a part of the evidence and
ignoring the remaining evidence cannot be regarded as
conclusively determining the questions of fact raised before the
Tribunal."
15. We are of the view that the Tribunal has not disposed of the appeal in
the manner required by law. It is not taken into account the relevant material
and the evidence which was brought on record by the assessing officer. Its
findings are, therefore, vitiated and cannot be acted upon.
16. For the above reasons we set-aside the impugned order of the Tribunal
and restore the appeal to its file to be disposed of afresh in accordance with
law. Whatever observations we have made with regard to the facts of the
present case are only for the purpose of disposal of this appeal.
17. The substantial questions of law are answered in favour of the revenue.
The appeal, however, as stated earlier is remitted to the Tribunal for being
disposed of afresh.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
February, 28, 2013
hs
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