2013 (12) TMI 13 - HC - Income Tax

Issue of share capital camouflage transactions / accommodation entries - Held that - The Assessee company is a private limited company The assessee company has issued share capital including premium of Rs.4,35,00,000/-, out of which only Rs.92,00,000/- was infused from the Directors/family members of the Directors. The remaining share capital had been infused from parties which were completely unrelated either to the Assessee or to any of its Directors - In a private limited company, normally the investment of shares is from parties or persons who are friends or relatives of Promoters/Directors Later on these shares were transferred to directors of the company at a substantial loss - The entire investment happened during a short span of time and re-transfer of the shares to the Directors of the company also happened during a short span of few days - The modus operandi and the manner in which cash is deposited in a bank and then utilized by way of an account payee cheque for purchase of shares clearly establishes that the said transaction was a camouflage transaction - The Assessee failed to produce the persons who had invested towards share capital shows that these were people who were completely unrelated to the Assessee - All the entries were merely accommodation entries - It would not have been difficult in case of private company to produce persons who were investing substantial amount of money in the company towards share capital - The Assessee has not been able to discharge the initial onus and has not been able to establish the identity, creditworthiness of the share applicants and the genuineness of the transaction Decided in favour of Revenue.

Issues Involved:
1. Legitimacy of reopening assessment under Section 147 of the Income Tax Act.
2. Validity of additions made under Section 68 of the Income Tax Act.
3. Assessment of identity, creditworthiness, and genuineness of share capital transactions.
4. Adequacy of evidence and procedural adherence by the Assessing Officer (AO).

Detailed Analysis:

1. Legitimacy of Reopening Assessment under Section 147:
The Assessee filed a return for the Assessment Year 2002-03 declaring nil income. Based on information from the Investigation Wing about a money laundering racket involving bogus accommodation entries, the AO issued a notice under Section 148 to reopen the case. The Assessee objected, arguing that some entries were duplicates, inflating the amount. Despite objections, the reopening was deemed valid by the Commissioner of Income Tax (Appeals) (CIT(A)), who upheld the AO's decision to reassess.

2. Validity of Additions under Section 68:
The AO found that the Assessee received share capital from 24 parties, allegedly part of a money laundering scheme by Mahesh Garg's group. The Investigation Wing detailed the modus operandi of using multiple bank accounts and name lenders to provide accommodation entries. The AO added Rs.3,49,86,000 to the Assessee's income, which was later contested.

3. Assessment of Identity, Creditworthiness, and Genuineness:
The Assessee provided affidavits from 18 parties confirming share capital transactions. However, the AO's summons to these parties were returned unserved. Further inquiries revealed additional share capital from 40 more persons, totaling Rs.4,35,00,000, with only Rs.92,00,000 from directors or their family members. The AO noted cash deposits followed by cheque issuance to the Assessee, indicating accommodation entries. The CIT(A) and ITAT initially deleted the additions, citing lack of direct evidence and procedural lapses by the AO, such as not summoning Mahesh Garg for cross-examination.

4. Adequacy of Evidence and Procedural Adherence by AO:
The AO's reliance on Mahesh Garg's statement without direct examination and the Assessee's failure to produce investors were critical points. The CIT(A) and ITAT found that the AO did not sufficiently verify the Assessee's evidence or allow cross-examination, thus favoring the Assessee. However, the High Court disagreed, emphasizing the need for the Assessee to prove the identity, creditworthiness, and genuineness of transactions beyond mere documentation like PAN numbers and bank statements.

Conclusion:
The High Court concluded that the Assessee failed to discharge the onus of proving the legitimacy of share capital transactions. The court highlighted that mere production of PAN numbers and bank statements was insufficient without corroborating evidence of genuine business activity and creditworthiness. The substantial question of law was answered in favor of the Revenue, reinstating the AO's additions under Section 68, with costs assessed at Rs. 20,000.

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