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TMI Blog2011 (1) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... se appeals by this common judgment. We would proceed to discuss the position of law in first instance and thereafter, on the application of that law, we shall answer the question which arises in different appeals. 2. Section 68 of the Act deals with unexplained incomes and is couched in the following language: "Section 68 CASH CREDITS. Where any sum is found credited in the books of an assessee maintained for any previous year, and assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year." 3. As per the provisions of this Section, in case the assessee has not been able to give satisfactory explanation in respect of certain expenditure or where any sum is found credited in the books of accounts, the AO can treat the same as undisclosed income and add to the income of the assessee. The assessee is required to give satisfactory explanation about the "nature and source" of such sum found credited in the books of accounts. 4. It is a common knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elicate balance must be maintained. It was, thus, stressed: "15. There cannot be two opinions on the aspect that the pernicious practice of conversion of unaccounted money through the masquerade or channel of investment in the share capital of a company must be firmly excoriated by the Revenue. Equally, where the preponderance of evidence indicates absence of culpability and complexity of the assessed it should not be harassed by the Revenue‟s insistence that it should prove the negative. In the case of a public issue, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. The Company must, however, maintain and make available to the AO for his perusal, all the information contained in the statutory share application documents. In the case of private placement the legal regime would not be the same. A delicate balance must be maintained while walking the tightrope of Section 68 and 69 of the IT Act. The burden of proof can seldom be discharged to the hilt by the assessed; if the AO harbours doubts of the legitimacy of any subscription he is empowered, nay duty-bound, to carry out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed." 9. The Court took note of many other judgments of different High Courts and on the analysis of those judgments formulated the following propositions, which emerged as under: "18. In this analysis, a distillation of the precedents yields the following propositions of law in the context of Section 68 of the IT Act. The assessed has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber. (4) If relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Shared 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication forms, share transfer register, etc. 14. As far as creditworthiness or financial strength of the credit/subscriber is concerned, that can be proved by producing the bank statement of the creditors/subscribers showing that it had sufficient balance in its accounts to enable it to subscribe to the share capital. This judgment further holds that once these documents are produced, the assessee would have satisfactorily discharge the onus cast upon him. Thereafter, it is for the AO to scrutinize the same and in case he nurtures any doubt about the veracity of these documents to probe the matter further. However, to discredit the documents produced by the assessee on the aforesaid aspects, there has to be some cogent reasons and materials for the AO and he cannot go into the realm of suspicion. 15. At this stage, we would like to refer to the judgment of the Bombay High Court in the case of CIT Vs. M/s Creative World Telefilms Ltd. (in ITA No.2182 of 2009 decided on 12.10.2009). The relevant portion of this order is reproduced below: "In the case in hand, it is not disputed that the assessee had given the details of name and address of the shareholder, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. However, in Commissioner of Income Tax Vs. Arunananda Textiles Pvt. Ltd. (in ITA No.1515 of 2005, decided on 02.03.2010), the Karnataka High Court went to the extent of observing that it was not for the assessee to place material before the Assessing Officer in regard to creditworthiness of the shareholders. Once the company had given the addresses of the shareholders and their identity was not in dispute, it was for the Assessing Officer to make further inquiry. It was borne by the following discussion in the said judgment: "6. The question raised in this appeal are squarely covered by several judgments of the Supreme Court and also the judgment of this Court passed in ASK Brothers Ltd. Vs. Commissioner of Income Tax, wherein this Court following the judgments of the Supreme Court in the case of Commissioner of Income Tax Vs. Lovely Exports (P) Ltd. reported in (20089) 216 CTR (SC 195) and also in the case of Commissioner of Income Tax Vs. Steller Investment Ltd. reported in (2001) 251 ITR 263 (SC) has ruled that it not for the assessee to place material before the Assessing Officer in regard to creditworthiness of the shareholders. If the company has given the addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding their creditworthiness. This would be moreso where the assessee is a public limited company and has issued the share capital to the public at large, as in such cases the company cannot be expected to know every detail pertaining to the identity and the financial worth of the subscribers. Further initial burden on the assessee would be somewhat heavy in case the assessee is a private limited company where the shareholders are family friends/close acquaintances, etc. It is because of the reason that in such circumstance, the assessee cannot feign ignorance about the status of these parties. 21. We may also usefully refer to the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. P. Mohanakala [(2007) 291 ITR 278 (SC)]. In that case, the assessee had received foreign gifts from one common donor. The payments were made to them by instruments issued by foreign banks and credited to the respective accounts of the assessees by negotiations through bank inIndia. The evidence indicated that the donor was to receive suitable compensation from the assessees. The AO held that the gifts though apparent were not real and accordingly treated all those amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the opinion. In cases where the explanation offered by the assessee about the nature and source of the sums found credited in the books is not satisfactory there is, prima facie, evidence against the assessee, viz., the receipt of money. The burden is on the assessee to rebut the same, and, if he fails to rebut it, it can be held against the assessee that it was a receipt of an income nature. The burden is on the assessee to take the plea that even if the explanation is not acceptable, the material and attending circumstances available on record do not justify the sum found credited in the books being treated as a receipt of income nature. 22. We would like to refer to another judgment of the Division Bench of this Court in the case of Commissioner of Income Tax Vs. Value Capital Services P. Ltd. [(2008) 307 ITR 334 (Delhi)]. The Court in that case held that the additional burden was on the Department to show that even if share application did not have the means to make investment, the investment made by them actually emanated from the coffers of the assessee so as to enable it to be treated as the undisclosed income of the assessee. In the absence of such findings, add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the assessee was the beneficiary. According to the AO, the modus operandi involved in such type of activity was like this: an entry operator operates a number of accounts in the same bank/branch or in different branches in the name of companies, firms, proprietary concerns and individuals and for the operation of these bank accounts, filing income tax returns etc., persons are hired. Most of these persons work on part-time basis and are called upon to sign documents, cheque books, etc. whenever required. Whenever any beneficiary is interested in taking an entry, he would approach the entry operator and handover the cash alongwith commission and take cheques, Demand Draft, Postal Order. The cash is deposited by the Entry Operator in a bank account either in his name or in the name of relative/friends or other person hired by him for the purposes of opening the bank account. After the deposit of cash when there is sufficient balance, the Entry Operator issues Demand Draft, Postal Orders, cheques in the name of beneficiary. Most of these concerns/individuals also have obtained PAN from the Department and are filing income tax returns, but what is shown in the return is not actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribe to the share to the capital of the assessee, but it is the assessee who is fastened with the liability. The Assessing Officer did not question M/s Diamond Protein Ltd. in this behalf. Insofar as Assessing Company is concerned, it is not disputed that money was paid to its towards the aforesaid share application money, by means of cheques. It is not for the Assessing Company to probe as to the source from where M/s Diamond Protein Ltd. collected the aforesaid money. It was for the Assessing Officer, in these circumstances to inquire into the affairs of M/s Diamond Protein Ltd. which is an independent company inasmuch as no finding is arrived at by the Assessing Officer that the two companies are umbrella companies or have any relationship with each other." 30. We are, therefore, of the opinion that there is no merit in these two appeals, which are accordingly dismissed at the admission stage itself. ITA No.2094 of 2010 31. In this case, the assessee had shown receipt of Rs.99.18 lacs on account of share application money. In order to prove the genuineness of the transactions and identity of the share applicants and their creditworthiness, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the AO to show the identity of the person who had applied for the shares. The shares also been allotted to respective persons in respect of which intimation was given to Registrar of Companies and necessary evidence has also been placed on record in the paper book which found place at page 23 and 24 of the paper book. The assessee also had placed on record the evidence as well as copy of income-tax returns of the share applicants. Keeping in view all these evidences it cannot be held that the assessee did not establish the identity of the share applicants. If it is so, then the law as pronounced by the Hon‟ble Supreme Court in the case of CIT vs. Lovely Exports Pvt. Ltd. (supra) is clear that if the share application money is received b the assessee company from alleged bogus shareholders whose names are given to the AO, then the Department is free to proceed to reopen their individual assessments in accordance with law, but the same cannot be regarded as undisclosed income of the assessee. In this view of the situation, we find no infirmity in the order of the CIT (A) vide which addition made on account of share application money has been deleted." 34. Having regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or passport despite request by the AO. The AO after analyzing the statements of these persons observed that these five persons were small agriculturists and had no means to make investment n the company. 38. In these circumstances, the entire receipts of Rs.25,23,500 in respect of these five persons was treated as unexplained investment and made the addition under Section 68 of the Act. 39. The CIT (A), in appeal, reexamined the entire issue analyzing the evidence in the light of the judgment in the case of Stellar Investment Ltd. (supra) and Sophia Finance Ltd. (supra) relied upon by the assessee. He confirmed the order of the AO and concluded that the assessee had merely given names of the parties and had not proved that they had necessary income to invest in the shares as also the creditworthiness of these persons. 40. The Tribunal has also affirmed the aforesaid decision of the CIT (A) in the following manner: "15. Having carefully examined the material available on record and the orders of the lower authorities, we find that shares were not quoted on stock exchange and it was subscribed by the persons who were known to the assessee but during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons of the assessee and the assessee has failed to prove the identity and creditworthiness, the addition u/s 68 can be made in the hands of the assessee. In the instant case, the assessee could not place any evidence on record to prove the identity and the credit worthiness of the so called subscribers and the A.O. was justified in treating this investment as unexplained and made the addition u/s 68 of the I.T. Act. We, therefore, find no infirmity in the order of the CIT (A). Accordingly, we confirm the same." 41. The learned counsel for the assessee argued that even when five persons were produced which established the identity and they had categorically stated that they had invested in the shares with their own money, there was no reason to make addition in respect of these persons as well. He also submitted that bank details, etc. in respect of all 15 shareholders were furnished to the CIT (A), even qua for the remand report, but this additional evidence was totally ignored. He referred to the judgment in the case of Steller Investment Ltd. (supra) as well as Lovely Exports P. Ltd. (supra). To buttress his submission that on the facts of this case, the assessee had di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to undertake further exercise as discussed above. In the instant case, no such documents are filed and no steps taken by the assessee which could establish the aforesaid three ingredients. 44. Additional evidence in the form of bank statement, etc. is given, but the assessee has not done anything to prove these bank accounts. On this evidence produced by the assessee, remand report was called for and the AO in his remand report dated 23.12.2003 submitted as under: "None of the 6 alleged share holders produced any documents in support of their identity. The fact was intimated to the assessee vide order sheet entries dated 13.6.2002 & 17.3.2003. they are not assessed to tax. They have not produced any documentary evidence showing that they are capable of saving/investing any amount at all. If the persons produced are not carrying relevant documents to establish their identity, creditworthiness at the time of recording of the statements and furnishing photo copy of some documents after a gap of substantial period, it is not possible to verify its correctness unless the concerned persons are produced with necessary documentary evidences (in original) in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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