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TMI Blog2017 (9) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... dence filed before them and the lower authorities establishing clearly/discharging of initial burden/onus statutorily vested on the appellant company to provide the source ' (ii) Whether the Appellate Tribunal is correct in law in confirming the assessment of share capital contributions as the income of the appellant company even though there were no materials in their possession of the respondent/Assessing Officer establishing such facts apart from mere suspicion as well as establishing perversity both on facts and in law in rendering their decision ' and (iii) Whether the Appellate Tribunal is correct in law in sustaining the assessment of share capital contributions as the income of the appellant company on the application of the deeming provisions in Section 68/69 of the Act even though there was no legal mandate for the appellant company to establish/prove the 'source for source' '" 3. The following substantial question of law has been framed while admitting TCA.No.436 of 2013 on 25.2.2014 : Whether the Appellate Tribunal is correct in law in confirming the disallowance of expenses incurred on gifts and compliments for the purposes of business within the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also been allotted shares by the assessee company, the sources of the said individual for contributing to the share capital of the assessee company have been explained. Sri.Prakash Chand Jain was allotted 33333 shares for Rs. 5 crores, whereas Heritage Creations, Nehru Palace, New Delhi was allotted 65333 shares for Rs. 9,80,00,000/- (Rupees nine crores and eighty lakhs only). Another individual Smt.Savitri of Royapet, Chennai was allotted 9440 shares for Rs. 1,41,60,000/- (Rupees one crore forty one lakhs and sixty thousand only). 7. The Assessing Officer has held that though monies were routed through banking channels, the explanation offered by the assessee company is not acceptable, as the said explanation was not convincing and satisfactory. In so far as the said Sri.Shahul Hameed is concerned, the Assessing Officer has noticed that the said individual initially purchased gold through one of his firms and later on, sold the gold again to the assessee company and thereafter, the sale proceeds were paid over for acquiring the shares. This sort of cycling and re-cycling of funds does not carry any conviction and hence, the addition to the share capital has been treated as `inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds have been brought in to show as if contribution was made to the share capital of the assessee company whereas truth of it being that this is the actual income of the assessee, which is sought to be camouflaged by devising the scheme of contribution to the capital. It was urged, for instance, that M/s.Heritage Creations Private Limited invested a substantial amount for purchasing the shares of the assessee company. But, the said M/s.Heritage Creations Private Limited immediately sold the shares to another concern viz., M/s.AK Exports. M/s.AK Exports is owned by the Managing Director of the assesee company. The sale of shares of the assessee company to M/s.AK Exports has resulted in a huge loss of Rs. 8.82 Crores to M/s.Heritage Creations Private Limited and the business sense in incurring such a huge loss in a short span of time remained unexplained and hence, the transactions are all 'make believe management practices', rather than being cases of genuine transactions of investment. 12. The principal contention of the assessee in answer thereto was that two of the investors are from Delhi and the officers of the Income Tax Department at Delhi made necessary enqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless (a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and (b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory: Provided further that nothing contained in the first proviso shall apply if the person, in whose name the sum referred to therein is recorded, is a venture capital fund or a venture capital company as referred to in Clause (23FB) of Section 10. 14. It is clear from the above provision that burden, initially, is cast upon the assessee to offer an explanation about the nature and source of the money found credited in its books of account and if that explanation is not satisfactory in the opinion of the Assessing Officer, the sum so credited be charged as the income for the previous year. Similarly, if the assessee is a company and the sum is credited, consisting of share application money or share capital or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly lead to a conclusion that that the money does not belong to that particular person, but belongs to the other automatically. 17. More importantly, the Supreme Court, in Daulat Ram, has laid down the following principle, which has a direct bearing upon the controversy at issue and it reads as under: The onus to prove that the apparent is not the real is on the party who claims it to be so. As it was the department which claimed that the amount of fixed deposit receipt belonged to the respondent firm even though the receipt had been issued in the name of Biswanath, the burden lay on the department to prove that the respondent was the owner of the amount despite the fact that the receipt was in the name of Biswanath. A simple way of discharging the onus and resolving the controversy was to trace the source and origin of the amount and find out its ultimate destination .. (Emphasis is mine) 18. Similarly, in the case of CIT, Orissa Vs. Orissa Corporation P. Ltd. [reported in (1986) Vol.159 ITR 78], the Supreme Court has held as under: To what extent the assessee had an obligation to discharge the burden of proving that these were genuine incomes has been considered by this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20. Again in the case of Sumati Dayal Vs. CIT [reported in 214 ITR 801], at page 805, the Supreme Court has clearly explained the point of approach to be followed both by the assessee and the Department, in the context of Section 68 of the Act, in the following words : "It is no doubt true that in all cases, in which, a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision and if a receipt is in the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee [Parimisetti Seetharamamma [1965] 57 ITR 532 at page 536]. But, in view of Section 68 of the Act, where any sum is found credited in the books of the assessee for any previous year, the same may be charged to income tax as the income of the assessee of that previous year if the explanation offered by the assessee about the nature and source thereof is, in the opinion of the Assessing Officer, not satisfactory. In such a case there is, prima facie, evidence against the assessee viz. the receipt of money and if he fails to rebut it, the said evidence being unrebutted, can be us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hameed, the Managing Director of the said company, appears to have categorically rejected that he ever had any purchase or sale transaction with the assessee either in bullion or in old gold jewellery. 25. Thereafter, the Managing Director of the assessee company has been confronted with that rejection of transaction by the Managing Director of M/s.Sun Land Properties and the Managing Director of the assessee company has confirmed the purchases made by the assessee and he, in turn, rejected the statement of Sri.Shahul Hameed as to why he has been denying the sale made by him in spite of the vouchers containing his (Shahul Hameed) signature as proof of sale of gold by him to the assessee company. 26. It is worthy to notice that in the profit and loss account, the assessee company has debited a sum of Rs. 5,11,04,113/- towards purchase of old gold jewellery. Further, for verifying the apparent contradictions, summons were issued to Sri.Shahul Hameed on 15.9.2009, in response to which, he appeared on 07.10.2009. A sworn statement was taken from him. He clearly stated that earlier they had purchased gold jewellery and fine gold from the assessee and they were again sold in the same y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit worthiness of the said Sri.Shahul Hameed. More importantly, the Assessing Officer has glossed over the fact that Sri Shahul Hameed invested a sum of Rs. 5.75 Crores, whereas the Vourchers 237 and 239 cover a sum of Rs. 4.9 Crores only. The difference in between the two is no less significant amount, running to Rs. 85.00 lakhs. Similarly, when it came to the investment made by Sri.Prakash Chand Jain, this is what has been set out by the Assessing Officer in paragraphs 2.8.3 and 2.8.4 : In the meantime, based on survey information, further enquiries were done through the office of the Additional Director of Investigation, New Delhi with respect to the alleged investment in the case of Sri.Prakash Chand Jain in the assessee company. The enquiry revealed that in response to the summons issued by O/O ITO (Inv.) Unit III, Delhi, on behalf of him, one Sri.K.V.S.Gupta, FCA appeared with power of authorization and gave the following information. Through the enquiries, it was gathered that Sri.Prakash Chand Jain is a non resident Indian stationed in Dubai, engaged in the business of jewellery in the name and style of M/s.Al Mowaiji Jewellers LLC in Dubai. He is being assessed in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company during March 2007 to an extent of Rs. 9,80,00,000/- with the premium. As an explanation to the source, it has shown the advances received in respect of IMT/Manesar Project from ITC Limited vide MOU/agreement dated 23.8.2007, for which, the company had furnished copies of the bank account, MOU, etc. Further, as per the submission, it was also in receipt of share application money from AEZ Infratech Private Limited during the financial year 2006-07. As per the submissions, the following were the receipts from ITC Ltd to the party : Date Ch. No. Amount Bank 8.2.2007 953586 1,51,00,000 HDFC Bank 19.3.2007 955019 9,74,00,000 HDFC Bank 19.3.2007 955018 1,00,00,000 HDFC Bank 19.3.2007 955017 2,00,00,000 HDFC Bank 19.3.2007 955016 25,00,000 HDFC Bank Total 14,50,00,000 HDFC Bank Even when the investor of the assessee demonstrated its resources, the Assessing Officer still has suspicion. 30. When it came to the investment made by Smt.Savithri, it was explained by the assessee company that her husband Sri.M.S.Kandasamy was a Director of the assessee company till his death and therefore, the legal heirs of M.S.Kandasam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact that such transactions made through banks do not conclusively prove that those transactions have been entered in the same way explained by an assessee. The fact that a payment has been made by cheque or draft by itself does not conclusively prove that the person making such payment had enough resources in his hands to make such payment. It is always possible to transact through banking channels and still manipulate the original character of the amount as to whom it belonged and how it was earned. Therefore, we cannot decide this appeal only on the ground that the payments objected in this case have been effected through banking channels. 33. In paragraph 27, the Tribunal proceeded to examine the absence of commercial wisdom of the investors in purchasing the shares of the assessee company for two fold reasons. The first one was that the Managing Director and his wife hold 98.5% of the share capital of the assessee company and consequently, it is a completely family held concern. Therefore, the investors will not be able to gain any control over the affairs of the assessee company, by their investment. The second is that there is no reason set forth as to why the assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustained a loss of Rs. 8.82 Crores and hence, the Tribunal concluded the issue holding that the Assessing Officer has rightly held that the amounts brought in by the assessee company into its share capital and share premium accounts are unexplained and they have to be treated as income of the assessee company and accordingly reversed the order of the CIT (Appeals). 38. The Tribunal has also rejected the appeal preferred by the assessee with regard to rejection of expenditure incurred by it for purchase of gifts and compliments to be given to customers. Though for a company of having turnover of Rs. 150 Crores the expenditure incurred towards purchase of gifts and compliments amounting to Rs. 10,45,913/- is a reasonable amount, but on the ground that the vouchers have not been produced before the Assessing Officer, the expenditure in that regard was disallowed. 39. The assessee pointed out that the vouchers are impounded by the Assessing Officer and hence, they were prevented from producing the same before the Assessing Officer. The Tribunal noted that the assessee was not without any remedy and that they could have secured copies of the vouchers, which are impounded by the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he very approach of the Assessing Officer and the Tribunal are completely opposed to settled legal principles enunciated and they have arrived at conclusions contrary to the legal principles on the subject. Further, they are finding fault with the assessee for the alleged failure of it's investors in proving beyond doubt that they have the capacity to invest at the moment they did in the assessee company. That is clearly a perverse view, as the assessing officer is not expected to perform a near impossibility. The assessee cannot call upon its investors to disclose all such business transactions thay carried on in the immediate past and as to how much they made from their respective business enterprises. The assessee cannot also call upon its investors to prove their good business sense in investing in the assessee company, as such investors cannot gain any controlling stake. 43. In the result, the questions of law framed in TCA.No.435 of 2013 are answered in favour of the assessee and against the Revenue. Hence, TCA.No.435 of 2013 is allowed. Consequently, MP.No.1 of 2014 is closed. 44. The question of law framed in TCA.No.436 of 2013 is answered in favour of the Revenue and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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