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TMI Blog2017 (2) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... king explanation for the credit entries in the books of account of the assessee in terms of section 68, it is legitimately expected that the exercise would be taken to the logical end. Whilst it does appear that the time given to the assessee company for proving the identity and creditworthiness of the investee companies was too short, the whole exercise started at the fag end of assessment proceedings and further that it is probably not always possible for the assessee placed in such situation to be able to enforce the physical attendance of the Directors who are not in Jaipur, the curtains on such exercise at verification may not be drawn and adverse inferences reached only on the basis of returning undelivered of the summons under section 131. Conversely, with doubts as to the identity, creditworthiness and genuineness of transaction persisting in the minds of the Assessing officer, the initial burden on the assessee cannot be said to be have been discharged. We accordingly set aside the matter to the file of the AO to examine the matter a fresh taking into consideration the legal proposition. Appeal filed by the Revenue is allowed for statistical purposes. - ITA No.702/JP/1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, the AO issued notices to these companies under section 133(6) to furnish information alongwith documentary evidences. A commission u/s 131(1)(d) of the Income Tax Act, 1961 were also issued to the Addl. DIT(Inv.) at Mumbai and Kolkatta. 2.2 The DDIT(Inv.) Unit 1(2), Mumbai sent his report to AO vide letter dated 22.12.2011 in respect of two companies based at Mumbai as under: 1.Omega Vincom Trading, G-9/10-113rd Floor Rani Sati Nagar, S.V.Road, Malad (W) Mumbai: On enquiry in room with Shri Jignesh Chhed (occupant) he informed me that he resididng in this room on rental basis since 3 years. The owner of room No. 10 is Smt.C.S. Agarwal and owner of Room No.11 is Shri Suresh R. Agarwal. The both rooms are jointly. The phone no. of Shri Suresh Agarwal is 022-28886401. As per his knowledge, there is no such company in this room since last 3 years. 2. Pranjal Trading Co. Pvt. Ltd., 1-A, Hill View ,CHS Ltd. next to Navrang Cinema, J.P. Road, Andheri (W) Mumbai On my visit, I found that this is the office of Chartered Accountant Shri K.K. Khadaria, on enquiry with office, she informed me that this is the publication office of Shri K.K. Khadaria. He is presently sitti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce at 3 No. Khalisa Kota Polyy, Kolkatta-150 amounting to ₹ 20,00,000/- on 17.6.2008 and rest 50,00,000/- through share application money from Nandan Merchants Pvt. Ltd. having its office at 11, Pollock Street, Kolkatta-01. The directors of the Melbright Suppliers (P) Ltd. are also presently residing in Mumbai as per the submission of the AR. From the submission of the AR, it is seen that the returned income of the company for A.Y. 2009-10 was only a meagre income of ₹ 31,021/-. 2.4 Further, the AO has asked the assessee company to produce the Directors of these investor companies vide his letter dated 23.12.2011. In response, the assessee company submitted that it was not possible for them to appear at such a short notice as they all are residing out of Jaipur. 2.5 The AO thereafter issued a final show-cause notice dated 28.12.2011 and in response, the assessee company submitted as under: We are in receipt of your letter dated 28.12.2011 bearing ref. No. Addl. CIT/R- 1/JPR/11-12/2260 proposing addition of ₹ 75 lacs in respect of share application money received from our cco0mpanies interalia based on inquiry report from ADIT(Inv.) Unit 1(4), Kolkatta u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) Gawarja Merchants P. Ltd. ₹ 1743 lacs As the net worth of the companies are many times higher than the amount invested into assessee company credit worthiness of these four companies are established. (a) All the four companies are registered and governed under the provisions of Companies Act,1956. (b) All the four companies are filing with annual returns with the Registrar of Companies and their status is active company. (c) All the companies has paid amount to Bright Metals India P. Ltd. towards share capital (d) Amount has been invested through banking channel and bank statement in support of it has also been furnished. (e) Shares have been allotted to all companies (f) Direct source of investment into Bright Metals India P. Ltd. has also been proved by all companies. (g) All companies are regularly filing their Income Tax Returns. (h) All the ingredients of Section 68 such as Identity, creditworthiness and genuineness of the transactions have been established. Therefore, no additions can be made under the provisions of the 68 of the Income Tax Act, 1961. 2.6 The AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficient evidences to prove genuineness of the transactions. It was in light of this that the assessee was asked to produce directors but it failed to do so. (iv) It can be seen from the report of ADIT (Inv.) Unit-1(4), Kolkotta that M/s Gawarja Merchants (P) Ltd. and M/s Melbright suppliers (P) Ltd. has meagre returned income for the assessment year 2009-10 at ₹ 47,129/- and ₹ 31,021/-respectively. The income of other two companies is also meagre as seen from details filed by the assessee. In the case of M/s Pranjal Trading company (P) Ltd. and M/s Omega Vincom Trading (P) Ltd., the return income is ₹ 26,790/- and ₹ 6,57,203/- respectively. In absence of any other details/documents available for scrutiny, the identity, genuineness and credit worthiness of the companies is not proved. (v) The ADIT (Inv.) Unit 1(4), Kolkotta has reported that the same Chartered Accountant appeared in the cases of M/s Gawarja Merchants (P) Ltd and M/s Melbright Suppliers (P) Ltd. even though the summon u/s 131 could not be served on one of the companies. Income tax inspector reported that M/s Melbright Suppliers (P) Ltd. could not be located on the given address. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43 lakhs in respect of Gawarja Merchants. It was further argued that the address of Omega Vincom and Pranjal Trading had changed. The new address were also provided by the appellant. It was also submitted that the directors of these companies were residing outside Jaipur and their addresses were given to the AO to summon them for necessary enquiry. The AO however did not accept the explanation filed by the appellant and made the addition of ₹ 75,00,000/- as untrue credit. 4.1 It is however, noted that the appellant had given complete details of the share applicants, including their PAN. The copies of return filed by them had also been produced. Thus their identities were proved. The companies did not have high income but their net worth was much more than the share capital subscribed by them. It is further noted that the transactions had been made through the banking channels. This shows that genuineness of the transaction and capacity of the share applicants was proved. In view of these documentary evidences furnished by the appellant, it could not be said that the genuineness of the transaction was not proved. It may be mentioned here that in a similar case namely, M/s A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon the following legal authorities: (i) Navodaya Castle (P) Ltd vs CIT 56 Taxmann.com 18 (SC) (ii) CIT vs Navodaya Castle (P) Ltd 50 Taxmann.com 110 (Del) (iii) Riddhi Promoters (P) Ltd vs CIT 58 Taxmann.com 367 (Del) (iv) CIT vs Jansampark Advertising Marketing (P) Ltd 56 Taxmann.com 286 (Del) (v) CIT vs Empire Buildtech (P) Ltd 366 ITR 110 (Del) (vi) CIT vs Ultra Modern Export(P) Ltd 40 Taxmann.com 458 (Del) 2.10 The Ld. AR of the assessee supported the order of the ld CIT(A) and submitted that the identity, genuineness of the transaction and creditworthiness of the creditor of the four companies for which addition is made by the AO is proved from the following:- 1. Omega Vincom Trading (P.) Ltd. - Assessee filed board resolution, share application form, confirmation, PAN, MOA/AOA, bank statement, ITR, Balance Sheet and P L a/c along with relevant schedules of the company. From the Balance Sheet, it can be noted that the net worth of the company is ₹ 373 lacs and in the schedule of investment, the investment in shares of the assessee is duly reflected at ₹ 17 lacs. - The DDIT (Inv.), Mumbai vide letter dt.22.12.2011 informed that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chants (P) Ltd. - Assessee filed board resolution, share application form, confirmation, PAN, MOA/AOA, bank statement, ITR, Balance Sheet and P L a/c along with relevant schedules of the company. From the Balance Sheet, it can be noted that the net worth of the company is ₹ 1743 lacs and in the schedule of investment, the investment in shares of the assessee is duly reflected at ₹ 10 lacs. - AO conducted the enquiry through ADIT (Inv.), Kolkatta. Summon issued u/s 131 of the IT Act, 1961 was served on the company by ADIT (Inv.), Kolkatta through its inspector. In response to the summon, AR of the company appeared and confirmed the investment in the share capital of the assessee and also explained the source of such investment. - The AO required the assessee to produce the directors of the company on 26.12.2011. The assessee vide letter dt. 26.12.2011 provided the present address of the directors of the company and requested the AO to directly issue notice to the directors for their presence as they are not residing at Jaipur. However, no such notice was issued. - From these facts, it is evident that assessee has proved the identity, genuineness of the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Del.) (Trib.) (viii) CIT Vs. Lovely Exports (P.) Ltd. 216 CTR 195 (SC) (ix) DCIT Vs. Dolphine Marbles (P) Ltd. 57 DTR 58 (Jab.)(TM) (x) M/s Bharti Syntex Ltd., Gangapur Vs. DCIT XLV Tax World 169 (Jpr.) (ITAT) dt. 13.01.11 (xi) CIT Vs. Divine Leasing and Finance Ltd. 299 ITR 268 (Del.) (HC) (xii) CIT Vs. Victor Electrodes Ltd. 329 ITR 271 (Del.) (HC) (xiii) CIT Vs. Gangour Investment Ltd. 18 DTR 242 (Del.) (HC) (xiv) CIT Vs. Ujala Dyeing and Printing Mills P. Ltd. 328 ITR 437 (Guj.) (HC) (xv) CIT vs. Nipuan Auto (P) Ltd. (2013) 89 DTR 342 (Del.) (HC) dated 30.04.2013 (xvi) CIT vs. Kamdhenu Steel Alloys Ltd. Ors. (2012) 68 DTR 38 (Del) (HC) dated 23.12.2011 3. In order to appreciate the rival contentions, we refer to various legal authorities on the subject which has been brought to our notice by both the parties. 3.1 In case of Navodaya Castle (P) Ltd (supra) which is a case of a private limited company, it is noted that the SLP has been rejected by the Hon ble Supreme Court holding that the Court do not see any merit in the SLP against the order of Hon ble Delhi High Court. In this case, the Hon ble Delhi High Court has referred to catena of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntification, but have their limitation when there is evidence and material to show that the subscriber was a paper company and not a genuine investor. 18. Lovely Exports (P.) Ltd. (supra) was also considered and distinguished in N.R. Portfolio (P.) Ltd. (supra) and it was held that the entire evidence available on record has to be considered, after relying upon CIT v. Nipun Builders and Developers [2013] 350 ITR 407/214 Taxman 429/30 taxmann.com 292 (Delhi), wherein it has been held that a reasonable approach has to be adopted and whether initial onus stands discharged would depend 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 money, dividends, warrants, etc. have to be sent and the relationship remains a continuing one. Therefore, an assessee cannot simply furnish some details and remain quiet when summons issued to shareholders remain unserved and uncomplied. As a general proposition, it would be improper to universally hold that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law is, therefore, answered in favour of the Revenue and against the respondent-assessee, but with an order of remit to the tribunal to decide the whole issue afresh. One of the reasons, why we have remitted the matter is that the cross objections of the respondentassessee questioning notice under Section 147/148 were dismissed as infructous and even if we decide the issue on merits in favour of the Revenue, the cross objections would got revived and require adjudication. The appeal is accordingly disposed of. 3.2 We now refer to another leading case of Lovely Exports (P) Ltd. (supra) which has been considered and referred in Navodaya Castle case (supra) and which has also been quoted by the ld AR in support of its contention. It was a case of public limited company where shares were subscribed by public and the facts thereof have been set out in the judgment of Hon ble Delhi High Court reported as Divine Leasing Finance Ltd.[2008] 299 ITR 268. The petition for leave to appeal against this order was dismissed by the Hon ble Supreme Court observing We find no merit in this Special Leave Petition for the simple reason that if the share application money is received by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank 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. 7.Sumati Dayal v. CIT [1995] 214 ITR 801 (SC) a succinct yet complete precis on the essentials of income-tax liability can be discerned from these words - In all cases in which a receipt is sought to be taxed as income, the burden lies on the Department to prove that it is within the taxing provision and if the receipt is in the nature of income, the burden of proving that it is not taxable because it falls within the exemption provided by the Act lies upon the assessee. This decision is adequate authority for the proposition that by virtue of section 68 of the Incometax Act the assessee is obliged to establish that amounts credited in the accounts do not represent its income; in that case the assessee s version that she had won them through betting on horse racing in two consecutive years did not attract credibility. The Apex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions and treat the subscribed capital as the undisclosed income of the Company. 16. In this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income-tax Act. The assessee has to prima facie prove (1) the identity of the creditor/subITA scriber; (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, Share Application Forms, Share Transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee. (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 andconstrue it, without more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, 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. 39. The case of CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 78/25 Taxman 80 (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 , CIT v. Makhni Tyagi (P.) Ltd. [2004] 267 ITR 433 / 136 Taxman 641 , CIT v. Antartica Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple 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 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 addresse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: 6. It is not sufficient that the identity of the share applicant or the creditor should be established for the assessee to discharge the initial onus, which is upon the assessee. Under the requirement of section 68, the assessee has to further satisfy the revenue as to the genuineness of the transaction and the creditworthiness of the share applicant or the individual who is advancing amounts. The assessee's reliance upon the order of the Commissioner (Appeals) to contend that the sources of the funds were in essence as directors, is, in this context, of no avail. The assessee has contended that it was incorporated just before the end of the financial year. However, the assessee had to necessarily show that the amount which it indicated as borrowed from the six applicants in fact belonged to them. The creditworthiness of the share applicants had to be seen in the context of the assertion made by them or the materials presented before the Assessing Officer at the relevant time. The materials on record disclosed that some information from at least two individuals indicated that the money had not been given by them. The appeal is accordingly dismissed. 3.8 In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r simply by allowing the appeal and deleting the additions made. It was also the obligation of the first appellate authority, as indeed of the Tribunal, to have ensured that effective inquiry was carried out, particularly in the face of the allegations of the revenue that the account statements reveal a uniform pattern of cash deposits of equal amounts in the respective accounts preceding the transactions in question. This necessitated a detailed scrutiny of the material submitted by the assessee in response to the notice under section 148 issued by the Assessing Officer, as also the material submitted at the stage of appeals, if deemed proper by way of making or causing to be made a 'further inquiry' in exercise of the power under section 250(4). This approach not having been adopted, the impugned order of the Tribunal, and consequently that of the Commissioner (Appeals), cannot be approved or upheld. [Para 42] 3.10 In the case of Empire Buildtech (P) Ltd (supra), the Hon ble Delhi High Court has held as under (Head Notes): In Lovely Exports (supra), the Supreme Court emphasized that the initial burden is upon the assessee to show as to the genuineness of the iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned unserved. The particulars of returns made available by the assessee and taken into consideration in paragraph 3.4 by the AO in this case would show that the said parties/applicants had disclosed very meager income. The AO also noticed that before issuing cheques to the assessee, huge amounts were transferred in the accounts of said share applicants. This discussion itself would reveal that even though the share applicants could not be accessed through notices, the assessee was in a position to obtain documents from them. While there can be no doubt that in Lovely Exports (P.) Ltd. (supra), the Court indicated the rule of shifting onus i.e. the responsibility of the Revenue to prove that Section 68 could be invoked once the basic burden stood discharged by furnishing relevant and material particulars, at the same time, that judgment cannot be said to limit the inferences that can be logically and legitimately drawn by the Revenue in the natural course of assessment proceedings. The information that assessee furnishes would have to be credible and at the same time verifiable. In this case, 5 share applicants could not be served as the notices were returned unserved. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Furthermore, the bank details of share applicants too had been provided. In the circumstances, it was held that the assessee had established the identity of the share applicants, the genuineness of transactions and their credit-worthiness. The AO chose to proceed no further but merely added the amounts because of the absence of the Directors physically present themselves before him. 6 We are of the opinion that no question of law arises, having regard to the concurrent findings of fact. The assessee has, in our opinion, complied with the law spelt out by the Supreme Court in CIT vs. Lovely Exports Pvt. Ltd. 216 CTR (SC) 195. The appeal is meritless and is consequently dismissed. 4. After going through the various legal authorities as narrated above, the legal proposition that emerges in the context of section 68 is as under: 4.1 Where any sum is found credited in the books maintained by the assessee, Section 68 requires that the assessee should offer an explanation about the nature and source of such sum found credited in its books of accounts to the satisfaction of the Assessing officer. In absence of explanation, or in the event of explanation being not found sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to universally hold that the assessee cannot plead that they had received money, but could do nothing more and it was for the Assessing Officer to enforce shareholders' attendance in spite of the fact that the shareholders were missing and not available. Their reluctance and hiding may reflect on the genuineness of the transaction and creditworthiness of the shareholder. It would be also incorrect to universally state that an inspector must be sent to verify the shareholders/subscribers at the available addresses, though this might be required in some cases. Similarly, it would be incorrect to state that the Assessing Officer should ascertain and get addresses from the Registrar of Companies' website or search for the addresses of shareholders themselves. 4.7 Unlike the case of private limited companies, in the case of public limited company which has gone for a public issue and got share subscriptions from prospective shareholders across the length and breadth of the country, the legal regime may not be the same. In such cases, the Company concerned cannot be expected to know every detail pertaining to the identity as well as financial worth of each of its subscribers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n circumstances requires that there should be some more evidence of positive nature to show that the subscribers had made genuine investment. 4.10 The entire evidence available on record has to be considered and a reasonable approach has to be adopted. The final conclusion must be pragmatic and practical, which takes into account holistic view of the entire evidence including the difficulties, which the assessee may face to unimpeachably establish identity, creditworthiness of the shareholders and the genuineness of the transaction. 4.11 Where the assessee has discharged the initial 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, the burden of proof shifts on the Assessing officer. 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. If the Assessing Officer harbours any doubts of the legitimacy of any subscription, he is empowered, nay duty-bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i and submitted certain documents. Further, personal attendance of the Directors of the investee companies were called for by the Assessing officer, however they couldn t appear before the Assessing officer as the assessee submitted that the notice served to them was too short and as they were residing out of Jaipur, they couldn t attend the hearing before the Assessing officer. The identity of these investee companies therefore cannot be said to have been established as there are surrounding circumstances to show that these companies donot exist at first place and secondly, there is no proof that these companies were carrying out any business activity. Further, in case of Gawarja Merchants, source of the investment in the assessee company was share application money received by the Replica Tracom Pvt Ltd and returned income for AY 2009-10 was shown as meagre ₹ 47,129. In case of Melbright Suppliers (P) ltd, source of the investment in the assessee company was advance money received from the Outlook Tracom Pvt Ltd and share application money received from Nandan Merchants and returned income for AY 2009-10 was shown as meagre ₹ 33,021. In case of Omega Vincom Trading (P ..... X X X X Extracts X X X X X X X X Extracts X X X X
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